Introduction To International Business Unit - I: Gratulent Publications

Gratulent Publications
UNIT - I
INTRODUCTION TO INTERNATIONAL BUSINESS

INTRODUCTION :
Firms operate in a challenging environment and in a globalized world where competition is no longer
restricted to domestic firms. In a continuously growing and changing situation, firms have to learn to survive
through innovative products and processes. Under these circumstances, most of the firms have international
connections both through imports and/or exports and in a way involved in international business. It is not easy to
arrive at an exact definition of international business as firms are involved in varying range of activities. The two
extreme for these activities are: on one side, a company may be simply exporting or importing with no investment
in any other country except home and on the other side a firm which has affiliates and subsidiaries across the
world and decision making is also decentralized to a large extent excluding few core areas. Within these two
situations, firms operate with different degrees of involvement in international business and through diverse modes
including joint venture, mergers, takeovers etc.
The firms that are involved in international business have to deal with different countries that vary in terms
of culture, political system, legal system and economic development. Clearly, managers of such firms have
extensive challenges in the form of marketing, human resource management, supply chain management and
financial management. It is the presence of these challenges that necessitates the study of international business
that can equip managers with tools and techniques to deal with the problems and issues in effective manner. The
tasks of managers get tougher when they realize that they have to deal with globalization at both production and
market level requiring them to find sources of cheaper raw materials, look for countries to produce at lowest
possible cost, locate new markets for the products, fine tune the products to the local market’s demand, advertise
them, and sell those to make profits. Further, the challenges are compounded when they hear about the voices
against globalization in either media or read about it in newspapers and/or magazines.
DEFINITION OF INTERNATIONAL BUSINESS :

1. International business includes any type of business activity that crosses national borders.
2. International business is defined as organization that buys and/or sells goods and services across two or more
national boundaries, even if management is located in a single country.
3. International business is equated only with those big enterprises, which have operating units outside their own
country.
According to Robock and Simmonds, “International business is defined as a field of management training
(that) deals with the special features of business activities that cross national boundaries”.
Czinkotra and Grosse and Kojawa, “International business is defined as transactions devised and carries out
across international borders to satisfy corporations and individuals”.
International business = Business transactions crossing national borders at any stage of the
transaction
All commercial transactions related to sales, transportation, investments, insurance, commodities, etc., among
nations whether private or government come under international business. While the main aim of governments is not to
earn profits, private organisations undertake international business with the sole motive of earning huge profits.
Three categories of organisations operate under international business. The first category is of organisations
which have managerial operations in only one country but involve in transactions of goods and services beyond
borders of two or more than two nations. The second category involves large organisations having managerial
operations outside their home country. The third and final category falls somewhere in between both the above
categories. The organisations may form joint ventures with overseas governments or local businesses. These
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institutions just give a little direction to the economic transactions but do not exercise full control over the business
and its transactions.
In its traditional form of international trade and finance as well as its newest form of multinational business
operations, international business has become massive in scale and has come to exercise a major influence
over political, economic and social from many types of comparative business studies and from a knowledge of
many aspects of foreign business operations. In fact, sometimes the foreign operations and the comparative
business are used as synonymous for international business. Foreign business refers to domestic operations
within a foreign country. Comparative business focuses on similarities and differences among countries and
business systems for focuses on similarities and differences among countries and business operations and
comparative business as fields of enquiry do not have as their major point of interest the special problems that
arise when business activities cross national boundaries. For example, the vital question of potential conflicts
between the nation-state and the multinational firm, which receives major attention is international business, is
not like to be centered or even peripheral in foreign operations and comparative business.
IMPORTANCE : The following points highlight the three importance of International business. The importance
are:
1. National Economy 2. Importance to Exporting Firm
3. Importance from Other Points of View.
1. National Economy :
1. It is important to meet imports of industrial needs.
2. Debt Servicing: This means to grant loan for and for their industrial development.
3. For rapid economic growth.
4. For profitable use of natural resources.
5. To face competition successfully-better quality goods production having lower or moderate prices. To improve
the image of the producer as well as of the country in the minds of foreign customers.
6. Increase in employment opportunities.
7. To increase national income.
8. Increase in standard of living of the people.
2. Importance to Exporting Firm : Business and industrial firms/exporting firms are also benefitted from the
international business -
(a) Insufficiency of Domestic Demand : If the domestic demand for the product is not sufficient to consume the
production, the firm may take a decision to enter the foreign market. In this way he can equalize the production
and demand.
(b) To Utilise Installed Capacity : If the installed capacity of the firm is much more than the level of demand of
the product in the domestic market, it can enter the international market and utilise its un-utilised installed capacity.
In this way it can export the surplus production.
(c) Legal Restrictions : Sometimes the Government of a country imposes certain restrictions on the growth and
expansion of certain firms or on the production and distribution of certain commodities in the domestic market in
order to achieve certain social objectives.
(d) Relative Profitability : The export business is more attractive for its higher rate of profitability. The higher
profitability rate also gives extra strength to the firm.
(e) Less Business Risk : A diversified export business helps the exporting firm in mitigating the risk of sharp
fluctuations in the business activity of the firm.
(f) Increased Productivity : Due to certain social and technological developments the industrial production has
increased to a great extent. The production will be higher at cheaper rate. The surplus production can be exported.
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(g) Social Responsibility : In order to meet the social responsibility some business firms take the decision to
contribute to the National Exchequer by exporting their products.
(h) Technological Improvements : Technological improvements also attract the business firm to enter foreign
markets. It introduces new products with latest technological improvements and faces the competition successfully
in the international markets.
(i) Product Obsolescence : If a product becomes obsolete in domestic market it may be in demand in International
markets. The firm has to make a survey for introducing the product in those markets.
3. Importance from Other Points of View :

The importance of export business can also be viewed from some other angles:
(i) International Collaboration : Developed countries fix their import quotas for different countries and for different
commodities. A county can export various commodities to these developed countries to the extent of its quota.
(ii) International Business Brings Various Countries Closer : Better business relations are established among
the countries. Government and non-government business commissions or business representatives visit other
countries from time to time. The local representatives and other related persons came into contact with foreign
representatives and come to know their habits and customs.
(iii) Helps in Maintaining Good Political Relations : The economic relations between two countries help each
other to improve their political relations. Various countries having different political ideologies import or export their
products. To conclude it is now undisputable that export business contributes to the national economy, national
exchequer, individual exporting firms and maintains international, economic cultural and political relations among
various countries. Countries have come closer on account of international business.
NATURE OF INTERNATIONAL BUSINESS :

International business is considered highly risky as compared to domestic business. The major contributor
to this is its complex nature. A detailed view of the nature of international business is given below:
1) Includes Commercial Activity : The transactions taking place across the boundaries in international business
are commercial in nature. These include overseas exchange of skilled labour, human resource, copyright,
trademarks, patents, commodities, services, capital, investments, insurance, etc.
2) Prone to Political Risk : International business is complex and always surrounded by risks of political nature.
This is because in overseas markets, managers have to continuously alter their strategies and values of foreign
exchange according to political regulations. Also, adjustments have to be made in marketing initiatives which are
impacted greatly by factors pertaining to countries and cultures.
3) Proactive or Reactive : International business can be done in preemptive or responsive manner. If an
organisation senses an opportunity and makes full use of it beforehand, it is termed as proactive approach. On
the other hand, reactive approach is when organisation waits for competitors’ moves and acts or protects
themselves accordingly.
4) Different from Domestic Business : As business is carried out beyond international boundaries, international
business differs a lot from domestic business. International business takes place beyond domestic boundaries,
in different economic conditions, with people of different cultures and geographical locations, as an industrial
revolution in modern world, and varying political scenarios.
5) Large-Scale Operations : The activities and operations taking place in international business are very large-
scale as they involve producing and marketing on an international level alongwith exporting the surplus.
6) Amalgamation of Economies : Finance, labour, infrastructure, raw materials, and other factors of production are
procured from distinguished economies. Even the designing, production, assembling, and marketing of the products
takes place in different countries. Hence, more than one economy is combined together in international business.
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7) Maximum Control Enjoyed by MNCs and Developed Countries : As the MNCs and developed countries
possess huge capital, skilled workforce, latest technology, and efficient R&D (research and development) terms;
they are in a better position to produce improved quality of goods at a nominal cost. Also, they tend to retain
employees as they can afford to compensate a premium salary to them. All these advantages have led to the
dominance of developed countries and MNCs in the international markets.
8) Excessive Competition : As mentioned earlier, MNCs and developed countries tend to dominate international
business due to their massive capital and ability to produce high quality products at low prices. An added advantage
is the significant links these countries have in the world market. Hence, the developing countries that possess
limited resources have to face a lot of competition and find it difficult to survive in the international market.
9) Significance of Science and Technology : In ensuring increased output and achieving economies of scale,
science and technology play a vital role in the international business scenario. In fact, a majore reason for developed
countries dominating the international market is that they focus a lot on using advanced technology. When MNCs
and developed countries use the advanced technologies, there is a high possibility of these technologies getting
transmitted to developing countries as well.
10) Regulations and Limitations : As international business has to be carried out across boundaries of several
countries, it has to go through a lot of laws, regulations, barriers to entry, etc., which vary from country to country.
Few countries tend to resist international business and have very stringent rules including trade barriers, constraints
on foreign exchange, etc., which gradually prove detrimental for international business.
SCOPE OF INTERNATIONAL BUSINESS : International business is much broader than international trade. It
includes not only international trade (i.e., export and import of goods and services), but also a wide variety of other
ways in which the firms operate internationally. International Management professionals are familiar with the
language, culture, economic and political environment, and business practices of countries in which multinational
firms actively trade and invest.
Major forms of business operations that constitute international business are as follows.
(i) Merchandise exports and imports: Merchandise means goods that are tangible, i.e., those that can be seen
and touched. When viewed from this perceptive, it is clear that while merchandise exports means sending tangible
goods abroad, merchandise imports means bringing tangible goods from a foreign country to one’s own country.
(ii) Service exports and imports: Service exports and imports involve trade in intangibles. It is because of the
intangible aspect of services that trade in services is also known as invisible trade.
(iii) Licensing and franchising: Permitting another party in a foreign country to produce and sell goods under
your trademarks, patents or copy rights in lieu of some fee is another way of entering into international business.
It is under the licensing system that Pepsi and CocaCola are produced and sold all over the world by local bottlers
in foreign countries.
(iv) Foreign investments: Foreign investment is another important form of international business. Foreign
investment involves investments of funds abroad in exchange for financial return. Foreign investment can be of
two types: direct and portfolio investments.
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Reasons Underlying International Business
Pull Factors Push Factors
- Growth
- Profitability - Uniqueness of Product or Service
- Achieving Economies of Scale - Marketing Opportunities Due to Life Cycles
- Risk Spread - Spreading R&D Costs
- Access to Imported Inputs - Resource Utilisation
- Economic Integration & Free Markets - Competition and Costs
- Emergence of WTO - Quality Improvement
- Unifying Effect and Peace - Government Policies and Regulations
MODES OF ENTRY INTERNATIONAL BUSINESS : All the activities and functions performed by organisations
looking to internationalise and tap overseas markets together constitute international business. Even a common
man contributes to international business in some or the other way. An organisation may enter into the international
market through various modes which are explained below :
1) Direct and Indirect Exporting : When products or services are manufactured in home country but are
marketed and sold in foreign countries, it is called export. This is of two types namely direct and indirect. Direct
export is when an organisation itself produces and sells the products directly to end-consumers. On the other
hand, indirect export involves intermediaries who act as a link between the producer and the end-consumer.
Exporting is the most elementary mode to enter overseas markets.
2) Licensing : Also known as technical collabortion, licensing is providing access to the technology, expertise,
plans, strategies, etc., to a licensee in the foreign country in exchange of fees or royalty. The organisation opting
for licensing does not need to put in capital in the foreign market nor does it need to interact with end-customers
located in the foreign markets.
3) Franchising : Franchising involves two parties namely franchiser and franchisee. Franchiser in the parent
organisation which allows the franchisee to commence business under certain fixed guidelines. Two forms of
franchising exist, i.e., direct and indirect. The franchiser formulates policies and monitors the operations of the
franchisee from the host country itself.
4) Contract Manufacturing : Under contract manufacturing, one organisation enters into a contract with another
organisation to manufacture its product or parts. The other organisation (client) in this way does not have to
arrange for production infrastructure, workforce, raw materials, etc., and can focus entirely on sales and marketing
of products. A local producer can be brought into agreement for a firm looking to sell its products in overseas
market. Many of the world’s leading organisations carry on their manufacturing processes through third party
manufacturers in countries having low cost of labour. The advantages include less capital investment and ease of
exit in case of product failure.
5) Turnkey Projects : As the name suggests, turnkey project is when a licensor builds a completely new plant or
production infrastructure which is fully operational, and hands over the key to the licensee. Soon after the licensee
receives the keys of the fully functional plant, it can start using it.
6) Joint Ventures : In order to build and sustain competitive advantage, two or more than two organisations
combine their resources and know-how to form a new organisation called the joint venture. This type of ownership
is basically held in a foreign company. When an organisation considers that it would be profitable to acquire
ownership in a new organisation for expanding market opportunities, it opts for joint venture.
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7) Mergers & Acquisitions : When an organisation acquires another, it is called the acquiring organisation while
the smaller organisation being acquired is the target organisation. This does not result in birth of a new form. Another
form is amalgamation of two organisations which lose their identity to come together as one new organisation. For
example, Maruti Motors operating in India and Suzuki based in Japan amalgamated
to form a new company called Maruti Suzuki (India) Limited.
8) Strategic Alliance : Strategic alliance occurs when two or more organisations enter into a contract or come
together to fulfil a specific function and achieve mutually set objectives in the market. These organisations do not
merge and remain anonymous. Having been proven as an effective mean to tackle weakness and enhance
strengths, strategic alliances have become popular recently. Few objectives for which strategic alliances are set
up are market expansion, enhancement of capital, access to latest technology, etc.
INTERNATIONALIZATION PROCESS
Following are the stages involved in Internationalization Process:
Stage1: International Marketing Strategy Scope and Framework

• Scope of international marketing strategy
• Analytical framework for international marketing
Stage2: International Marketing Environment
• Company resources and capabilities
• Analysis of international competitors
• Culture in international marketing
• Creating competitive advantage
• Coping with political risk and uncertainly
• Profiling international product markets
• Vision and strategy for international markets
Stage3: International Marketing Strategy
• Consumer products firm
• Industrial product firm
• services firm
Stage4: International Market Entry Strategies
• Generic international market entry strategies
• exporting
• strategic alliances
• foreign direct investment
Stage5: Strategic Alignment And Performance
• Channels of international distribution
• Pricing in international markets
• International marketing negotiations
• Assessing international marketing performance.
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MANAGERIAL IMPLICATIONS :
A firm, which plans to go international, has to make a series of strategic decisions. They are broadly the
following :
1) International Business Decision : The first decision a company has to make is whether to take up international
business or not. This decision is based on a serious consideration of a number of important
factors, such as the present and future overseas opportunities, present and future domestic market opportunities,
the resources of the company (particularly skill, experience, production and marketing capabilities and finance),
company objectives, etc.
2) Market Selection Decision : Once it has been decided to go international, the next important step is the
selection of the most appropriate market. For this purpose, a thorough analysis of the potentials of the various
overseas markets and their respective marketing environments is essential.
Company Company
Objectives Resources
International
Business
Decision
Market Environmental
Potential Market
Factors
Selection
Decision
Entry and
Operating
Decision
Promotion Product
Marketing
Mix
Decision
Distribution Price
Marketing
Organisation
Decision
3) Entry and Operating Decisions : Once the market selection decision has been made, the next important
task is to determine the appropriate mode of entering the foreign market.
4) Marketing Mix Decision : The foreign market is characterised by a number of uncontrollable variables. The
marketing mix consists of internal factors, which are controllable. The success of international marketing, therefore,
depends to a large extent on the appropriateness of the marketing mix.
5) Marketing Organisation Decision : A company, which wants to do direct exporting, has also to decide about
its organisational structure so that the exporting function may be properly performed. This decision should
necessarily be based on a careful consideration of such factors as the expected volume of export business, the
nature of the overseas market, the nature of the product, the size and resources of the company, and the length
of its export experience.
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INTERNATIONALISATION OF BUSINESS
Liberalisation, Privatisation and Globalisation (LPG) measures adopted by countries all over the globe
have led to the reduction in trade barriers and allowed for the smooth flow of goods and services across borders.
Due to adoption of LPG measures, a large number of firms in both developing and developed economies are
entering global markets to take advantage of the availability of cheap labour, inexpensive land and abundant
resources. Recent decades have witnessed rapid growth in international business and because of this rapid
internationalisation; MNEs now consider the entire world as one market. Accordingly, internationalisation is perceived
as an important component of corporate strategy that promotes sustained growth. Scholars have devoted
considerable time and effort to explain the relationship between internationalisation and performance. However,
empirical studies regarding the relationship between internationalisation and performance report conflicting results.
The primary logic for internationalising operations is to explore the unique benefits and minimise costs
related to global market participation. Prior studies regarding international management demonstrate unique
benefits exist for firms adopting the Resource Based View (RBV) and that resources are heterogeneous with
high mobility. The benefits arising from global market participation foster competitive advantage and boost the
performance of an organisation.
Stages of Internationalisation
Figure identifies five stages in the process of going international in true sense.
These stages describe significant difference in the strategy, world view, orientation, Domestic Company
and practice of companies operating in more than one country. One of the key differences
in companies at these different stages is in orientations.
1) Domestic Company : The stage-one company is domestic in its focus, vision, and International Company
operations. The environmental scanning of the stage-one company is limited to the
domestic, familiar, homecountry environment. The unconscious motto of a stage-one
Multinational Company
company is: “If it’s not happening in the home country, it is not happening”.
During this stage, a company has its operations and vision limited to the national
boundaries. They plan to serve domestic customers, to exploit domestic market Global Company
opportunities, raising funds from domestic finance institutions. They concentrate on
analysing domestic environment and try to take advantage of opportunities generated by
the changes in national environment. Their sphere of activities lies within national boundaries. Transnational Company
The domestic company prefers to remain domestic and never think of going Fig.
for globalisation. It may add new product lines, serve new local markets. Their whole
planning is limited to national markets only.
2) International Company : Under this company extends marketing, manufacturing, and other activity outside
the home country. When a company decides to pursue opportunities outside the home country, it has evolved into
this category. The hallmark of the international company is the belief that the home-country ways of doing business,
people, practices, values, and products are superior to those found elsewhere in the world. The focus of the
international company is on the home-country market.
Because there are few, if any, people in the international company with international experience, it typically
relies on an international division structure where people with international interest and experience can be grouped
to focus on international opportunities. The marketing strategy of the international company is extension; that is,
products, advertising, promotion, pricing, and business practices developed for the home-country market are
“extended” into markets around the world.
3) Multinational Company : In time, the international company discovers that differences in markets around the
world demand an adaptation of its marketing mix in order to succeed.
When a company decides to respond to market differences, it evolves into a multinational that pursues a
multi domestic strategy. The focus of the multinational company is multinational or in strategic terms, multi
domestic i.e., this company formulates a unique strategy for each country in which it conducts business. The
orientation of this company shifts from ethnocentric to polycentric.
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4) Global Company : The global company makes a major strategic departure from the multinational. The global
company will have either a global marketing strategy or a global sourcing strategy, but not both. It will either focus
on global markets and source from the home or a single country to supply these markets, or it will focus on the
domestic market and source from the world to supply its domestic channels.
Organisations that pursue a global strategy focus on increasing profitability by reaping the cost advantage
that comes from the experience curve effects and location economies. They pursue a low-cost strategy. The
production, marketing, and R&D activities of organisations pursuing a global strategy are concentrated in a few
favourable locations.
5) Transnational Company : Under this strategy, company aims to simultaneously exploit location economies,
leverage core competencies, and pay attention to local responsiveness. It is arguably the most direct response to
the growing globalisation of business. The transnational corporation is much more than a company with sales,
investments, and operations in many countries. This company, which is increasingly dominating markets and
industries around the world, is an integrated world enterprise that links global resources with global markets at a
profit. There is, to be sure, no “pure” transnational company example, but there are a growing number of companies
that exhibit many.
Managerial Implications of Internationalisation

Positive implications of global market participation that have been widely discussed in studies regarding
international management follow:
1) Economies of Scale : Economies of scale occur due to higher factor specialisation because of increased
production. Higher specialisation of factors of production leads to potential cost reductions.
2) Economies of Scope : Economies of scope (efficiencies wrought by variety, not volume) occur when a firm is
able to jointly produce two or more products cheaper than producing each product individually. Scope economies
arise for a diversified firm that possesses the ability to spread investments and costs across the same or different
value chains when its non-diversified counterparts cannot.
3) Learning and Innovation : Learning and innovation benefits occur when a firm conducts business in global
heterogeneous markets. The diversity of global markets exposes firms to an assortment of stimuli and provides an
opportunity to enhance learning and develop new capabilities that can be then deployed throughout the organisation.
4) Access to Key Resources : Access to key resources benefits globally diversified firms because they have
access to a greater variety of resources. An internationally diversified firm may select a location that provides
resources at the lowest possible cost. Nations differ in factor endowments that lead to differences in factor costs.
Thus, an internationally diversified firm may configure their valueadded chain in such a way that each link is locted
in the country that results in the least cost for that specific link.
5) Reduced Risks : Risk reduction benefits an internationalised firm because it may spread its operations
throughout multiple countries from where it can retaliate the aggressive moves made by competitors. Operating
in multiple markets allows firms to offset the losses of one national market by the returns from a different market.
Furthermore, globalisation minimises the effect of adverse changes in one country’s interest rates, wage rates,
and commodity and raw material prices by providing the option to readily shift production and resourcing sites to
other favourable markets.
Thus, internationalisation provides firms with a set of benefits that will increase revenues and enhance
performance. Conversely, internationalisation also exposes firms to certain risks that increase costs thereby
reducing performance which are as follows:
1) Lack of Market Knowledge : The lack of knowledge regarding foreign markets and the environment in the
initial stages of internationalisation is significant risks that may deteriorate performance in international markets.
This notion is known as the liability of foreignness.
2) Increased Transaction Costs : Furthermore, increased internationalisation can increase transaction costs
and other costs of processing information, thus reducing performance.
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3) Problem Related to Cashflow : The limited ability of mangers to adjust to the international environment
further exerts a negative influence on performance. Internationalisation may lead to egency problems with free
cashflows in firms that have a larger debt capacity and easy access to free cashflow. Managers of these companies
tend to invest free cashflows in projects with a negative Net Present Value (NPV) to pursue their own interests.
FOREIGN INVESTMENTS :
INTRODUCTION :
At the time of independence, India’s technological base and domestic savings were both weak and stagnant.
Therefore, India adopted import substitution and encouraged foreign private capital and technology as elements
of her strategy for industrial development in order to fill up the technological and production gaps and accelerate
the development process.
Foreign investment is seen as a means to supplement domestic investment for achieving a higher level of
economic development. It benefits domestic industry as well as the Indian consumer by providing opportunities for
technological upgradation, access to global managerial skills and practices, optimal utilization of human and natural
resources, making Indian industry internationally competitive, opening up exports markets, providing backward and
forward linkages, and access to international quality goods and services.
Investment in a country by individuals of and organizations from other countries is an important aspect for
international finance. This flow of international finance may take the form of portfolio investment, that is, acquisition
of securities or direct investment creation of productive facilities.
Foreign direct investment (FDI) is the outcome of the mutual interest of international firms and host countries.
According to the international Monetary Fund, FDI is defined as “investment that is made to acquire a lasting
interest in an enterprise operating in an economy other than that of investor “.The investors purpose being to
have an effective voice in management of the enterprise. The essence of FDI is the transmission to the host
country of a package of capital, managerial skills, and technical knowledge.
NEED FOR FOREIGN INVESTMENT :

1. Raising the level of investment : Foreign investment can fill the gap between desired investment and locally
mobilized savings. Local capital markets are often not well developed. Thus they cannot meet the capital
requirement for large investment projects. Besides, access to the hard currency needed to purchase investment
goods not available locally can be difficult. Foreign investment solves both these problems at once as it is a direct
source of external capital.
2. Up gradation of technology : Foreign investment can supply a package of needed resources such as
management experience, entrepreneurial abilities, organizational and technological skills. Foreign investment
brings with it technological knowledge while transferring machinery and equipment to developing countries.
3. Exploitation of natural resources : A number of underdeveloped countries possess huge mineral resources,
which await exploitation. These countries themselves do not possess the required technical skill and expertise to
accomplish this task. Therefore, they have to depend upon foreign capital to undertake the exploitation of their
mineral wealth.
4. Development of basic economic infrastructure : Underdeveloped or developing countries require huge
capital investment for the development of basic economic structure as their domestic capital is often too inadequate.
In such a situation foreign investment plays a pivotal role in the development of basic infrastructure such as
transport and communication system, generation and distribution of electricity, development of irrigation facilities,
and so on.
5. Improvement in exports competitiveness : Foreign investment can help the host country improve its export
performance. It has a positive impact on the host country’s export competitiveness by raising the level of efficiency
and the standard of product quality. Further, foreign investment provides to the host country better access to
foreign markets.
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6. Improvement in the balance of payments position : In case of an-adverse balance of payments situation in
the host country, investment presents a short-run solution to the problem.
7. Benefit of consumers : Consumers in developing countries stand to gain from foreign investment through
new products and improved quality of goods at competitive prices.
8. Revenue to government : Profit generation by foreign investment in the host country contribute to corporate
tax revenue in the latter.
Types of Foreign Investment

Foreign investment is of following two types :
1) Foreign Direct Investment (FDI) : Foreign direct investment (FDI) refers to acquiring the ownership in a
business enterprise in one country into a company operating in another country. This investment may take in
several ways like purchasing or constructing an a new plant abroad or by enhancing its infrastructure by adding
machineries, factories etc. The company making direct investments have a significant degree of power and
control over the working of the company in which investments are made.
2) Foreign Indirect/Institutional Investment
(FII)/ Portfolio Investment : In foreign Foreign
institutional investment the investor does not Capital
have lasting interest and control over the
enterprise. This form of investment is short-term
Foreign Direct Investment: Indirect Foreign (Portfolio)
in nature and is easy to operate. These types of
1) SIA and FIPB Approved Investment:
investments involve buying debt (bonds) or
equity instruments (stocks) of a foreign Investments 1) GDRs
organisation. 2) RBI Approved Investments 2) FII Investments
3) NRI Investments 3) Off-shore Funds
Fig. Categories of Foreign Capital in India

SIA - Secretariat for Industrial Approvals,
FIPB - Foreign Investment Promotion Board,
RBI - Reserve Bank of India
NRI - Non-Resident Indian,
GDR - Global Depository Receipts,
FII - Foreign Institutional Investors
ISSUES IN FOREIGN INVESTMENT : Foreign investment is not an unmixed blessing. Governments in developing
countries have to be careful while deciding on the magnitude, pattern and conditions of private foreign investment.
The possible adverse effects of foreign investment are as follows:
1. The historically exploitative character of foreign investment as a partner of colonialism naturally arouses deep-
rooted nationalist sentiments and suspicions.
2. There is widespread belief based on sufficient empirical evidence that foreign capital is essentially interested in
loco technology and high profitable consumer goods and not in technologically difficult, long-gestation industries,
which are of high priority from the point of view of the host nation.
3. The clue to direct investment lies not in the physical movement of capital from a developed country to a less
developed country, but in capital formation in the latter through the local operation of a multinational corporations
based in the former.
4. Foreign capital has historically been accused of an attitude of discrimination against employment of local
nationals in high-salary jobs and against local transport, insurance, or credit organizations.
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5. The development caused by foreign investment tends to have an enclave character. That is to say it only
creates small pockets to affluence isolated from the mainstream of the host country’s state of social and economic
development.
6. Foreign enterprises, by virtue of their financial strength and general competitive efficiency, inevitably obstruct
the growth of indigenous industrial entrepreneurship.
7. The cost of foreign capital for the host country tends to be very high. That such costly capital imposes a very
severe strain on the host country’s foreign exchange can easily be understood by comparing the quantum of
capital inflow excluding investment profits with the quantum of foreign exchange outgo on account of capital and
profit remittances.
8. When foreign investments compete with home investments, profits in domestic industries fall, leading to a fall
in domestic savings.
9. The contribution of the foreign firm to public revenue through corporate taxes is comparatively less because of
liberal tax concessions, investment allowances, designed public subsidies, and tariff protection provided by the
host government.
10. Foreign firms may influence political decisions in developing countries. In view of their large size and power,
National sovereignty and control over economic policies may be jeopardized. In extreme cases, the foreign firms
may bribe public officials to secure undue favours.
TECHNOLOGY TRANSFER :
Technology is a new variable in the equation of economic relations. Traditional theory assumes that all nations
have equal access to technology and, therefore, that there is no need to transfer technology from one county to
another. Recent research findings have invalidated this assumption. In addition, they point to technology differences
as primary cause of international inequalities in economic achievements. To reduce the inequalities, technology
capabilities of the backward nations must be strengthened. The quickest way to do so is to transfer technology
from the developed to the developing nations.
DEFINITION
Technology is any device or process used for productive purposes. In its broadest sense, it is the sum of
the ways in which a given group provides itself with good and services, the group being a nation, an industry, or a
single firm.
There is a fundamental characteristic of technology that demands clear recognition. Q unites unlike
commodities and capital, technology is not depleted or its supply diminished when it is transferred or used. It is
usable but not consumable. Once created, technology is inexhaustible until it becomes obsolete.
Therefore; export of technology need not cause the source country to reduce its use of the technology.
Indirectly, a decline may result if the recipient country creates an industry large to change the global supply and
demand equilibrium of the goods produced by the technology involved. For most technology sought by the developing
nations this is not the case.
SOURCES OF TECHNOLOGY : Contrary to the classical assumption, technology is not a free good but a
valuable property, nor is it evenly distributed around the globe. The supply schedules differ widely from country to
country. To obtain new technology, a nation has three alternatives:
1. Produce the technology capability at home
2. Import it from abroad
3. Import goods containing the desired technology
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For most LDCs, home production of technology is often uneco-nomic. Since much of what they are
seeking already exists in the industri-ally advanced areas, they can fill their needs by importation. Normally, the
importation can be effected at savings over the domestic cost of research and development (R&D). R&D
expenditures devoted to projects duplicat-ing existing know-how are obviously wasteful. Thus, economic rationale
requires that LDCs concentrate their home production of new technology on any unusual requirements that
cannot be met from import sources.
The access to technology depends on its ownership. Nonproprietary technology belongs to the public. It is
there for the taking, but it is not free. The taker must have the ability to gather it from libraries, public research
institutions, or wherever it may be found. To locate the sources and to sort out what is usable and unsuitable from
any given application may involve considerable cost, which might be called the assembling and packaging of
technology. Consulting firms specialize in this type of service. They very sources and consumers of technology
but instead act as intermediaries between the sources and consumers of technology.
Proprietary technology is privately owned. It consists, trademarks, and secret processes. The most efficient
and profitable technology, often also the newest, belong in this category. Access to proprietary technology is at the
owner’s discretion. It may or may not be for sale. If the sale creates potential competitors, the owners’ interest is
served by not selling it unless the expected loss from new competition is less than the price for which the
technology can be sold.
Much proprietary technology is not for sale. It can move only with investments of owner firm. This is
embodied technology, as distinguished from disembodied technology, which can be transferred without the original
owner’s investments. All nonproprietary technology is disembodied.
At the macro and micro levels, nations people, and Organizations increasingly depend on technology for
prosperity and quality of life.
The competitive edge of an individual firm vastly depends on technology. One of the means of acquiring
technology is through its transfer.
Technology transfer coves various activities, including the internal transfer of technology from the R&D or
engineering department to the manufacturing department of a firm based in a country. It also includes the same
transfer of technology from a laboratory or operations of a MNCs in one country to its laboratory or operations in
another country. Finally, It includes the transfer of technology from a research consortium supported by many
firms to one of the members. Simply told, technology transfer is a process that permits the flow of technology
from of technology from a source to a receiver.The source is the owner or the holder of the knowledge and it can
be individual, a company, or a country. The source is the owner or the or holder of the knowledge and it can be
individual, a company. or a country. The receiver is the beneficiary of the transfer technology. Technology is
transferred through published material (such as journals, books): purchase and sale of machinery, equipment
and intermediate goods, transfer of data and personal: and interpersonal communication.
TECHNOLOGY TRANSFER COMPRISES SIX CATEGORIES :

1. International Technology Transfer, in which the transfer is across national boundaries. Generally, such
transfers take place between developed and developing countries.
2. Regional Technology Transfer, in which technology is transferred from one another.
3. Cross-industry or Cross-sector Technology Transfer, in which technology is transferred from one industrial
sector to another.
4. Interfirm Technology Transfer,in which technology is transferred from one company to another.
5. Intra-firm Technology Transfer, in which technology is transferred within a firm,from one location to another.
Intrafirm transfers can also be made from one department to another within the same facility.
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6. Pirating or Reverse-Engineering, whereby access to technology is obtained at the expense of the property
rights of the owners of technology.
MODES OF TRANSFER :
Since technology defies delineation as a discrete variable, the analysis of its transfer is encumbered by
such other factors as capital investments, economic organization, labor resources, entrepreneurship, and even
en sociocultural systems. Lacking disaggregated data, different analysts have used different composites as
proxies for data on technology flows. Many economists treat direct foreign investments and licensing agreements
as synonymous with international technology transfers. Others tabulate scientific and professional conferences,
technical assistance programs, exchanges of educators and students, plus many other kinds of information
flows. Obviously, all of these have some technology content, but few are pure technology.
IMPORTING NONPROPRIETARY TECHNOLOGY :

Non proprietary technology can be transferred from one country to another in any number of ways.
Technology in pure from can be imported if the transferee possesses the capacities to collect and employ it.
LDCs many rely on indigenous enterprises or on foreign firms to do the importing. Since LDCs often lack indigenous
firms who can affect the transfer, they rely heavily on foreign consultants.
Another way for an LDC to obtain nonproprietary is by importing the hardware required and then either
implementing a training program for its use or dispatching managerial personnel to study how to use the hardware.
Experience tends to favor home-based training programs, initially with expatriate instructors from developed
countries and later with indigenous instructors, over the alternative of sending people from LDCs to learn abroad.
The advantage is twofold:
1. The home-based program ensures better adaptation of the technology to local conditions.
2. Fallout from the program is minimized by reducing the risk of “brain drain,” which has ravaged many foreign-
based programs.
Importing technology intensive goods is the third method of obtaining new technology.
IMPORTING PROPRIETORY TECHNOLOGY :

An LDC’s access to proprietary technology is far more complicated. To acquire embodied technology it
must attract direct investments by the desired industry. The direct cost of such acquisition is any special incentives
that the country is required to offer to interest the potential investor, who may have more profitable investment
alternatives elsewhere. If the incentives offered exceed the investor’s opportunity cost of forgoing its other alternative,
parties, the LDC and the multinational corporation (MNC), benefit. The LDC has no concrete way of assessing data
and the MNC’s opportunity cost: it lack both the necessary data and the expertise. This gives the MNC a strategic
bargaining advantage and wide latitude for its demands for incentives.
Proprietary technology that are readily for sale can be transferred by exporting turnkey projects, licensing
patents or trademarks, selling formulas or blueprints, organizing training programs, Orr dispatching experts. The
choice depends again on the seller’s preference-which serves the MNC’s objectives best. Owner willingness to
sell proprietary technologies varies widely. Some technologies, such as that of the latest IBM computers or coca-
cola syrup, are absolutely nonnegotiable. At the other extreme are the so-called shelved technologies, for which
their owners are anxious to find any takers at all.
The shelved technologies are mainly by-products of corporate R & D activities. For example, in the process of
seeking improvements in aircraft and spacecraft technologies, Boeing researchers have discovered numerous patent-
able techniques and compounds for which the company has no anticipated use.
The Market Model

LDCs’ comparative technology deficiencies require access to technologies that belong to private firms.
The governments of developed nations can facilitate the international transactional transfer process. But they
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cannot force the transfer to take place without expropriating private property. LDCs’ requests for treaty obligations
or other official commitments by industrial national to guarantee an expeditious and an expeditious and inexpensive
transfer of technology is, therefore, largely a misdirected rhetoric.
Right and Wrong Technology

Any manufacturing process can usually set up using alternative configurations of equipment. In selecting the
optimal equipment configuration, we must look beyond the general goals of low cost and high productivity and
consider each configuration’s demands for labor skills and attitudes, supervision, industrial engineering for tools and
manufacturing techniques, materials and supplies, maintenance, product scheduling, inventory controls, and quality
control procedures. Each of these ingredients is directly affected by the environment. The economic environment
affects costs and availability of workers; the political environment establishes what is acceptable for a plant to make
and how. Thus, it is imperative that a technical strategy be derived in part from a realistic assessment of the total
environment in which it is to operate.
Nationalism
The technology supply of LDCs is powerfully influenced by the policies of public authorities. Some groups
in developing countries oppose technology imports and insist on indigenous production of new technology. They
argue that since technology and growth are closely linked, those nations who are behind in the production of
technology are destined to perpetual backwardness. This is false reasoning.
As high technology applications—automation, computerization, and robotics—are replacing many
traditional factory systems in industrial countries, much old equipment is surpluses as economically obsolete,
though physically intact. Many LDCs’ needs for industrial systems can be met by utilizing this technological slack.
Indeed, a number of multinationals have already affected transfers of entire factories to their affiliates in LDCs.
Automobiles, trucks, refrigerators, shoes, pharmaceuticals, and metal fabrication head the list, but there are
more and more others. Such they benefit the multinationals by extending the productive life of their capital assets.
Parties in the Transfer Process

International technology transfer has both horizontal and a vertical dimension, each with its own elements.
From the horizontal perspective, the three basic elements in technology transfer are the home country, the host
country and the transaction The vertical dimension of technology transfer refers to the issues specific to the
nation state, or to the industries or firms within the home and host countries.
In general, the various elements may be categorized as (i) home country, (ii) host country and (iii) the
transaction.
Home Country’s Reactions to Technology Transfers
Home countries express apprehensions about the export of their technology. They have reasons to oppose the
export of technology. They argue that the established of production facilitates by MNCs in subsidiaries abroad decreases
their export potential. Additionally, they claim, because some of the MNCs imports stem from their subsidiaries, the
volume of imports of the home country tends to increase. Given the decrease in exports and increase in imports, the
balance of trade tends to be adverse to be adverse to the home country. Besides technology transfer tends to affect
adversely comparative advantages of the country. Labor unions in the home country too oppose technology transfer on
the ground that the jobs generated from the new technology will benefit the country citizens.
Host Country’s Reactions to technology Transfers
More serious are the reactions of the host country to transfer. The subject of technology transfers is highly
sensitive, often evoking strong reservations against it from the country citizens. The criticisms against technology
transfer are based on economic and social factory.
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Economic Implications
Economic implications include payment of fee, royalty, dividends, interest and salaries to technicians and
tax concessions resulting in loss to the national exchequer. All these are payable to the transferring country and
might prove very expensive to the host country. In addition to the payments just stated, the technology supplier
often succeeds in extracting payments through various other techniques like over-pricing and buying intermediates
at high prices. There are malpractices too, for example, tie-up purchase, and restriction on exports, and charging
excessive prices.
Many times, the type of technology transferred by international business is not appropriate to developing
countries. The technology that is developed is inevitably the one most suitable for industrial countries which are
appropriate to resources endowment of developed nations. Such technology are not in the interest of developing
countries.
Social Implications
The social and cultural implications of technology transfer are more serious than the economic significance.
Along with the transfer of technology, there is the transmission of culture from the exporting countries. The
Indians who work in firms using such imported technology get influenced and accustomed to the skills, concepts,
policies, practices, thoughts, and beliefs.Then there are social problems like pollution, urbanization, congestion,
depleted natural resources, and similar other evils.
PRICING & REGULATION :

In a cross border transaction, countries on either side would like to ensure that it gets its due share of
taxes. Transfer Pricing Regulations seek to achieve this objective. Transfer pricing means pricing of goods,
services or intangibles when they are provided for use or consumption to a related party (e.g. subsidiary, associate).
Since it’s possible for these related parties to transfer profits or losses between tax jurisdictions they operate
under, such intra group transactions could be guise for potential tax avoidance. This makes the tax authorities
and businesses pay special attention to such transactions, as the tax authorities seek to detect tax avoidance
and businesses seek to structure and price the transactions in a manner that are tax compliant and yet meet their
group objectives. For global groups, this task is not only quite complex as they seek to minimise the total tax
liability of the group as a whole. Take an example of a subsidiary company in India receiving technical support
services from its overseas associated enterprises for a charge. Now it is possible that the overseas associated
enterprise may charge the Indian entity in a manner that will result in shifting of profits to an overseas jurisdiction
say by charging a abnormally high price. This is only possible because a foreign enterprise is able to exercise
control over the Indian associate. But, if they were unrelated then pricing would have been fixed by market forces
without any influence by a group company. Thus, whenever there is an international transaction between associated
enterprises, the Indian transfer pricing regulations come into play.
SIGNIFICANCE MEANING AND APPLICABILITY :

1) The Transfer Pricing provisions were brought under Indian income tax laws from financial year 2001-02.
2) With a view to provide a detailed statutory framework which, can lead to computation of reasonable, fair and
equitable profits and tax in India, in the case of such multinational enterprises, the Finance Act, 2001 substituted
the then existing section 92 with sections 92A to 92F in the Income-tax Act, 1961, relating to computation of
income from an international transaction having regard to the arm’s length price, meaning of associated enterprise,
meaning of information and documents by persons entering into international transactions and definitions of
certain expressions occurring in the said section. The Central Board of Direct Taxes (CBDT) has come out with
Transfer Pricing Rules - Rule 10A to Rule 10E.
3) Since that time the Central Board of Direct Taxes (CBDT) has only made the law more complex and carried out
retrospective amendments to overrule determinations given by Tribunals and Higher Courts which were favorable
to the tax payer.
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4) The government has failed in its promise to make effective and useful rules in the areas of Safe Harbour Rules,
Advance Price Agreements and making the Mutual Agreement Procedures more speedy and effective.
5) Consequently, India is the most litigious country in the Transfer pricing Area. The amount of Tax Demands done
by revenue authorities has spiraled: Year Amounts in Rs. 2004-07 60,41,00,00,000 2007-08 16,21,00,00,000
2008-09 61,38,00,00,000 2009-10 1,09,07,00,00,000 2010-11 2,32,38,00,00,000 2011-12 4,45,36,00,00,000
6) Utmost importance is being given to transfer pricing by the Indian tax authorities. As per recent press reports,
around 2500 cases were picked up for scrutiny by the Indian transfer pricing authorities and it is estimated that the
finance ministry is attempting to raise Rs.80,000 crores from transfer pricing adjustment orders up to March
2011. The country has over 1,500 cases out of which 877 multinational cases from 25 countries are pending.
Needless to say that, transfer pricing has become an important source of raising revenues for the Indian government
hungry for more and more funds. Transfer pricing also continues to remain the topmost priority for the tax authorities
worldwide. It is therefore critical that there are no loose ends while reviewing the intra-group transfer pricing
policy.
7) The above figures show that transfer pricing is not a mere compliance exercise. It has to be used as an
effective tax-planning tool to minimize the overall tax exposure and to optimize after tax cash flows for the group
as a whole.
8) As per the provisions of section 92C the arms length price (ALP) in relation to an international transaction shall
be determined by any of the following methods, being the most appropriate method, having regard to the nature of
transaction or class of transaction or class of associated persons or functions performed by such persons or
such other relevant factors as the Board may prescribe:
(a) Comparable Uncontrolled Price Method (“CUP”)
(b) Resale Price Method (“RPM”)
(c) Cost Plus Method (“CPM”)
(d) Profit Split Method (“PSM”)
(e) Transactional Net Margin Method (“TNMM”)
(f) Any other method prescribed by CBDT Under the ALP mechanism, a permissible tolerance band is defined.
9) Applicability of Transfer Pricing in India: Transfer pricing provisions are applicable based on fulfillment of two
conditions: Firstly, there must be an international transaction. Secondly, such an international transaction must
be between two or more associated enterprises, either or both of whom are non-residents.
10) Associated Enterprises (AE) – How Identified? The basic criterion to determine associated enterprises is the
participation in management, control or capital (ownership) of one enterprise by another enterprise. The participation
may be direct or indirect or through one or more intermediaries as defined in Section 92A(1) of Income Tax Act,
1961. The above section is further supplemented by 13 clauses which enlist various situations under which two
enterprises shall be deemed to be Associated Enterprises as per Section 92A(2) of Income Tax Act, 1961.
11) What is an International Transaction? An international transaction is essentially a cross border transaction
between AEs in any sort of property, whether tangible or intangible, or in the provision of services, lending of
money etc. At least one of the parties to the transaction must be a nonresident entering into one or more of the
following transactions:
i. Transactions relating to Purchase, sale or lease of Tangible or Intangible Property
ii. Transactions relating to provision of services
iii. Capital financing transactions such as lending/borrowing, guarantees, etc.
iv. Transactions relating to business restructuring irrespective of having a bearing on profits, income, losses
or assets at the time of transaction/ future date.
v. Mutual agreement between AEs for allocation/apportionment of any cost, contribution or expense.
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An illustration of a distant ‘International Transaction’ could be where a resident enterprise exports goods to
an unrelated person abroad, and there is a separate arrangement or agreement between the unrelated person
and an AE, which influences the price at which the goods are exported. In such a case the transaction with the
unrelated enterprise will also be subject to TP Regulations (TPR). Therefore, the ambit of the TPR is very WIDE.
12) The initial onus of proof that its transfer pricing meets with the arm’s length expectation lies on the taxpayer
and it is the taxpayer who needs to discharge this onus based on comprehensive documents, if the tax
enhancement, interest and penalties were to be avoided under the Indian regulations.
13) Reference to Transfer Pricing Officer (TPO) Section 92CA of the Income Tax Act, 1961, states that where any
person, being the assessee (taxpayer), has entered into an international transaction in any previous year, and the
Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the
Commissioner, refer the computation of the arms length price in relation to the said international transaction under
section 92C to the Transfer Pricing Officer. This Officer is specially trained on International TP laws and practices
and their number has been increased from 18 to 80 in recent times with the scrutiny audit time increased from 33
months to 45 months from the end of financial year.
14) Additionally, the customs officials and the TPOs are co-ordinating in recent times.
15) Documentation / Return While there are certain relaxations in the maintenance of documentation in certain
cases, the law requires detailed maintenance of documentation if the value of the international transaction with
related parties was to exceed Rs 10 million per fiscal year.
Thirteen different types of documents are required to be maintained. These include –
i. Enterprise-wise documents:- Description of the enterprise, relationship with other associated enterprises, and
nature of business carried out.
ii. Transaction-specific documents:- Information regarding each transaction, description of the functions performed,
assets employed and risks assumed by each party to the transaction, Economic & Market Analysis etc.
iii. Computation related documents:- Describe in details the method considered, actual working assumptions,
policies etc., adjustment made to transfer price, any other relevant information, data, documents relied for
determination of arm’s Length price etc. A report from a Chartered Accountant in the prescribed form giving
details of transactions is required to be submitted within a specific time limit.
16) The Company’s case may be picked up for a compulsory transfer pricing audit by the Indian transfer pricing
authorities if the value of the international transactions with its related parties would exceed Rs 150 million per
annum. Consequently, it would be desirable to have proper documentation in place upfront so that transfer pricing
audit subsequently becomes an easier affair
17) In practice, it may not always be possible to claim corresponding adjustment in the overseas country where
the associate enterprise of the tax payer operates with the result that enhanced income pursuant to an adverse
transfer pricing adjustment in India may result in double taxation for the group on the whole. It therefore becomes
imperative to avoid all such enhancements in India based on suitable and contemporaneous documentation.
18) The transfer pricing provisions generally follow the OECD guidelines relating to the same. However, there are
certain fundamental differences in that the Indian provisions require the computation of an ‘arms length price’ as
against the internationally accepted norm of arms length range. Further, the arms length price is to be computed
as the ‘arithmetic mean’ of comparable results. A variance of around 5% of the mean may be opted for.
19) Safe Harbour Rule With a view to reduce uncertainty on the taxpayers’ front, the Finance (No. 2) Act, 2009
introduced Safe Harbour regulations in India effective form 1 April 2009. Safe Harbour has been defined to mean
‘circumstances’ in which the revenue authorities shall accept the transfer pricing declared by the taxpayer. But
this rule has not been notified1 by the Central Board of Direct Taxes(CBDT) as yet.
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20) What is an Advance Pricing Agreement (APA) An APA is an agreement between the Central Board of Direct
Taxes and any person, which determines, in advance, the arm’s length price or specifies the manner of the
determination of arm’s length price (or both), in relation to an international transaction. Hence, once APA has been
entered in to with respect to an international transaction, the arm’s length price with respect to that international
transaction, for the period specified in the APA, will be determined only in accordance with the APA. The APA
process is voluntary and will supplement appeal and other Double Taxation Avoidance Agreement (DTAA)
mechanism for resolving transfer pricing dispute. The term of APA can be a maximum of five years.
International Pricing Objectives

Following are the international pricing objectives :
1) Market Penetration : Market penetration may be a very important objective, particularly for new exporter a
firm may attempt to penetrate the market with a low price.
2) Market Share : The price may be manipulated to increase the market share. In many cases it is a corollary to
market penetration.
3) Market Skimming : This is often the case with innovative products. The product is introduced with a high initial
price to skim the cream of the market. The price may be subsequently reduced to achieve greater market
penetration.
4) Fighting Competition : Sometimes price is a tool to fight competition. A price reduction by the competitor may
have to be countered by price cuts.
5) Preventing New Entry : A firm may charge a low price even when there is scope for high price so that the
industry does not look very attractive to new entrants.
6) Shorten Payback Period : When the market is uncertain and risky because of factors like swift technological
changes, short product lifecycles, political reasons, threat of potential competition, etc., recouping the investment
as early as possible would be an important objective.
7) Early Cash Recovery : A firm with liquidity problem might give priority to generate a better cash flow.
8) Meeting Export Obligation : A company with specific export obligation may be compelled to adopt a pricing
policy that enables it to discharge its export obligation.
9) Disposal of Surplus : A company confronted with a surplus stock may resort to exporting to dispose of the
surplus. In such cases, exports sometimes take the form of dumping.
10) Optimum Capacity Utilisation : Exporting is sometimes resorted to enable the firm to achieve optimum
capacity utilisation so as to minimise the unit cost of production.
11) Return on Investment : Achieving the target rate of return is the most important pricing objective in a number
of cases.
12) Profit Maximisation : In many cases, the primary pricing objective is maximisation of profits.
PRICING DECISIONS
IN INTERNATIONAL MARKET Pricing Decisions in International
The various pricing decisions to be taken
in international marketing are : Price Standardisation vs. Differentiation Dumping
Price Standardisation
vs. Differentiation Transfer Pricing Grey Market Goods
A major problem for companies
is how to coordinate prices between Currency Considerations in Exporting
countries. There are two essential & International Marketing
opposing forces first, to achieve similar
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positioning in different markets by adopting largely standardised pricing; and second, to maximise profitability by
adapting pricing to different market conditions. The underlying forces favouring standardisation (uniform pricing)
or differentiation (market by market pricing) are shown in fig.
Price Differentiation Price Standardisation

Differences in : Differences in :
1) Average industry prices 1) Internationalisation of
2) Price segments Consumer competition.
3) Methods & importance prices Retail 2) Homogenisation of
of special offers. prices Price competitive structures.
4) Importance of own positioning 3) International activities
brands. Terms and of large retail
5) Strength of local conditions organisations.
competitors Product 4) Increased danger
6) Retailer power. line pricing of cross-border
7) Terms & Conditions. Special arbitrage.
8) Consumer offers
preferences.
9) Price interest and
awareness.
Fig. Structural Factors of Standardised versus Differentiated Pricing in European

Consumer Goods Markets
In determining to what extent prices should be standardised across borders two basic approaches appear:
1) Price Standardisation/ Uniform Pricing : This is based on setting a price for the product as it leaves the
factory. At its simplest it involves setting a fixed world price at the headquarters of the firm. This fixed world price
is then applied in all markets after taking account to factors such as foreign exchange rates and variance in the
regulatory context. For the firm this is a low-risk strategy, but no attempt is made to respond to local conditions
and so no effort is made to maximise profits. However, this pricing strategy might be appropriate if the firm sells
to very large customers, who have companies in several countries. In such a situation the firm might be under
pressure from the customer only to deliver at the same price to every country subsidiary, throughout the customer’s
multinational organisation. Another advantage of price standardisation includes the potential for rapid introduction
of new products in international markets and the presentation of a consistent (price) image across markets.
2) Price Differentiation/Market by Market Pricing : This allows each local subsidiary or partner (agent, distributor,
etc.) to set a price that is considered to be the most appropriate for local conditions, and no attempt is made to
coordinate prices from country to country. Cross-cultural empirical research has found significant differences in
customer characteristics, preference and purchasing behaviour among different countries. The weakness with
‘price differentiation’ is the lack of control that the headquarters has over the prices set by the subsidiary operations
or external partner. Significantly different prices may be set in adjacent markets, and this can reflect badly on the
image of multinational firms. It also encourages the creation of parallel importing/grey markets, whereby products
can be purchased in one market and sold in another, undercutting the established market prices in the process.
Dumping
In international trade, this occurs when one country exports a significant amount of goods to another
country at prices much lower than in the domestic market. It is a type of discrimination in which different prices
are charged for the same product in the similar market. Dumping is defined as the act of a manufacturer in one
country exporting a product to another country at a price which is either below the price it charges in its home
market or is below its costs of production. The term has a negative connotation as advocates of free markets see
“dumping” as a form of protectionism.
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Types of Dumping
Dumping is of three types. These are as follows :
1) Sporadic Dumping : It occurs when a manufacturer with unsold inventories wants to get rid of distressed and
excess merchandise. To preserve its competitive position at home, the manufacturer must avoid strating a price
war that could harm its home market. One way to find a solution involves destroying excess supplies, as in the
example of Asian farmers dumping small chickens in the sea or burning them. Another way to solve the problem
is to cut losses by selling for any price that can be realised. The excess supply is dumped abroad in a market
where the product is normally not sold.
2) Predatory Dumping : It is more permanent than sporadic dumping. This strategy involves selling at a loss to gain
access to a market and perhaps to drive-out the competition. Once the competition is gone or the market established,
the company uses its monopoly position to increase price. Some critics question the allegation that predatory
dumping is harmful by pointing out that if price is subsequently raised by the firm that does the dumping, former
competitors can rejoin the market when it becomes more profitable again.
3) Persistent Dumping : It is the most permanent type of dumping, requiring a consistent selling at lower prices
in one market than in others. This practice may be the result of firm’s recognition that markets are different in
terms of overhead costs and demand characteristics. For example, a firm may assume that demand abroad is
more elastic than it is at home. Based on this perception, the firm may decide to use incremental or marginal cost
pricing abroad while using full-cost pricing to cover fixed costs at home. This practice benefits foreign consumers,
but it works to the disadvantage of local consumers.
4) Reverse Dumping : The three kinds of dumping just
discussed have one characteristic in common each involves A
charging lower prices abroad than at home. It is possible, Arm’s length
Transfer price
however, to have the opposite tactic reverse dumping. In price
order to have such a case, the overseas demand must be
Related parties B C Unrelated parties
less elastic, and the market will tolerate a higher price. Any
dumping will thus be done in the manufactur’s home market
by selling locally at a lower price. Fig. Concept of Transfer Pricing
Transfer Pricing
Transfer pricing is arbitrary pricing of exports and imports that may be greater than or less than the arm’s
length prices. It is basically the pricing of intra-corporate transactions. Different units of an MNC operate in different
countries on the basis of vertical and horizontal linkages. Varieties of goods, especially intermediate goods, move
among different units. Prices in such cases are often arbitrary through under invoicing and over-invoicing of
transactions.
The concept of transfer pricing, which was earlier limited to foreign multinational companies, is becoming
increasingly significant for Indian companies as a result of their increasing internationalisation. Indian firms enter
international markets by way of joint ventures, wholly owned subsidiaries, etc. Companies own distribution systems
in international markets, which make transfer pricing crucial for formulating an international pricing strategy. The
price of an international transaction between related parties is called transfer price.
INTERNATIONAL COLLABORATIVE ARRANGEMENTS AND STRATEGIC ALLIANCES

INTRODUCTION
Many of the modes of entry from which firms may choose involve some form of collaboration with other
companies, i.e., a formal, long-term contractual agreement between or among partners. A strategic
alliance represents a collaborative agreement between firms that is of strategic importance to one or both partners’
competitive viability.
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MOTIVES FOR COLLABORATIVE ARRANGEMENTS : Each participant in a collaborative arrangement has its
own basic objectives for operating internationally as well as its own motives for collaborating with a partner.
1. Gain Location-Specific Assets : Cultural, political, competitive and economic differences among countries
create challenges for companies that operate abroad. To overcome such barriers and gain access to location-
specific assets (e.g., distribution access or a competent workforce), firms may pursue collaborative arrangements.
2. Overcome Legal Constraints : Countries may prohibit or limit the participation of foreign firms in certain
industries, or discriminate against foreign firms via tax rates and profit repatriation. Firms may be able to overcome
such barriers via collaboration with a local partner.
3. Diversify Geographically : By operating in a variety of countries, a firm can smooth its sales and
earnings; collaborative arrangements may also offer a faster initial means of entering multiple markets or establishing
multiple sources of supply.
4. Minimize Exposure in Risky Environments. The higher the risk managers perceive with respect to a foreign
operation, the greater their desire to form a collaborative arrangement.
TYPES OF COLLABORATIVE ARRANGEMENTS : While collaborative arrangements allow for a greater

spreading of assets across countries, the various types of arrangements necessitate trade-offs among objectives.
Finding a desirable partner can be problematic. A firm has a wider choice of operating forms and partners when
there is less likelihood of competition and when it has a desired, unique, difficult-to-duplicate resource.
A] Some Considerations in Collaborative Arrangements : Two critical variables that influence the choice
of collaborative arrangement are a firm’s desire for control over its foreign operations and its prior expansion into
foreign ventures.
1. Control : The loss of control over flexibility, revenues and competition is a critical variable in the selection of
forms of foreign operation. The more a firm depends on collaborative arrangements, the more likely its control will
be lessened over decisions regarding quality, new product directions and production expansion.
2. Prior Expansion of the Company. If a firm already owns and controls operations in a foreign country, the
advantages of collaboration may not be as attractive as otherwise.
B] Licensing : Under a licensing agreement, a firm (the licensor) grants rights to intangible property to another
company (the licensee) to use in a specified geographic area for a specified period of time; in exchange,
the licensee ordinarily pays a royalty to the licensor. Such rights may be exclusive or nonexclusive. Usually
the licensor is obliged to furnish technical information and assistance, while the licensee is obliged to exploit the
rights effectively and pay compensation to the licensor. Intangible property may be classified as:
• patents, inventions, formulas, processes, designs, patterns • trademarks, trade names, brand names
• copyrights for literary, musical, or artistic compositions • franchises, licenses, contracts
• methods, programs, procedures, systems.
1. Major Motives for Licensing : Licensing often has an economic motive, such as the desire for faster start-
up, lower costs, or access to additional property rights (e.g., technology). For the licensor, the risks and costs of
a given venture are lessened; for the licensee, costs are less than if it had to develop a product or process on its
own. Cross-licensing represents the situation in which companies in various countries exchange technology
rather than compete with each other with every product in every market.
2. Payment : (See Figure 14.4) The amount and type of payment for licensing arrangements may vary.
Each contract tends to be negotiated on its own merits; the bargaining range is based on dual expectations. Both
agreement-specific and environment-specific factors may affect the value of a license.
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3. Sales to Controlled Entities : Many licenses are given to firms owned in part or in whole by the licensor. From
a legal standpoint, subsidiaries are separate companies; thus, a license may be required in order to
transfer intangible property.
C] Franchising : Franchising represents a specialized form of licensing in which the franchisor not only sells
an independent franchisee the use of the intangible property essential to the franchisee’s business, but also
operationally assists the business on a continuing basis. In a sense, the two partners act like a vertically integrated
firm because they are interdependent and each produces a part of the product that ultimately reaches the customer.
1. Organization of Franchising : A franchisor may penetrate a foreign country by dealing directly with its
foreign franchisees, or by setting up a master franchise and giving that organization the right to open outlets on
its own or to develop sub-franchises in the country or region.
2. Operational Modifications : Franchise success is derived from three factors: product standardization, effective
cost control and high recognition. Nonetheless, franchisors face a classic dilemma: the more they standardize
on a global basis, the lower the potential for product acceptance in a given country; the more they permit adaptation
to local conditions, the less the franchisor can offer the franchisee, the higher the costs and the less the control
by the franchisor.
D] Management Contracts : A management contract represents an arrangement in which one firm provides
management personnel to perform general or specialized functions to another firm for a fee. A firm usually pursues
such contracts when it believes a partner can manage certain operations more efficiently and effectively than it
can itself.
E] Turnkey Operations : Turnkey operations represent a type of collaborative arrangement in which one firm
contracts with another to build complete, ready-to-operate facilities. Usually, suppliers of turnkey facilities are
industrial-equipment and construction companies; projects may cost billions of dollars; customers most often
are government agencies or large MNEs.
F] Joint Ventures : A joint venture represents a direct investment in which two or more partners share ownership.
As a firm’s share of the equity declines, its ability to control a given operation also declines. A consortium
represents the joining together of several entities (e.g., companies and governments) to combine resources and/
or to strengthen the possibility of pursuing a major undertaking. Other forms of joint ventures include:
• two firms from the same country joining together in a foreign market
• a foreign firm joining with a local firm
• firms from two or more countries establishing an operation in a third country
• a private firm and a local government
• a private firm joining a government-owned firm in a third country.
G] Equity Alliances : An equity alliance represents a collaborative arrangement in which at least one of the
collaborating firms takes an ownership position (usually a minority) in the other(s). The purpose of an equity
alliance is to solidify a collaborating contract, thus making it more difficult to break.
IMPORTANCE OF INTERNATIONAL COLLABORATIVE ARRANGEMENTS

The importance of international collaborative arrangements can be explained with the help of following points:
1) Optimum Resource Utilisation : Resources are not easily available. A company’s competitive position is
determined by the volume of resources available to it. Through collaborative arrangements, resources can be
transferred from nations that are rich in resources to the ones having poor resource availability.
2) Technological Assistance : Technology is continuously evolving. The pace of technological development is
low in the nations that are underdeveloped. Superior and advanced technology is required by the companies for
increasing the quality of products and services.
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These technological differences are minimised with the help of foreign collaboration.
3) International Relations : Collaborative arrangements help in developing relations between nations, thereby
minimising the difference among them and in creating a positive climate. The foundation of cultural relations is
build on these international relations, as they encourage peace and harmony among nations.
4) Development of Economies : Collaboration between countries facilitates economic development. It helps in
increasing a country’s economic growth by :
i) Accumulating physical, capital and human resources,
ii) Providing latest technologies to the underdeveloped nations, and
iii) Rapid industrial development.
5) Research and Development : A collaborative arrangement motivates companies for developing innovated
products and technologies. This in turn encourages the firms to invest and focus on their research and development
facilities.
6) Improves Standard of Living : As foreign collaboration results in increased economic development, it leads
to more employment opportunities, better working environment and improved living standards.
STRATEGIC ALLIANCE :
A strategic alliance is a term used to describe a variety of cooperative agreements between different
firms, such as shared research, formal joint ventures, or minority equity participation. The modern form of strategic
alliances is becoming increasingly popular and has three distinguishing characteristics:
1. They are frequently between firms in industrialized nations
2. The focus is often on creating new products and/or technologies rather than distributing existing ones
3. They are often only created for short term durations
To gain access to new markets and technologies while achieving economies of scale, international marketers
have a number of organisation forms to choose from licensing, partially owned or wholly owned subsidiaries, joint
ventures and acquisitions. A relatively new organisational form of market entry and competitive cooperation is strategic
alliance. This form of corporate cooperation has been receiving a great deal of attention as large multinational firms
still find it necessary to find strategic partners to penetrate in a market.
There is no clear and precise definition of strategic alliance. There is no one way to form a strategic
alliance. An alliance may be in the areas of production, distribution, marketing, and research and development
America Online is a good example of strategic alliances.
Strategic alliances may be the result of mergers, acquisitions, joint ventures, and licensing agreements.
Joint ventures are naturally strategic alliances, but not all strategic alliances are joint ventures. Unlike joint ventures
which require two or more partners to create a separate entity, a strategic alliance does not necessarily require a
new legal entity. As such, it may not require partners to make arrangements to share equity. Instead of being an
equity-based investment, a strategic alliance may be more of a contractual arrangement whereby two or more
partners agree to cooperate with each other and utilise each partner’s resources and expertise to penetrate a
particular market.
Companies enter into alliance relationships for a variety of reasons. Those in the emerging Latin American
economies are similar to their counterparts in many other nations in terms of their motivations. In general, through
alliances with foreign partners, they seek resource acquisition, competitive posturing, and risk/cost reduction.
While companies have paid attention to the hard side of alliance management (e.g. financial issues and other
operational issues), the soft side also requires attention. The soft side has to do with the management of relationship
capital in an alliance. Relationship capital focuses on the socio psychological aspects of the alliance, and the two
important areas of relationship capital are mutual trust and commitment.
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Types of Srategic Alliances

Strategic alliance can be categorised on the following basis:
1) On the Basis of Directions of Alliances : Like M & As collaborative ventures can be categorised as vertical
backward (or upstream), vertical forward (or downstream), horizontal or diversified. The company must always
retain control of its core strategic assets and activities but can outsource other activities to partners. Following
are the types of strategic alliances:
i) Diversification Alliances : Alliances between businesses in unrelated areas are often used by one or more of
the businesses to take them into a new competitive arena. This form of alliance is viewed as important from a
portfolio perspective in so far as the key advantage of diversification is to broaden product and market portfolio in
order to reduce the risk of trauma in any one sector.
ii) Vertical Networks and Alliances : These can be upstream in the supply chain toward suppliers or downstream
toward distributors and customers. These alliances produce the following potential benefits:
a) The ability for each collaborating business to concentrate on its own core competence, while at the
same time benefiting for the core competences of the other businesses in the alliance, creating synergy;
b) Improved responsiveness if just-in-time management techniques are employed;
c) Creating of new barriers to entry;
d) Production of logistical economies of scale;
e) Generation of superior information on activities at all stages of the supply chain; and
f) Tying in of suppliers, distributors, and customers to the business.
2) On the Basis of Extent and Timescale of Collaboration : There are several other methods than can be
used to distinguish alliances, which are as follows :
i) Extent of Cooperation Focused and Complex Alliances : It is possible to distinguish alliances by where they
are positioned in respect to the number of areas in which the parties cooperate with each other. Some alliances
are set-up between businesses in order to collaborate in only one area of activity, such as joint purchasing,
shared research, or shared distribution. A continuum exists between the two extremes of fully focused (collaboration
in one activity only) and complex (collaboration in all activities the parties act in concert to the point where they
appear to be one single organisation).
ii) Timescales of the Collaboration : Another way in which alliances can be sub-divide is by asking how long
they are intended to last.
Some are set-up for a specific project only, and are referred as ‘joint ventures’ time-limited arrangements for
the joint accomplishment of shared aim or project. Others can last for many years and are intended to enable
both (or all) parties to intensify the strength of their strategic position on an ongoing basis.
iii) Consortiums : One particular type of (usually) short to mediumterm alliance is the consortium. Consortiums
are often created for time-limited projects, such as civil engineering or construction developments. The channel
tunnel was constructed by a number of construction companies in a consortium that was called Trans Manche
Link (TML). TML was dissolved on completion of the project. Camelot, the first U.K. National Lottery operator was
another example of a consortium.
ADVANTAGES OF STRATEGIC ALLIANCES

The advantages or merits or strategic alliance re as follows:
1) Spread and Reduce Costs : To produce or sell abroad, a company must incure certain fixed costs. At a small
volume of business, it may be cheaper for it to contract the work to a specialist rather than handle it internally.
2) Specialise in Competencies : The resource-based view of the firm holds that each company has a unique
combination of competencies. A company may seek to improve its performance by concentrating on those activities
that best fit its competencies and by depending on other firms to supply it with products, services, or support
activities for which it has lesser competency.
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3) A void or Counter Competition : Sometimes markets are not large enough to hold many competitors.
Companies may then band together so that they do not have to compete with one another.
4) Secure Vertical and Horiontal Links : There are potential cost savings and supply assurances from vertical
integration. However, companies may lack the competence or resources needed to own and manage the full
value-chain of activities. Horizontal links may provide finished products or components. For finished products,
there may be economies of scope in distribution.
5) Gain Location-Specific Assets : Cultural, political, competitive, and economic differences among countries
create barriers for companies that want to operate abroad. When they feel ill equipped to handle these differences,
such companies may seek to collaborate with local companies that will help manage local operations.
6) Overcome Governmental Constraints : Many countries limit foreign ownership. For example, the United
States limits foreign ownership in airlines that service the domestic market and in sensitive defence manufacturers.
Mexico limits ownership in the oil industry. China and India are particularly restrictive, often requiring foreign
companies either to share ownership or make numerous concessions to help them meet their economic and
sovereignty goals. Thus, companies may have to collaborate if they are to serve certain foreign markets.
7) Minimise Exposure in Risky Environments : Companies worry that political or economic changes will affect
the safety of assets and their earnings in their foreign operations. One way to minimise loss from foreign political
occurrences is to minimise the base of assets located abroad or to share them. A government may be less willing
to move against a shared operation for fear of encountering opposition from more than one company, especially
if they are from different countries and can potentially elicit support from their home governments.
Disadvantages of Strategic Alliance:

The disadvantages of strategic Alliance are as follows:
1) Adverse Selection: One serious problem with alliances is the adverse selection of partners. Potential
cooperative partners can misinterpret the skills, abilities, and other resources that they will bring to an alliance.
The partner may promise to bring to the alliance certain resources that if either does not control or cannot
acquire.
2) Moral Hazard: Partners in an alliance may possess resources and capabilities of high quality and of considerable
value but fail to make them available to alliance partners.
3) Hold Up: A hold up may take place even without an adverse selection. Once a strategic alliance has been
formed, partners may make investments that have value only in the context of that alliance and in no other
activities.
4) Access to Information: Access to information is another drawback of strategic alliance .For collaboration to
work effectively, one alliance partner (or both) may have to provide the other with information it would prefer to
keeps secret. It is often difficult to identify information needs ahead of time.
5) Distribution of Earnings: This is the most serious problem between alliance partners. As the partners share
risks and costs, they also share profits. This amounts to over simplification of the issue. There are other financial
considerations that can cause conflict.
6) Potential Loss of Autonomy: Loss of autonomy is another potential drawback of a strategic alliance. It was for
this reason that the late Dhirubhai Ambani never countenanced the idea of an alliance. He bought technology for
his PFY plant at Patalaganga from DuPont but refused their equity participation.
7) Changing Circumstances: Changing circumstances may also affect the viability of a strategic alliance. The
economic conditions that motivated the co-operative arrangement may no longer exist, or technological advances
may render the alliance obsolete.
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PROBLEMS OF COLLABORATIVE ARRANGEMENTS : Dissatisfaction with the results of collaboration can

cause an arrangement to break down. Problems arise for a number of reasons.
A. Collaboration’s Importance to Partners : One partner may give more attention to the collaboration than the
other—often because of a difference in size. An active partner will blame the less active partner for its lack of
attention, while the less active partner will blame the other for poor decisions.
B. Differing Objectives : Although firms may enter into collaborative arrangements with complementary
capabilities and objectives, their views regarding such things as reinvestment vs. profit repatriation and desirable
performance standards may evolve quite differently over time.
C. Control Problems : When no single party has control of a collaborative arrangement, the venture may lack
direction; if one party dominates, it must still consider the interests of the other. By sharing assets with another
firm, a company may lose some control over the extent and/or quality of the assets’ use. Further, even when
control is ceded to one of the partners, both may be held responsible for problems.
D. Partners’ Contributions and Appropriations : One partner’s ability to contribute technology, capital and
other assets may diminish (at least on a relative basis) over time. Further, in almost all collaborations the danger
exists that one partner will use the others’ contributed assets, or take more than its fair share from the operation,
thus enabling it to become a direct competitor. Such weaknesses may cause a drag on a venture and even lead
to the dissolution of the agreement.
E. Differences in Culture : Differences in both national and corporate cultures may cause problems
with collaborative arrangements, especially joint ventures. Firms differ by nationality in terms of how they evaluate
the success of an operation (e.g., profitability, strategic market position and/or social objectives). Nonetheless, joint
ventures from culturally distant countries tend to survive at least as well as those between partners from similar
cultures.
Strategic Alliance (already covered in modes of entry into international business)
CONCEPT OF BALANCE OF PAYMENTS ACCOUNT :

The Balance of Payments or BoP is a statement or record of all monetary and economic transactions
made between a country and the rest of the world within a defined period (every quarter or year). These records
include transactions made by individuals, companies and the government. Keeping a record of these transactions
helps the country to monitor the flow of money and develop policies that would help in building a strong economy.
In a perfect scenario, the Balance of Payments (BoP) should be zero. That is, the money coming in and the
money going out should balance out. But that doesn’t happen in most cases. A country’s BoP statement correctly
indicates whether the country has a surplus or a deficit of funds. A BoP surplus indicates that a country’s exports are
more than its imports. A BoP deficit, on the other hand, indicates that a country’s imports are more than exports.
Both scenarios have short-term and long-term effects on the country’s economy.
COMPONENTS OF BOP
The accounting contents or components of balance of payments are:
Components of BOP
Current Account Capital Account
Official Reserve Account Other Items in the

Balance of Payments
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1) Current Account : Generally current account is sub-divided into three types, vi. (i) the merchandise trade balance,
(ii) the services balance and (iii) the balance on unilateral transfers. Only “current” data is recorded under this
category and there is no place for future planning. The additional amount presents the money acquired and the
arrears stands for the expenses incurred. Following are the three types of current account:
i) Merchandise : The merchandise trade balance represents account stability between the imported and exported
concrete objects like vehicles, PC, equipments, etc. It is favourable in case the export exceeds imports. It is
unfavourable in case the import is more than exports. Merchandise account of imports and exports is the greatest
element to represent the international transactions in most of the nations.
ii) Invisibles : The second type of current account includes the services in form of shipping, interest payments,
tourism, dividends, insurance charge and expenses on security. These services are at times also known as
invisible trade.
iii) Unilateral Transfers : Unilateral transfers include grant-in-aids and donations from the public as well as
the private sector. The donations from the private sector comprises of the different types of gifts and charitable
contributions. For example, the gifts and funds sent by those working outside the country for their families are
a part of private transfer. Funds, products and services which are sent to foreign nations as relief are also
parts of government transfers.
2) Capital Account : The capital account refers to a record of the complete national currency value related with
monetary dealing for a given time period, between the citizens of the country and those outside. Investments,
loans and other monetary resources as well as the associated responsibilities are part of it. Capital account
consists of monetary deals related with global business and cash flow related with change in the monetary
pattern due to buying international stocks, bonds as well as the money deposited. Following are the different
types of capital account:
i) Direct Investment : Direct investment takes place at the time when the shareholder buys equity like stocks,
or purchases the complete organisation or innovate a section of it. Usually, the foreign direct investment (FDI)
happens when the organisations are able to make the best out of the different flaws in the marketplace.
Foreign direct investment is also carried out by the organisations when the prospective gains through investing
in international market seem to supersede the invested amount, which would aid in the exchange of the
currency and would also embark potential risk taking. The chances are that the gains through the international
trade exceeds that from the national trade on account of little expense on resources and production, supportive
funding, grants on investments, complete control over the native market, etc.
ii) Portfolio Investment : Portfolio investments stand for buying and selling of international monetary resources
like bonds and stocks which are free from the factors like shifting the administration. Both domestic and
international investors actually look for sumptuous gains, security and cash flow through their invested amount.
In the past few years there has been an explosion in investment in the international market, particularly due to
the fact that the investor sees the risk factor by branching out towards the international market. Usually, the
investors have contemplated the fact that they can reduce the factor by spreading towards the global market,
instead of solely relying on the domestic market. Moreover, some international markets are also expected to
bring the advantage of heavy gains to the investors.
iii) Capital Flows : The third type of capital account is the capital flows. It stands for the investment which
would be fruitful within a year. Deposits in accounts, short-term securities, short term loans, investment in the
stock market, etc., are the part of it. These types of claims are highly susceptible to associated changes in the
interest rates in associated countries and the expected variation in the rate of exchange. For example, in case
the interest rate in India booms without bringing about any change in other related variables, the investors
would like to make the best of it by investing or depositing in India; in case the hike in interest rate also brings
about an associated down fall in the value of Indian currency, investors might shun investing here.
3) Official Reserve Account : Official reserves refer to governmental resources. It stands for buying and selling
through the centrally recognised bank (for example, India’s central bank is ‘The Reserve Bank of India, RBI’). In case
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of arrears or excess in the balance of payments, there is a necessity to bring about the associated variations in the
official reserve. For example, if the country is experiencing shortage of BOP, the central bank has to compensate for
it by giving the official resources, like SDRs, foreign exchange or gold; it might also borrow from the global central
banks. On the other hand, in case there is excess of BOP in the country, the central bank can keep the surplus
amount for the future use or can payback the international debts.
4) Other Items in the BOP (Balance of Payments) : The other items in the BOP are the things which could not
be incorporated in any of the above types. In order to maintain the balance in BOP, they are included in it. Following
are the different types of residual things:
i) Errors and Omissions : In this category, the errors in recording the data may happen at the time of accounting.
The reasons behing these flaws could be depicting the sample instead of the exact data of the dealings (for
example, the average export of rice is presented, rather than giving an exact record of each and every quintal),
fraudulence such as reporting lesser amount for avoiding the levied taxes, illegal transactions outside the
country, and so on.
ii) Official Reserve Transactions : Except this category, the remaining types are known as ‘autonomous
transactions’ as they are carried out with autonomous intention; this implies that they are carried out without
the desire to bring about the relative effect on the BOP or rate of exchange. On the other hand, the government
or the national central bank carries out these transactions with some particular global financial aim, and
hence, keeps these transactions under close scrutiny in order to study how they would influence BOP and the
rate of exchange. Consequently, these transactions are not independent. The foremost under this type is the
variations in the native official reserved resources. A country keeps these resources as global currencies, or
securities for international currencies, gold, Special Drawing Rights (SDR) alongwith the IMF. The SDR scheme
permits a country to take the benefits of international exchange equivalent to its reserves alongwith IMF. It is
quite essential that the variation in the deposits of the country be revealed in the total worth of the BOP items.
These resources are cut down to spend on the expenses in the international market. These cutting down of
the funds are reflected as credits in BOP (as selling them would bring flow of funds in the nation). The excess
of these funds are reflected as debit as they are procuring resources.
SIGNIFICANCE OF BALANCE OF PAYMENT ACCOUNT (BOP) :

The BOP statement provides a clear picture of the economic relations between different countries. It is an integral
aspect of international financial management.
The BOP statement provides information pertaining to the demand and supply of the country’s currency. The
trade data shows a clear picture of whether the country’s currency is appreciating or depreciating in comparison
with other countries. Next, the country’s BOP determines its potential as a constructive economic partner. In
addition, a country’s BOP indicates its position in international economic growth.
By studying its BOP statement and its components closely, a country would be able to identify trends that may be
beneficial or harmful to the economy and take appropriate measures.
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UNIT - II
INTERNATIONAL BUSINESS ENVIRONMENT
INTRODUCION
The environment of any organisation is the aggregate of all conditions, events and influences that surround
and affect it. The International Business Environment imposes several constraints on an international enterprise
and has considerable impact and influence on the scope and direction of its activities. The enterprise, on the other
hand, has very little control over its international environment. The basic job of the enterprise, therefore, is to
identify with the environment in which it operates, and to formulate its policies in accordance with the forces which
operate in its environment.
International marketing is different from domestic marketing because the environment changes when a firm
crosses international borders. Typically, a firm understands its domestic environment quite well, but is less familiar
with the environment in other countries and must invest more time and resources into understanding the new
environment. The environment of international marketing is regarded as the sum total of all the external forces
working upon the firm as it goes about its affairs in foreign and domestic markets.
The environment can be classified in terms of domestic, foreign, and international spheres of impact. The
domestic environment is familiar to managers and consists of those uncontrollable external forces that affect the
firm in its home market.
ECONOMIC ENVIRONMENT
Economic conditions, economic policies and the economic system are the important external factors that
constitute the economic environment of a business.
The economic conditions of a country-for example, the nature of the economy, the stage of development
of the economy, economic resources, the level of income, the distribution of income and assets, etc-are among
the very important determinants of business strategies.
In a developing country, the low income may be the reason for the very low demand for a product. The sale
of a product for which the demand is income-elastic naturally increases with an increase in income. But a firm is
unable to increase the purchasing power of the people to generate a higher demand for its product. Hence, it may
have to reduce the price of the product to increase the sales. The reduction in the cost of production may have to
be effected to facilitate price reduction. It may even be necessary to invent or develop a new low-cost product to
suit the low-income market.
Thus Colgate designed a simple, hand-driven, inexpensive ($10) washing machine for low-income buyers
in less developed countries. Similarly, the National Cash Register Company took an innovative step backward by
developing a crank-operated cash register that would sell at half the cost of a modern cash register and this was
well received in a number of developing countries.
In countries where investment and income are steadily and rapidly rising, business prospects are generally
bright, and further investments are encouraged. There are a number of economists and businessmen who feel
that the developed countries are no longer worthwhile propositions for investment because these economies
have reached more or less saturation levels in certain respects.
In developed economies, replacement demand accounts for a considerable part of the total demand for
many consumer durables whereas the replacement demand is negligible in the developing economies.
The economic policy of the government, needless to say, has a very great impact on business. Some types or
categories of business are favorably affected by government policy, some adversely affected, while it is neutral in
respect of others. For example, a restrictive import policy, or a policy of protecting the home industries, may
greatly help the import-competing industries.
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Similarly, an industry that falls within the priority sector in terms of the government policy may get a
number of incentives and other positive support from the government, whereas those industries which are regarded
as inessential may have the odds against them.
In India, the government’s concern about the concentration of economic power restricted the role of the
large industrial houses and foreign concerns to the core sector, the heavy investment sector, the export sector
and backward regions.
The monetary and fiscal policies, by the incentives and disincentives they offer and by their neutrality, also
affect the business in different ways.
An industrial undertaking may be able to take advantage of external economies by locating itself in a large
city; but the Government of India’s policy was to discourage industrial location in such places and constrain or
persuade industries undertaking, a backward area location may have many disadvantages. However, the incentives
available for units located in these backward areas many compensate them for these disadvantages, at least to
some extent.
According to the industrial policy of the Government of India until July 1991, the development of 17 of the
most important industries were reserved for the state. In the development of another 12 major industries, the
state was to play a dominant role. In the remaining industries, co-operative enterprises, joint sector enterprises
and small scale units were to get preferential treatment over large entrepreneurs in the private sector. The
government policy, thus limited the scope of private business. However, the new policy ushered in since July
1991 has wide opened many of the industries for the private sector.
The scope of international business depends, to a large extent, on the economic system. At one end,
there are the free market economies or capitalist economies, and at the other end are the centrally planned
economies or communist countries. In between these two are the mixed economies. Within the mixed economic
system itself, there are wide variations.
The freedom of private enterprise is the greatest in the free market economy, which is characterized by
the following assumptions:
(i) The factors of production (labor, land, capital) are privately owned, and production occurs at the initiative of the
private enterprise.
(ii) Income is received in monetary form by the sale of services of the factors of production and from the profits of
the private enterprise.
(iii) Members of the free market economy have freedom of choice in so far as consumption, occupation, savings
and investment are concerned.
(iv) The free market economy is not planned controlled or regulated by the government. The government satisfies
community or collective wants, but does not compete with private firms, nor does it tell the people where to work
or what to produce.
The completely free market economy, however, is an abstract system rather than a real one. Today, even the
so-called market economies are subject to a number of government regulations. Countries like the United States,
Japan, Australia, Canada and member countries of the EEC are regarded as market economies.
The communist countries have, by and large, a centrally planned economic system. Under the rule of a
communist or authoritarian socialist government, the state owns all the means of production, determines the
goals of production and controls the economy according to a central master plan. There is hardly any consumer
sovereignty in a centrally planned economy, unlike in the free market economy. The consumption pattern in a
centrally planned economy is dictated by the state.
China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland etc., had centrally planned economies.
However, recently several of these countries have discarded communist system and have moved towards the
market economy.
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In between the capitalist system and the centrally planned system falls the system of the mixed economy,
under which both the public and private sectors co-exist, as in India. The extent of state participation varies widely
between the mixed economies.
However, in many mixed economies, the strategic and other nationally very important industries are fully
owned or dominated by the state.
The economic system, thus, is a very important determinant of the scope of private business. The economic
system and policy are, therefore, very important external constraints on business.
POLITICAL AND LEGAL ENVIRONMENT :

Political System
A political system is a system of politics and government. It is usually compared to the law system,
economic system, cultural system, and other social systems. It is different from them, and can be generally
defined on a spectrum from left, i.e. communism and socialism to the right, i.e. fascism and anarchism. However,
none are in these pure forms, therefore most are somewhere in the middle where capitalism is Australia is a
prime example of being centre right.
The system of government in a nation wields considerable impact on its business. The type and structure
of government prevailing in a country decides, promotes, fosters, encourages, shelters, directs, and controls the
business of that country. A political system (another name for the type of government) that is stable, honest,
efficient and dynamic and which ensures political participation to the people, and assures personal security to the
citizens, is a primary factor for economic development. The developed economies of today owe their success to
a large extent to the political system they richly enjoyed. Political system refers to the system of government in a
nation. The economic and legal systems of the country are often shaped by its political system. Political systems/
government can be classified on two prominent bases which are :
1)Political System as the Basis: One way to classify governments is to consider them as:
i) Parliamentary Governments: Parliamentary governments consult with citizens from time to time for the purpose
of learning about opinions and preferences. Government policies are thus intended to reflect the desire of the majority
segment of the society .Most industrialized nations and all democratic nations can be classified as parliamentary.
ii) Absolutist System: At the other end of the spectrum are absolutist governments, which include monarchies
and dictatorships. In an absolutist system, the ruling regime dictates government policy without considering citizen’s
needs or opinions. Frequently, absolutist countries are newly formed nations or those undergoing some kind of
political transition.
Another way to classify governments is by number of political parties. This classification results in four
types of governments:
i) Two-Party System: In a two-party system, there are typically two-strong parties that take turns controlling the
government although other parties are allowed .The United States and the United Kingdom are prime examples.
The two parties generally have different philosophies, resulting in a change in government policy when one party
succeeds the other.
ii) Multiparty System: In a multiparty system, there are several political parties, none of which is strong enough to
gain control of the government. Even though some parties may be large, their elected representatives fall short of
majority. A government must then be formed through coalitions between the various parties, each of which wants
to protect its own interests. The longevity of the coalition depends largely on the cooperation of party partners.
Usually, the coalition is continuously challenged by various opposing parties.
iii) Single-party: In a single-party system, there may be several parties, but one party is so dominant that there is
little opportunity for others to elect representatives to govern the country. Egypt has operated under single-party
rule for more than three decades. Countries often use this form of government in the early stage of the development
of a true parliamentary system.
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iv) Dominated one-party: In a dominated one-party system, the dominant party does not allow any opposition,
resulting in no alternative for the people. In contrast, a single-party system does allow some opposition party. The
former Soviet Union, Cuba, and Libya are good examples of dominated one-party systems. Such as system may
easily transform itself int a dictatorship.
2) Economic System as the Basis: Basically, three systems can be identified;
i) Communist Theory: Communist Theory holds that all resources should be owned and shared by all the people
(i.e., not by profit-seeking enterprises) for the benefit of the society. In practice it is the government that controls all
productive resources and industries and as a result the government determines jobs, production, price, education,
and just about anything else. The emphasis is on human welfare. Because profit making is not the government’s
main motive, there is a lack of incentive for workers and managers to improve productivity.
ii) Socialism Theory: The degree of government control that occurs under socialism is somewhat less than
under communism. A socialist government owns and operates the basic, major industries but leaves small
businesses to private ownership. Socialism is a matter of degree, and not all socialist countries are the same. A
socialist country such as Poland used to lean towards communism, as evidenced by its rigid control over prices
and distribution.
iii) Capitalism Theory: At the opposite end of the continuum from communism is capitalism. The philosophy of
capitalism provides for a free-market system that allows business competition and freedom of choice for both
consumers and companies. It is a market oriented system in which individuals, motivated by private gain, are
allowed to produce goods or services for public consumption under competitive conditions. Product price is
determined by demand and supply. This system serves the needs of society by encouraging decentralized decision-
making, risk taking, and innovation.
COMPONENTS OF CULTURE
While trading in a global scenario, it is quite vital to become tolerant towards cultural diversity. Following
are the main components of a culture:
1) Language: the philosophy and way of living of a particular group are revealed through their language. It determines
their thoughts and behaviour. More than 3, 000 languages are spoken worldwide, and every
language plays a primary role in its culture. Hence, language is considered as a vital part of a culture.
2) Religion: It is the key towards the development and survival of a culture. It provides a sense of understanding to
most of the people about their livelihood and also determines their reasons of existence. Religious ideas and viewpoints
often determine the values, actions and outlook of the society. Though there are a number of religious faiths prevailing
under different societies, yet they are categorized under six basic religious philosophies, i.e., animism (primitive
religions), Buddhism, Hinduism, ISLAM, Christianity and Judaism.
3) Attitudes and Values: Attitudes, viewpoints and values of individuals regarding particular matters play a vital
role in determining their actions and developing country’s economy. Several countries such as Australia, the USA,
the UK, etc., which support individualism, allow individuals to open up their minds and convey their thoughts if
they Disagree on certain points. However, countries such as Indonesia, Japan, Mexico or China which support
collective cultures, consider this type of behaviour as rude, and ill-mannered.
4) Social Organization: The organization of social actions and role relationships is in accordance with the
cultural beliefs and outlook, such as source and history of the culture, family, acquaintance, masculine and
feminine roles, relationship between the juniors and seniors, etc.
5) Education System: The education system followed in a particular country is specifically based on its culture
which certainly helps in disseminating society’s cultural norms and values. Many researchers have revealed that
the secondary and higher educational levels are closely interrelated with the economic development of the nation.
As per global point of view, education plays a crucial role in determining the competency of a nation
because a country becomes successful only when it retains trained and skilled manpower.
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6) Technology: The technological and educational development of a culture is significantly reflected through
material signs, problem-solving methods, quantitative systems, administrative techniques, work of art and other
related intellectual tools. Research has shown that there is a close positive relationship between per capita
income and per capita energy expenditure. High GDP and industrialization and low GDP and agriculture.
7) Political Systems: Before entering into global business, an organization needs to contemplate the internal
political environment of the countries and their political relationships with other countries. The utilization of a
nation’s resources by its people is managed and controlled by politicians.
Undoubtedly, politics is reflected even though religious associations, trade unions and multinational
corporations (MNCs). Political risk is always posed in front of various MNCs when they take stride towards
international trade.
8) Legal Systems: The legal System of a culture refers to the rules and regulations (whether written or unwritten)
laid down by the society authority or customs. The overall outlook and attitude of a particular culture is reflected
through its legal system.
Though there are a number of legal systems prevailing under different societies, yet they can be categorized
under following: civil, common, communism, indegneous or Islam.
LEGAL ENVIRONMENT
Kinds of Legal Systems:
There are following basic legal systems prevailing around the world:
1) Code Law: This law derive from Roman law, practiced in Germany, Japan, France, and non-Marxist and non-
Islamic countries. The Code Legal System, also called a Civil Law System, is based on a detailed set of laws that
make up a code. Rules for conducting business are a part of the code. Code Law is based on an all-inclusive
system of written rules (codes) of law.
Under code law, the legal system is generally divided into three separate codes: commercial, civil, and
criminal. The civil law system, also called a codified legal system, is based on a detailed set of laws that make up
a code. Rules for conducting business transactions are a part of the code.
2) Common Law: This law derived from English law, is prevalent in countries which were under British influence.
Common law comes from English Law and it is the foundation of the legal system in the U.S., Canada, England,
Australia, NewZealand, India, and many other countries. Common law is based on the cumulative wisdom of
Judges’ decisions in individual cases. In common law countries, vast areas of law, such as contracts, torts, and
agency are controlled by collections of principles deducted from specific disputes resolved in an adversary process.
The basis for common law is tradition, past practices, and legal precedents set by the courts through
interpretations of statues, legal legislation, and past rulings. Common law seeks “interpretation through the past
decisions of higher courts which interpret the same statues or apply established and customary principles of law
to a similar ser of facts”.
3) Theoretic Law: This system is based on religious teachings, as they are enshrined in the religious scriptures.
Islamic law, Sha; riat, is the most widely practiced religious legal system in today’s world. It is based on morality
rather than commercial requirement of human behaviour in all aspects of a person’s self and social life.
Islamic Law is based on the Holy Book of Islam “The Quran” and on the interpretation of the practices and
sayings of Prophet Mohammad .It also follows the writings of scholars and teachers of Islamic scholarship, who
derived rules by analogy from the principles established in the holy Quran.
The basic foundation of Islamic law remain unaltered even after many centuries because they have been
derived from the holy book and are acceptable to all devout Muslims. Even though Islamic jurists and scholars
constantly debate and application of Islamic law to the modern world, their debates are only scholastic deliberations.
However, to keep pace with the advancement of life , many Muslim countries have a blend of common law and
Civil law system along with the Sha; riat law.
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Legal Factors affecting International Marketing:

Some of the major forces in legal environment of international business are as follows:
1) Bribery: Bribery, a form of pecuniary corruption, is an act implying money or gift given that alters the behaviour
of the recipient. Bribery constitutes a crime and is defined by Black’s Law Dictionary as “the offering, giving,
receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a
public or legal duty”. The bribe is the gift bestowed to influence the recipient’s conduct. It may be any money, good
right in action, property, preferment, privilege, emolument, object of value, advantage, or merely a promise or
undertaking to induce or influence the action, vote, or influence of a person in an official or public capacity.
2) Branch versus Subsidiary: When establishing a foreign operation, a company often must decide between
making that operation a branch or a subsidiary.
i) Branch: Practically speaking, a branch is merely an extension of the parent company; it does not have its own
stock or its own board of directors, and its establishment generally involves fewer corporate formalities.
ii) Subsidiary: A subsidiary is an FDI that is legally a separate of company, even if the parent owns all of the voting
stock. A subsidiary is considered a separate company.
3) Counterfeiting: A counterfeit product is an imitation which infringes upon a production monopoly held by either
a state or corporation. Goods are produced with the intent to bypass this monopoly and thus take advantage of
the established worth of the previous product. The word counterfeit frequently describes both the forgeries of
currency and documents, as well as imitations of clothing, software, pharmaceuticals. Watches, electronics, and
company logos and brands.
4) Strategic Concerns: many legal issues affect the process of value creation, ranging from where a company
makes a product to how it tries to market it. Specifically, the following legal contingencies often shape an international
company’s strategic plans.
i) Product Safety and Liability: International companies often must customize products to comply with local
standards if they are to do business in a particular country .Sometimes these legal standards are higher than in
their home market, sometimes they are just different .
ii) Marketplace Behaviour: National laws determine permissible practices in pricing, distribution, advertising, and
promotion of products and services. For instance, TV cigarette advertising is prohibited in many countries. In France,
a manufacturer cannot offer a product it does not manufacture as an inducement to buy one of its products.
iii) Product Origin: National laws shape the flow of products across borders. Countries devise laws that use the
origin of the product to determine the charge to the provider for the right to bring it into the local market. Also,
countries measure product origin to determine the proportion of the product that is made in the local market. (the
idea of local content) versus made outside the local market.
iv) Legal Jurisdiction: Each country specifies which law should apply and where litigation should apply and
where litigation should occur when I involves agents-whether they are legal residents of the same or of different
countries. A nation’s courts have the final decision on jurisdiction. Usually, a company will push the court in its
home country to claim jurisdiction, believing it will then receive more favourable treatment.
v) Arbitration: Often, companies will resort to arbitration to resolve disputes. A small number of complaints
against governments are heard through the International Centre for Settlement of Investment Disputes. This body
is closely linked to the WorldBank; a noncompliant government risks getting cut off from bank funds if it decides
not to honour its legal debts.
5) Gray/Grey Market: Gray markets are the result of arbitrage in which companies buy a product in the market
and sell it in other markets, benefiting from the prevailing price differential. Gray market goods are genuinely
branded merchandise distinguished only by their sale through channels unauthorized by the trademark owner.
The goods appear to be and in most cases are, physically identical in every way, including their trademarks.
Therefore, price is the major difference.
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The Frame Work for Analyzing International Business Environment

a) Methods
There are three ways of scanning the International business environment:
Ad-hoc scanning - Short term, infrequent examinations usually initiated by a crisis
Regular scanning - Studies done on a regular schedule (say, once a year)
Continuous scanning - (also called continuous learning) - continuous structured data collection and
processing on a broad range of environmental factors.
Most commentators feel that in today’s turbulent business environment the best scanning method available
is continuous scanning. This allows the firm to act quickly, take advantage of opportunities before competitors do,
and respond to environmental threats before significant damage is done.
b) PEST Analysis
PEST analysis stands for “Political, Economic, Social, and Technological analysis” and describes a
framework of macro environmental factors used in environmental scanning. It is also referred to as the STEP,
STEEP or PESTLE analysis (Political, Economic, Socio-cultural, Technological, Legal, Environmental). Recently
it was even further extended to STEEPLED, including ethics and demographics.
It is a part of the external analysis when doing market research and gives a certain overview of the different macro
environmental factors that the company has to take into consideration. Political factors include areas such as tax
policy, employment laws, environmental regulations, trade restrictions and tariffs and political stability. The economic
factors are the economic growth, interest rates, exchange rates and inflation rate. Social factors often look at the
cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and
emphasis on safety. The technological factors also include ecological and environmental aspects and can determine
the bassiers to entry, minimum efficient production level and influence outsourcing decisions. It looks at elements
such as R&D activity, automation, technology incentives and the rate of technological change.
The PEST factors combined with external micro environmental factors can be classified as opportunities
and threats in a SWOT analysis.
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UNIT - III
GLOBAL TRADING AND INVESTMENT ENVIRONMENT
WORLD TRADE IN GOODS AND SERVICES – MAJOR TRENDS AND DEVELOPMENTS

Trade in goods and services is defined as change in ownership of material resources and services between
one economy and another. The indicator comprises sales of goods and services as well as barter transactions or
goods exchanged as part of gifts or grants between residents and non-residents. It is measured in million USD and
percentage of GDP for net trade and also annual growth for exports and imports.
Intense competition among countries, industries, and firms on a global level is a recent development
owed to the confluence of several major trends. Among these trends are:
1) Forced Dynamism : International trade is forced to succumb to trends that shape the global political, cultural,
and economic environment. International trade is a complex topic, because the environment it operates in is
constantly changing. First, businesses are constantly pushing the frontiers of economic growth, technology,
culture, and politics which also change the surrounding global society and global economic context. Secondly,
factors external to international trade (e.g., developments in science and information technology) are constantly
forcing international trade to change how they operate.
2) Cooperation among Countries : Countries cooperate with each other in thousands of ways through international
organisations, treaties, and consultations. Such cooperation generally encourages the globalization of business
by eliminating restrictions on it and by outlining frameworks that reduce uncertainties about what companies will
and will not be allowed to do. Countries cooperate:
i) To gain reciprocal advantages,
ii) To attack problems they cannot solve alone, and
iii) To deal with concerns that lie outside anyone’s territory.
Agreements on a variety of commercially related activities, such as transportation and trade, allow nations
to gain reciprocal advantages. For example, groups of countries have agreed to allow foreign airlines to land in
and fly over their territories, such as Canada’s and Russia’s agreements commencing in 2001 to allow polar over
flights that will save five hours between New York and Hong Kong.
Groups of countries have also agreed to protect the property of foreign-owned companies and to permit
foreign-made goods and services to enter their territories with fewer restrictions. In addition, countries cooperate
on problems they cannot solve alone, such as by coordinating national eco-nomic programs (including interest
rates) so that global economic conditions are minimally disrupted, and by restricting imports of certain products
to protect endangered species.
Finally, countries set agreements on how to commercially exploit areas outside any of their territories.
These include outer space (such as on the transmission of television programs), non-coastal areas of oceans
and seas (such as on exploitation of minerals), and Antarctica (for example, limits on fishing within its coastal
waters).
3) Liberalization of Cross-border Movements : Every country restricts the movement across its borders of
goods and services as well as of the resources, such as workers and capital, to produce them. Such restrictions
make international trade cumbersome; further, because the restrictions may change at any time, the ability to
sustain international trade is always uncertain. However, governments today impose fewer restrictions on cross-
border movements than they did a decade or two ago, allowing companies to better take advantage of international
opportunities. Governments have decreased restrictions because they believe that:
i) So-called open economies (having very few international restrictions) will give consumers better access to a
greater variety of goods and services at lower prices,
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ii) Producers will become more efficient by competing against foreign companies, and
iii) If they reduce their own restrictions, other countries will do the same.
4) Transfer of Technology : Technology transfer is the process by which commercial technology is disseminated.
This will take the form of a technology transfer transaction, which may or may not be a legally binding contract, but
which will involve the communication, by the transferor, of the relevant knowledge to the recipient. It also includes
non-commercial technology transfers, such as those found in international cooperation agreements between
developed and developing states. Such agreements may relate to infrastructure or agricultural development, or to
international; cooperation in the fields of research, education, employment or transport.
5) Growth in Emerging Markets : The growth of emerging markets (e.g., India, China, Brazil, and other parts of
Asia and South America especially) has impacted international trade in every way. The emerging markets have
simultaneously increased the potential size and worth of current major international trade while also facilitating
the emergence of a whole new generation of innovative companies. According to “A special report on innovation
in emerging markets” by The Economist magazine, “The emerging world, long a source of cheap la, now rivals
the rich countries for business innovation”.
WORLD TRADE & PROTECTIONISM – TARIFF & NON-TARIFF BARRIERS

Protectionism is the economic policy of restraining trade between nations, through methods such as high
tariffs on imported goods, restrictive quotas, and anti-dumping laws in an attempt to protect domestic industries
in a particular nation from foreign take-over or competition. This contrasts with free trade, where no artificial
barriers to entry are instituted.
The term is mostly used in the context of economics, where protectionism refers to policies or doctrines
which “protect” businesses and living wages by restricting or regulating trade between foreign nations:
Subsidies - To protect existing businesses from risk associated with change, such as costs of labour, materials,
etc.
Tariffs - to increase the price of a foreign competitor’s goods. ( Including restrictive quotas, and anti-dumping
measures.) on par or higher than domestic prices.
Quotas - to prevent dumping of cheaper foreign goods that would overwhelm the market.
Tax cuts - Alleviation of the burdens of social and business costs.
Intervention - The use of state power to bolster an economic entity.
Protectionism has frequently been associated with economic theories such as mercantilism, the belief that
it is beneficial to maintain a positive trade balance, and import substitution. There are two main variants of protectionism,
depending on whether the tariff is intended to be collected (traditional protectionism) or not (modern protectionism).
MODERN PROTECTIONISM
In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example
some commentators, such as Jagdish Bhagwati, see developed countries’ efforts in imposing their own labor or
environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports
are seen in this light.
Recent examples of protectionism are typically motivated by the desire to protect the livelihoods of individuals
in politically important domestic industries.
Whereas formerly blue-collar jobs were being lost to foreign competition, in recent years there has been
a renewed discussion of protectionism due to offshore outsourcing and the loss of white-collar jobs. Most
economists view this form of protectionism as a disguised transfer payment from consumers (who pay higher
prices for food or other protected goods) to local high-cost producers.
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TRADITIONAL PROTECTIONISM
In its historic sense, protectionism is the economic policy of relying on revenue tariffs for government funding
in order to reduce or eliminate taxation on domestic industries and labor (e.g., corporate and personal income
taxes). In protectionist theory, emphasis is placed on reducing taxation on domestic labor and savings at a cost of
higher tariffs on foreign products. This contrasts with the free trade model, in which first emphasis is placed on
exempting foreign products from taxation, with the lost revenue to be compensated domestically.
Traditional protectionism sees revenue tariffs as a source of government funding, much like a sales tax,
that can be used to reduce other domestic forms of taxes. The goal of traditional protectionism is to maximize tax
revenue from the purchase of foreign products with the goal of being able to reduce or eliminate other forms of
domestic taxation (income taxes, sales taxes, etc.) as a result. Tariffs were the predominant source of tax revenue
in the United States from its founding through World War II, allowing the country to operate through most of that
period without income and sales taxes. Traditional protectionism remains highly dependent on large amounts of
imports. It also requires tariffs to be kept at reasonable rates to ensure maximum government revenue.
TARIFF BARRIERS :
A tariff is a tax on imported goods. When a ship arrives in port a customs officer inspects the contents and
charges a tax according to the tariff formula. Since the goods cannot be landed until the tax is paid it is the easiest
tax to collect, and the cost of collection is small. Smugglers of course seek to evade the tariff.
An ad valorem tax is a percentage of the value of the item, say 10 cents on the dollar, while a specific tariff
is so-much per weight, say $5 per ton.
A “revenue tariff” is a set of rates designed primarily to raise money for the government. A tariff on coffee
imports, for example (by a country that does not grow coffee) raises a steady flow of revenue.
A “protective tariff” is intended to artificially inflate prices of imports and “protect” domestic industries from
foreign competition For example, a 50% tax on a machine that importers formerly sold for $100 and now sell for
$150. Without a tariff the local manufacturers could only charge $100 for the same machine; now they can
charge $149 and make the sale.
A prohibitive tariff is one so high that no one imports any of that item.
The distinction between protective and revenue tariffs is subtle: protective tariffs in addition to protecting
local producers also raise revenue; revenue tariffs produce revenue but they also offer some protection to local
producers. (A pure revenue tariff is a tax on goods not produced in the country, like coffee perhaps.)
Tax, tariff and trade rules in modern times are usually set together because of their common impact on
industrial policy, investment policy, and agricultural policy.
There are two main ways of implementing a tariff:
Ad valorem tariff
Fixed percentage of the value of the good that is being imported. Sometimes these are problematic as
when the international price of a good falls, so does the tariff, and domestic industries become more vulnerable to
competition. Conversely when the price of a good rises on the international market so does the tariff, but a country
is often less interested in protection when the price is higher. They also face the problem of transfer pricing where
a company declares a value for goods being traded which differs from the market price, aimed at reducing overall
taxes due.
Specific Tariff
Tariff of a specific amount of money that does not vary with the price of the good. These tariffs may be
harder to decide the amount at which to set them, and they may need to be updated due to changes in the market
or inflation.
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Adherents of supply-side economics sometimes refer to domestic taxes, such as income taxes, as being
a “tariff” affecting inter-household trade.
CUSTOMS VALUATION :
The rates of customs duties leviable on imported goods (& export items in certain cases) are either
specific or on ad valorem basis or at times specific cum ad valorem. When customs duties are levied at ad
valorem rates, i.e., depending upon its value, it becomes essential to lay down in the law itself the broad guidelines
for such valuation to avoid arbitrariness and to ensure that there is uniformity in approach at different Customs
formations. Section 14 of the Customs Act, 1962 lays down the basis for valuation of import & export goods in the
country. It has been subject to certain changes – basic last change being in July-August, 1988 when present
version came into operation.
TRADE SANCTIONS :
Trade sanctions are trade penalties imposed by one or more countries on one or more other countries.
Typically the sanctions take the form of import tariffs (duties), licensing schemes or other administrative hurdles.
They tend to arise in the context of an unresolved trade or policy dispute, such as a disagreement about the
fairness of some policy affecting international trade (imports or exports).
For example, one country may conclude that another is unfairly subsidising exports of one or more products, or
unfairly protecting some sector from competition (from imported goods or services). The first country may retaliate by
imposing import duties, or some other sanction, on goods or services from the second.
Trade sanctions are distinguished from economic sanctions, which are used as a punitive measure in
international relations (examples being recent US or multilateral sanctions against Cuba, Iraq, or North Korea).
NON-TARIFF BARRIERS :
SUBSIDIES : In economics, a subsidy is generally a monetary grant given by government to lower the price faced by
producers or consumers of a good, generally because it is considered to be in the public interest. Subsidies are also
referred to as corporate welfare by those who oppose their use. The term subsidy may also refer to assistance granted
by others, such as individuals or non-government institutions, although this is more usually described as charity. A
subsidy normally exemplifies the opposite of a tax, but can also be given using a reduction of the tax burden. These
kinds of subsidies are generally called tax expenditures or tax breaks.
Subsidies protect the consumer from paying the full price of the good consumed, however they also
prevent the consumer from receiving the full value of the thing not consumed – in that sense, a subsidized society
is a consumption society because it unfairly encourages consumption more than conservation. Under free-
market conditions, consumers would make choices which optimize the value of their transactions; where it was
less expensive to conserve, they would conserve. In a subsidized economy however, consumers are denied the
benefit of conservation and as a result, subsidized goods have an artificially higher value than expenditures which
do not consume. Subsidies are paid for by taxation which creates a deadweight loss for that activity which is
taxed
QUOTAS :
A quota is a prescribed number or share of something.
In common language, especially in business, a quota is a time-mea-sured goal for production or
achievement. An assembly line worker might have a quota for the number of products made; a salesperson might
have a quota to meet for weekly sales;
In trade, a quota is a form of protectionism used to restrict the import of something to a specific quantity The
number of cars imported from Japan may have a quota of 50,000 vehicles per annum to protect auto manufacturers
in the United States.
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IMF member’s quota is broadly determined by its economic position relative to other members. Various
economic factors are considered in determining changes in quotas, including GDP, current account transactions,
and official reserves.
When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing
members considered by the IMF to be broadly comparable in economic size and characteristics.
Quotas are denominated in Special Drawing Rights, the IMF’s unit of account. The largest member of the IMF is
the United States, with a quota of SDR 37.1 billion (about $53.5 billion), and the smallest member is Palau, with a
quota of SDR 3.1 million (about $4.5 million).
VERS - VOLUNTARY EXPORT RESTRAINTS

A voluntary export restraint is a restriction set by a government on the quantity of goods that can be
exported out of a country during a specified period of time.
Often the word voluntary is placed in quotes because these restraints are typically implemented upon the
insistence of the importing nations.
Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular
exporting countries. VERs are then offered by the exporter to appease the importing country and to avoid the effects of
possible trade restraints on the part of the importer. Thus VERs are rarely completely voluntary.
Also, VERs are typically implemented on a bilateral basis, that is, on exports from one exporter to one
importing country. VERs have been used since the 1930s at least, and have been applied to products ranging
from textiles and footwear to steel, machine tools and automobiles. They became a popular form of protection
during the 1980s, perhaps in part because they did not violate countries’ agreements under the GATT. As a result
of the Uruguay round of the GATT, completed in 1994, WTO members agreed not to implement any new VERs
and to phase out any existing VERs over a four year period. Exceptions can be granted for one sector in each
importing country.
Some interesting examples of VERs occurred with auto exports from Japan in the early 1980s and with
textile exports in the 1950s and 60s. US-Japan Automobile VERs.
FOREIGN INVESTMENT – PATTERN, STRUCTURE & EFFECTS
PATTERN
Foreign investment involves capital flows from one country to another, granting extensive ownership stakes
in domestic companies and assets. Foreign investment denotes that foreigners have an active role in management
as a part of their investment. A modern trend leans toward globalization, where multinational firms have investments
in a variety of countries.
Foreign investments can be made by individuals, but are most often endeavors pursued by companies
and corporations with substantial assets looking to expand their reach. As globalization increases, more and
more companies have branches in countries around the world. For some companies, opening new manufacturing
and production plants in a different country is attractive because of the opportunities for cheaper production, labor
and lower or fewer taxes.
DIRECT VS INDIRECT FOREIGN INVESTMENTS :

Foreign investments can be classified in one of two ways: direct and indirect. Foreign direct investments
(FDIs) are the physical investments and purchases made by a company in a foreign country, typically by opening
plants and buying buildings, machines, factories and other equipment in the foreign country. These types of
investments find a far greater deal of favor, as they are generally considered long-term investments and help
bolster the foreign country’s economy.
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Foreign indirect investments involve corporations, financial institutions and private investors buying stakes
or positions in foreign companies that trade on a foreign stock exchange. In general, this form of foreign investment
is less favorable, as the domestic company can easily sell off their investment very quickly, sometimes within days
of the purchase. This type of investment is also sometimes referred to as a foreign portfolio investment (FPI).
Indirect investments include not only equity instruments such as stocks, but also debt instruments such as bonds.
OTHER TYPES OF FOREIGN INVESTMENT

There are two additional types of foreign investments to be considered: commercial loans and official
flows. Commercial loans are typically in the form of bank loans that are issued by a domestic bank to businesses
in foreign countries or the governments of those countries. Official flows is a general term that refers to different
forms of developmental assistance that developed or developing nations are given by a domestic country.
Commercial loans, up until the 1980s, were the largest source of foreign investment throughout developing
countries and emerging markets. Following this period, commercial loan investments plateaued, and direct
investments and portfolio investments increased significantly around the globe.
STRUCTURE OF FOREIGN INVESTMENT

Until 1991, the Indian economy was a closed market. India’s economic liberalization dramatically changed
the situation for foreign investment – today FDI up to 100 percent is allowed under the automatic route in most
sectors/activities.
Under the automatic route, FDI does not require any prior agreement and only involves intimation to the
Reserve Bank of India within 30 days of inward remittances and/or of the issuing of shares to non-residents.
The Indian government continues to shape FDI policies. Key examples include easing FDI norms for
the single brand retail sector and the medical devices industry and reform to FDI sectoral caps.
Structures for foreign investment into India include liaison offices, project offices, branch offices and
wholly owned subsidiaries. Here, we overview each structure in terms of the situations in which it is appropriate,
permissible activities and limitations. We then examine the concept of permanent establishment, and FDI under
the automatic and government approval route.
LIAISON OFFICE :
A liaison office (LO) is often chosen by overseas companies as the first step towards setting up a company
in India. The major advantage of establishing a liaison office is that, if it is obeying regulations and only adhering to
the business activities stated below, it is not subject to taxation in India.
A liaison office can engage in the following activities:

• Representing the parent company/group companies;
• Promoting export/import from/to India;
• Promoting technical/financial collaborations between parent/group companies and companies in India; &
• Assisting communication between parent company and Indian companies.
A liaison office is not allowed to commence any commercial, trading or industrial activities, directly or
indirectly, and is required to sustain itself out of private remittances received from its foreign parent company
through usual banking channels.
To establish a liaison office, a foreign parent company should have a net worth of no less than US$50,000
and have a three-year profit making track record in its home country. Companies without a significant profit record
and/or capital amount may find it difficult to get permission for a liaison office by the Reserve Bank of India (RBI).
Applications to establish a liaison office are sent to the Reserve Bank of India (RBI) and a license to operate is
generally given for three years (after which it needs to be renewed).
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BRANCH OFFICE : Any foreign company engaged in manufacturing or trading activities overseas is allowed to
set up a branch office (BO) in India to:
• Export/import goods;
• Render professional or consulting services; or
• Promote technical or financial collaborations between Indian companies and parent or overseas group companies.
A BO’s business activities must be in compliance with a parent company’s activities. A branch office is
considered to be a foreign company in India by the RBI, which means that BOs are treated as an addition of the
foreign company for income tax purposes.
A BOs allowable scope of activities is broader than for a liaison office, however BOs are still generally
forbidden from engaging in retail trading, manufacturing or processing activities within India.
The major exception to this rule is in special economic zones, where branch offices can be established to
undertake manufacturing and service activities without RBI approval if conditions are met.
To qualify to open a branch office, the foreign parent company should have a net worth not less than
US$100,000 and a profit-making track record for the preceding five years.
Similar to a liaison office, applications to establish a branch office are sent to the RBI and a license to
operate is generally given for three years (after which it needs to be renewed).
PROJECT OFFICE : The project office (PO), essentially a branch office set up with the limited purpose of executing
a specific project, allows companies to establish a business presence for a limited period of time.
A business must secure a contract from an Indian company in order to execute a project in India and thus
establish a project office.
This project must be:

• Funded with remittances from abroad;
• Funded by a joint or multilateral financing agency;
• Cleared by an appropriate authority; or
• Based on a contract awarded by a company or entity in India which in turn is funded by a public financial
institution or bank in India.
Otherwise, RBI permission is required.
WHOLLY OWNED SUBSIDIARY :

Wholly owned subsidiaries (WOS) are the most suitable and widely used form of business enterprise for
foreign investors in India because they allow total control over business operations, provide limited liability, and
have fewer restrictions on business activities than liaison offices and project offices. They have independent legal
status as Indian companies distinct from the foreign parent company.
Foreign investment in India is regulated under the Foreign Exchange Management Act, 1999, and is allowed
under two routes i.e. the automatic route and government approval route (described below).
A WOS requires a minimum of two directors, and has from two to fifty shareholders with limited liability.
No track record is required for the shareholders and the shareholders can be other legal entities. The minimum
paid-up capital requirement is INR100,000 (approx US$2,000). No approvals of other regulatory authorities are
needed.
A wholly owned subsidiary is subject to Indian laws and regulations as applicable to other domestic Indian
companies and treated as an Indian company for taxation.
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PERMANENT ESTABLISHMENT :
Whether an enterprise is a permanent establishment (PE) determines the right of the state to charge
taxes on the income of an enterprise that accrues or arises in India.
A PE is a fixed place of business through which the business of an enterprise is carried on. Whether a
foreign-invested enterprise is a PE depends on their business model and any tax treaty between India and the
foreign company’s country.
Important concepts in determining a permanent establishment include:
Business Connection : If there is no business connection between a non-resident entity and a resident-entity, the
resident entity may not be a PE of the non-resident entity, and the resident-entity would have to be assessed for income
tax as a separate entity. In such a case, a non-resident entity will not be liable to tax in India.
Attribution of Profits : The PE criterion is commonly used in international double taxation conventions to determine
the taxability of an income in the country from which it originates. As per double taxation conventions, the profits
of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business
in the other contracting state through a PE.
The tax treaties that are entered by India with other states recognize mainly three types of PE:
Fixed Place PE : A fixed place of business, with a degree of permanence, at which business is wholly or partially
carried out.
Agency PE : An agency that secures orders wholly or almost wholly on behalf of foreign enterprises, regularly
delivers goods from a maintained stock of goods and has the authority to conclude contracts on behalf of foreign
enterprises.
Service PE : The foreign enterprise furnishes or performs services in India through employees or other personnel
for a specified period, which varies by country.
Automatic vs. government approval route

FDI in India can be done through two routes – the automatic route and the government route – with most done
through the former.
AUTOMATIC APPROVAL : FDI in sectors/activities to the extent permitted under the automatic route does not
require any prior approval either by the Government or RBI. Investors are only required to notify the regional office
associated with the RBI within 30 days of receipt of inward remittances and to file the required documents with
that office within 30 days of the issuing of shares to foreign investors.
The FDI policy allows investment up to 100 percent under the automatic route in all the sectors/activities except:
1. Sectors Prohibited for FDI:

• Lottery business including government/private lottery, online lotteries, etc.
• Gambling and betting including casinos etc.
• Chit funds
• Nidhi company
• Trading in Transferable Development Rights
• Real estate business or construction of farm houses
• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
• Activities/sectors not open to private sector investment e.g. atomic energy and railway transport (other than
mass rapid transport systems).
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2. Activities requiring an industrial license

3. All the proposals falling outside notified sectoral policy/caps under the sectors in which FDI is not permitted.
4. Proposals in which the foreign collaborator has an existing collaboration in India in the existing field.
5. Proposals for acquisitions of shares in an existing Indian company in financial services sector where stock
exchange regulations are attracted.
GOVERNMENT APPROVAL : Under the government route, the foreign investor or the Indian company are required
to obtain prior approval of the Government of India, Ministry of Finance and the FIPB or Department of Industrial
Policy & Promotion (in the case of 100 percent export-oriented units).
The activities/sectors for which the automatic route is not available, and thus the government route for foreign
investment must be used, include the following:
• Public sector banks and credit information companies
• Commodities and stock exchanges
• Asset reconstruction companies
• Power exchanges
• Atomic energy and related projects
• Petroleum, including exploration/refinery/marketing
• Defense and strategic industries
• Print media
• Satellite establishment and private security agency services
EFFECTS OF FOREIGN INVESTMENT :

Foreign direct investment (FDI) is a crucial factor in international economic integration. FDI creates direct,
stable and long-lasting links between economies. It promotes the transfer of new technology and know-how between
countries, and provides the host economy to promote its products more widely in international markets. FDI is also
an extra funding source for investment and, under the right policy environment; it can be an important channel for
development of SMEs. Increased FDI inflows to a country can create several positive economic effects. Among
others, FDI can affect labour and capital markets, trade patterns and economic growth. It is well known from the
theory of host country effects of FDI that in order for FDI to occur, the multinational enterprise (MNE) must have
some firm specific advantages compared to the enterprises in the host economy. These firm specific advantages
may result in technology transfer from the parent firm to its affiliate in the host country of investment and related
spillover effects in the host economy by firms.
International investment is important to most economies, and can be particularly vital for developing
countries. In many instances, developing countries have both the demand for a good or service, and the labor and
natural resources to supply it, but they lack the access to capital necessary to begin producing. In the United
States, most businesses start when an entrepreneur goes to a bank and takes out a loan. Larger enterprises may
go to an investment bank to sell stocks or bonds, to get their businesses going. But in many developing countries,
either banks do not exist in adequate numbers or they do not have enough capital to lend to even the majority of
worthy borrowers. Thus, foreign investment provides essential capital to help spark the creation of productive
enterprises.
MOVEMENTS IN FOREIGN EXCHANGE & INTEREST RATES

Foreign Exchange rate (For Ex rate) is one of the most important means through which a country’s relative
level of economic health is determined. A country’s foreign exchange rate provides a window to its economic
stability, which is why it is constantly watched and analyzed. If you are thinking of sending or receiving money
from overseas, you need to keep a keen eye on the currency exchange rates.
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The exchange rate is defined as “the rate at which one country’s currency may be converted into another.”
It may fluctuate daily with the changing market forces of supply and demand of currencies from one country to
another. For these reasons; when sending or receiving money internationally, it is important to understand what
determines exchange rates.
Factors affecting movement in foreign exchange and interest rates:

1. Inflation Rates : Changes in market inflation cause changes in currency exchange rates. A country with a
lower inflation rate than another’s will see an appreciation in the value of its currency. The prices of goods and
services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate
exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and
is usually accompanied by higher interest rates
2. Interest Rates : Changes in interest rate affect currency value and dollar exchange rate. For ex rates, interest
rates, and inflation are all correlated. Increases in interest rates cause a country’s currency to appreciate because
higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise
in exchange rates
3. Country’s Current Account / Balance of Payments : A country’s current account reflects balance of trade
and earnings on foreign investment. It consists of total number of transactions including its exports, imports, debt,
etc. A deficit in current account due to spending more of its currency on importing products than it is earning
through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic
currency.
4. Government Debt : Government debt is public debt or national debt owned by the central government. A
country with government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell
their bonds in the open market if the market predicts government debt within a certain country. As a result, a
decrease in the value of its exchange rate will follow.
5. Terms of Trade : Related to current accounts and balance of payments, the terms of trade is the ratio of export
prices to import prices. A country’s terms of trade improves if its exports prices rise at a greater rate than its
imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an
increase in its currency’s value. This results in an appreciation of exchange rate.
6. Political Stability & Performance : A country’s political state and economic performance can affect its currency
strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing
investment away from other countries with more political and economic stability. Increase in foreign capital, in
turn, leads to an appreciation in the value of its domestic currency. A country with sound financial and trade policy
does not give any room for uncertainty in value of its currency. But, a country prone to political confusions may
see a depreciation in exchange rates.
7. Recession : When a country experiences a recession, its interest rates are likely to fall, decreasing its chances
to acquire foreign capital. As a result, its currency weakens in comparison to that of other countries, therefore
lowering the exchange rate.
8. Speculation : If a country’s currency value is expected to rise, investors will demand more of that currency in
order to make a profit in the near future. As a result, the value of the currency will rise due to the increase in
demand. With this increase in currency value comes a rise in the exchange rate as well.
All of these factors determine the foreign exchange rate fluctuations. If you send or receive money frequently,
being up-to-date on these factors will help you better evaluate the optimal time for international money transfer. To
avoid any potential falls in currency exchange rates, opt for a locked-in exchange rate service, which will guarantee
that your currency is exchanged at the same rate despite any factors that influence an unfavorable fluctuation.
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IMPACT ON TRADE & INVESTMENT :
SUPPLIER PAYMENTS :
When paying a supplier, it’s this exchange rate exposure that can make a difference to your business. If,
for example, you’re contracted to pay a French supplier for a shipment of goods in six months’ time at a cost of
€50,000, every percent of change in the EUR/GBP rate will have a direct impact on your bottom line. At the time
of writing, the EUR/GBP exchange rate sits at 0.91, making your final bill £45,500 if paid today. However, should
the value of the pound fall by 2.5%, EUR/GBP would rise to over 0.93, lifting your supplier payment to over
£46,500 – meaning you’re paying an additional £1,000 for the same shipment of goods. Nonetheless,
should exchange rates move in your favor (the pound strengthening in this example) then you’d end up forking out
less for your euro payment.
While supplier payments and exporting are some of the more upfront ways in which exchange rates can
affect you and your business, there are a plethora of ways currency volatility can trickle into your business. These
are namely transactional, translational, credit and liquidity exposures:
Sales Forecasts : For multinational companies, sales forecasts can be any of the following: headache, hindrance,
tailwind or motivator. Where they become more complicated is when sales are listed in another currency and
what looks like a firm beat on your well thought-out sales forecast turns to pennies when the exchange rate
moves against you.
Balance sheet hedging : Any finance director or CFO who’s got experience dealing with multinational companies
will know that holding assets and liabilities in a variety of currencies can be a burden. When you’re creating or
submitting financial documents, balance sheets can be subject to sharp revisions or remeasurements if the
value of an asset or liability has changed due to foreign exchange fluctuations. A loan taken out in Japanese yen
will look very different on your sterling-denominated balance sheet from one quarter to another if currency markets
are volatile, unpredictable and changing.
Exchange rate fluctuations can have a substantial impact on investment portfolio, even if you only hold
domestic investments. For example, the strong dollar generally dampens global demand for commodities as
they are priced in dollars. This lower demand can affect earnings and valuations for domestic commodity producers,
although part of the negative impact would be mitigated by the weaker local currency. A strong currency can also
have an effect on sales and profits earned overseas; in 2015, numerous U.S. multinationals attributed a hit to the
top-line and bottom-line from the stronger dollar. Of course, the effect of exchange rates on portfolio returns is
well known. Investing in securities that are denominated in an appreciating currency can boost total returns, while
investing in securities denominated in a depreciating currency can trim total returns. For instance, a number of
European stock indices reached record highs in the first four months of 2015, but American investors who had
invested in them would have seen their returns reduced substantially by the plunging euro.
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UNIT - IV
INTERNATIONAL ECONOMIC INSTITUTIONS AND AGREEMENTS
WORLD TRADE ORGANISATION (WTO)

The WTO was established on January 1, 1995. It is the embodiment of the Uruguay Round results and the
successor to GATT. 76 Governments became members of WTO on its first day. It has now 146 members, India
being one of the founder members. It has a legal status and enjoys privileges and immunities on the same footing
as the IMF and the World Bank. It is composed of the Ministerial Conference and the General Council. The
Ministerial Conference (MC) is the highest body. It is composed of the representatives of all the Members. The
Ministerial Conference is the executive of the WTO and responsible for carrying out the functions of the WTO.
The MC meets at least once every two years.
The General Council (GC) is an executive forum composed of representatives of all the Members. The
GC discharges the functions of MC during the intervals between meetings of MC. The GC has three functional
councils working under its guidance and supervision namely:
a) Council for Trade in Goods.
b) Council for Trade in Services.
c) Council for Trade Related Aspects of Intellectual Property Rights (TRIPs).
Director-General heads the secretariat of WTO. He is responsible for preparing budgets and financial statements
of the WTO. WTO has now become the third pillar of United Nations Organization (UNO) after World Bank and
International Monetary Fund.
OBJECTIVES OF WTO : In its preamble, the Agreement establishing the WTO lays down the following objectives
of the WTO.
1. Its relation in the field of trade and economic endeavor shall be conducted with a view to raising standards of
living, ensuring full employment and large and steadily growing volume of real income and effective demand, and
expanding the production and trade in goods and services.
2. To allow for the optimal use of the world’s resources in accordance with the objective of sustainable development,
seeking both (a) to protect and preserve the environment, and (b) to enhance the means for doing so in a manner
consistent with respective needs and concerns at different levels of economic development.
3. To make positive efforts designed to ensure that developing countries especially the least developed among
them, secure a share in the growth in international trade commensurate with the needs of their economic
development.
4. To achieve these objectives by entering into reciprocal and mutually advantageous arrangements directed
towards substantial reduction of tariffs and other barriers to trade and the elimination of discriminatory treatment
in international trade relations.
5. To develop an integrated, more viable and durable multilateral trading system encompassing the GATT, the results of
past trade liberalization efforts, and all the results of the Uruguay Round of multilateral trade negotiations.
6. To ensure linkages between trade policies, environment policies and sustainable development.
FUNCTIONS OF WTO : The following are the functions of the WTO:

1. It facilitates the implementation, administration and operation of the objectives of the Agreement and of the
Multilateral Trade Agreements.
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2. It provides the framework for the implementation, administration and operation of the bilateral Trade Agreements
relating to trade in civil aircraft, government procurement, trade in diary products and bovine meat.
3. It provides the forum for negotiations among its members concerning their multilateral trade relations in matters
relating to the agreements and a framework for the implementation of the result of such negotiations, as decided
by the Ministerial Conference.
4. It administers the Understanding on Rules and Procedures governing the Settlement of Disputes of the
Agreement.
5. It cooperates with the IMF and the World Bank and its affiliated agencies with a view to achieving greater
coherence in global economic policy-making.
Following are the achievements of WTO in the short period it has been in existence:
1. WTO has helped in making greater market orientations a general rule.
2. Tariff based protection has become the rule.
3. Restrictive measures, which were being used for balance of payments purposes, have declined markedly.
4. WTO has brought services trade into the multilateral system. Many countries are opening their markets for
trade and investment either unilaterally or through regional or multilateral negotiations.
5. Many underdeveloped countries have promoted economic growth in their countries. They have undergone
radical trade, exchange and domestic reforms, which have improved the efficiency of resource use and opened
new investment opportunities.
6. Bilateralism has been, to a great extent, placed under control by the extension of WTO provisions to services,
TRIPS and TRIMS and by the unified dispute settlement mechanism, in which the pos-sibility of unilaterally
blocking the adoption of panel decisions no longer exists.
7. The Trade Policy Review Mechanism has created a process of continuous monitoring of trade policy developments,
which by promoting greater transparency has assisted in the process of liberalization and reform.
The WTO, however, has still to make progress on the following issues:
1. The trade reform process is incomplete in many countries, some tariff peaks remain, and negotiations are still
proceedings in various areas, notably in basic telecommunications and financial services.
2. There have been at least some reversals in the overall liberalization process in some developing countries. Examples
may be increasing of antidumping measures, selective tariff increases and investment related measures.
3. The combination of globalization and technological change creates a premium on high skill as against low skill.
Concerns have been raised that this will amount to growing social divisions.
4. The major share of the benefits of the WTO has gone to the countries of the North. WTO has been much more
beneficial to the developed countries where the benefits of free trade accrue primarily to the underdeveloped
countries, the progress has been much slower.
5. The WTO has not done much for the development of non-tariff barriers to imports from the underdeveloped
countries such as anti dumping duties.
6. “One size fits all” approach is increasingly getting embedded in the WTO rules and disciplines. The policies
and rules appropriate or advantages to the industrialized world are getting established as common rules to be
obeyed by the developing countries as well. As a result, the multilateral trade rules are increasingly becoming a
codification of the policies, perceptions, laws and regulations of the industrialized countries.
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7. As a result of pressures resulting from WTO, the interests of international trade, which are primarily the interests
of transnational corporations take precedence over local concerns and policies even if such a course exposes
the local population to serious health and security risks.
8. All the WTO members are not equally integrated in the multilateral system.
9. As brought out in the last Ministerial Meeting at Mexico in September 2003, the implementation related issues
are becoming a source of serious concern.
WTO AND DEVELOPING COUNTRIES :

About two thirds of the WTO’s around 150 members are developing countries. They play an increasingly
important and active role in the WTO because of their numbers, because they are becoming more important in the
global economy, and because they increasingly look to trade as a vital tool in their development efforts. Developing
countries are a highly diverse group often with very different views and concerns.
The WTO deals with the special needs of developing countries in three ways:
• the WTO agreements contain special provisions on developing countries.
• the Committee on Trade and Development is the main body focusing on work in this area in the WTO, with
some others dealing with specific topics such as trade and debt, and technology transfer.
• the WTO Secretariat provides technical assistance (mainly training of various kinds) for developing countries.
In the agreements: more time, better terms
The WTO agreements include numerous provisions giving developing and least developed countries
special rights or extra leniency — “special and differential treatment”. Among these are provisions that allow
developed countries to treat developing countries more favorably than other WTO members. The General
Agreement on Tariffs and Trade (GATT, which deals with trade in goods) has a special section (Part 4) on Trade
and Development which includes provisions on the concept of non-reciprocity in trade negotiations between
developed and developing countries — when developed countries grant trade concessions to developing countries
they should not expect the developing countries to make matching offers in return. Both GATT and the General
Agreement on Trade in Services (GATS) allow developing countries some preferential treatment.
Other measures concerning developing countries in the WTO agreements include:

• extra time for developing countries to fulfill their commitments (in many of the WTO agreements)
• provisions designed to increase developing countries’ trading opportunities through greater market access (e.g.
in textiles, services, technical barriers to trade)
• provisions requiring WTO members to safeguard the interests of developing countries when adopting some
domestic or international measures (e.g. in anti-dumping, safeguards, technical barriers to trade)
• provisions for various means of helping developing countries (e.g. to deal with commitments on animal and
plant health standards, technical standards, and in strengthening their domestic telecommunications sectors).
LEGAL ASSISTANCE: A SECRETARIAT SERVICE

The WTO Secretariat has special legal advisers for assisting developing countries in any WTO dispute
and for giving them legal counsel. The service is offered by the WTO’s Training and Technical Cooperation
Institute. Developing countries regularly make use of it. Furthermore, in 2001, 32 WTO governments set up an
Advisory Centre on WTO law. Its members consist of countries contributing to the funding, and those receiving legal
advice. All least-developed countries are automatically eligible for advice. Other developing countries and transition
economies have to be fee-paying members in order to receive advice.
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IMF :
The most important outcome of the Bretton Woods conference was the formation of International Monetary
Fund (IMF). It started functioning in March 1947 with the membership of 30 countries. Presently, it has more than
185 members.
The two main objectives of formation of IMF are the member countries followed a set of agreed rules of
conduct in international trade and finance and of providing borrowing facilities for the member countries to tide
over their BOP difficulties.
After the crises of 1971, the Board of Governors of the IMF recognised the necessity of investigating the
possible measures for the improvement in the international monetary system. A committee of 20 members was
formed in 1972. Three basic weaknesses of the Bretton Woods system, identified by the committee included
shortage of international liquidity, confidence and adjustment.
In 1976, some amendments to the articles of agreements of the IMF have been formed.
PURPOSES OF IMF : The main statutory purposes of IMF includes promoting the balanced expansion of world
trade, to stable the exchange rates, the avoidance of competitive currency devaluations, and the orderly correction
of a country’s balance of payments problem. According to the articles of agreements, the purposes of the
International Monetary Fund are:
1. To promote international monetary cooperation through a permanent institution which provides the machinery
for consultation and collaboration on international monetary problems;
2. To facilitate the expansion and balanced growth of international trade and contribute thereby to the promotion
and maintenance of high levels of employment and real income;
3. To promote exchange stability, maintain orderly exchange arrangements among member states, and avoid
competitive currency depreciations;
4. To assist in establishing a multilateral system of payments of current transactions among members and in
eliminating foreign-exchange restrictions that hamper world trade; and
5. To alleviate serious disequilibrium in the international balance of payments of members by making the resources
of the Fund available under adequate safeguards, so as to prevent the members from
resorting to measures that endanger national or international prosperity.
FUNCTIONS OF IMF : To serve above purposes, IMF performs following functions:

1. It regulates economic and financial developments and policies of the member countries globally and gives
policy advices to them.
2. It lends money to member countries to deal with their balance of payment problems.
3. It supports for the adjustment and reform policies not just provide temporary finance.
4. It provides technical assistance and training to the governments and central banks of member countries in its
area of expertise.
5. It conducts research, statistics, forecasts, and analysis based on tracking of global, regional, and individual
economies and markets.
COLLABORATION OF IMF :
The IMF collaborates with many international bodies such as World Bank, regional development banks,
the World Trade Organization (WTO), UN agencies etc. While all of these organizations are involved in global
economic issues, each has its own unique areas of responsibility and specialization. The IMF also works closely
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with the Group of Twenty (G-20) industrialized and emerging market economies and interacts with think tanks,
civil society, and the media on a daily basis.
ORGANIZATION AND MANAGEMENT OF IMF : This section explains the organization structure and
management where the IMF gets its resources and how they are used.
Management: The IMF is headquartered at Washington, D.C. led by a Managing Director, who is head of the staff
and Chairman of the Executive Board. The Managing Director is assisted by a First Deputy Managing Director
and three other Deputy Managing Directors. The Management team oversees the work of the staff and maintains
high-level contacts with member governments, the media, non-governmental organizations, think tanks, and
other institutions.
QUOTAS: When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing
members of broadly comparable economic size and characteristics. The IMF uses a quota formula to help
assess a member’s relative position.
The current quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent),
economic variability (15 percent), and international reserves (5 percent). For this purpose, GDP is measured through
a blend of GDP—based on market exchange rates (weight of 60 percent)—and on PPP exchange rates (40 percent).
The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across
members. Quotas are denominated in Special Drawing Rights (SDRs).
SPECIAL DRAWING RIGHTS : Special Drawing Rights (SDRs) are IMF’s unit of account. The SDR is neither a
currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.
Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement
of voluntary exchanges between members; and second, by the IMF designating members with strong external
positions to purchase SDRs from members with weak external positions. The largest member of the IMF is the
United States, with a current quota (as of January 25, 2016) of SDR 42.1 billion (about $58 billion), and the
smallest member is Tuvalu, with a current quota of SDR 1.8 million (about $2.5 million). The conditions for
implementing the quota increased as agreed under the 14th General Quota Review meeting on January 26, 2016.
As a result, the quotas of each of the IMF’s 189 members will increase to a combined SDR 477 billion (about
US$659 billion) from about SDR 238.5 billion (about US$329 billion). According to IMF (2016), as of March 2016,
204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be
exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major
currencies: the U.S. dollar, the euro, the Japanese yen, and the pound sterling. The basket will be expanded to
include the Chinese renminbi (RMB) as the fifth currency, effective from October 1, 2016.
According to IMF (2016), in view of the Bretton Woods fixed exchange rate system, SDR was created by
the IMF in 1969 as a supplementary international reserve asset. A country participating in Bretton Woods system
needed official reserves that could be used to purchase its domestic currency in foreign exchange markets, as
required to maintain its exchange rate. But the international supply of two key reserve assets that were gold and
the U.S. dollar proved inadequate for supporting the expansion of world trade and financial flows.
Therefore, the international community decided to create a new international reserve asset under the
auspices of the IMF. Only a few years after the creation of the SDR, the Bretton Woods system collapsed and the
major currencies shifted to floating exchange rate regimes. Subsequently, the growth in international capital
markets facilitated borrowing by creditworthy governments and many countries accumulated significant amounts
of international reserves.
These developments lessened the reliance on the SDR as a global reserve asset. However, more recently, the
2009 SDR allocations totaling SDR 182.6 billion played a critical role in providing liquidity to the global economic system
and supplementing member countries’ official reserves amid the global financial crisis.
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CURRENT STATE OF IMF :

After the long period of the existence of IMF, a lot of contradictory views have come up on the importance
and role of the IMF in today’s international economy and on its effectiveness in dealing with international financial
crisis. It will not be surprising if it would be called as one and only almost universal financial institution, having grown
from the 44 states represented at the 1944 Bretton Woods conference to more than 185 countries today. Now it
includes almost every economy of the world with few exceptions such as Cuba, North Korea, Taiwan etc. It is owned
by the governments of its member countries, represented through a Board of Governors. The Governor for each
member country is usually the Minister of Finance or sometimes the Central Bank Governor. Voting is in accordance
with the size of a country’s share-holding in the Fund (or “quota”), and many important decisions require special
majorities (85% of the vote).
The United States, the largest member of the IMF, currently has 17.78% of the vote, and thus can veto any
major decision of the Fund if it feels is unacceptable. It still sees its primary purpose in promoting world trade, and
in securing the general well-being of the world economy, through analysis and advice. It provides credit to member
countries, known in IMF terminology as “drawings on the Fund”. Such credits are extended in relation to the size
of the quota.
Since the 1950’s, credit has been provided in “tranches”, units corresponding to 25% of a member’s
quota. It is also a provider of subsidized credit. It facilitates low-income members, which are defined principally on
a basis of per capita income and eligibility for the concessional lending of the World Bank Group under IDA
(International Development Association), are known as the Enhanced Structural Adjustment Facility. The loans
are made available in three installments over a three year period, carry an interest of 0.5%, and are repaid over a
period from 5 ½ to 10 years after the loan disbursement. It also has the task of creating supplementary reserves,
in the form of the SDR. The issue of SDRs is linked, according to the first Amendment of the Articles of Agreement),
to a general need for liquidity.
The IMF tries to influence the policies of its members, in the belief that poor policies have an adverse
effect that extend beyond national frontiers; this function is known as “surveillance”. In the course of surveillance,
the IMF collects a real amount of data, which it has presented in a standardized and systematized way in such
publications as International Financial Statistics.
WORLD BANK :
INTRODUCTION :
A need arises to finance various projects in various countries to promote the development of economically
backward regions. The United States and other countries have established a variety of development banks whose
lending is directed to investments that would not otherwise be funded by private capital. The investments include
dams, roads, communication systems, and other infrastructural projects whose economic benefits cannot be
computed and/or captured by private investors, as well as projects, such as steel mills or chemical plants, whose
value lies not only in the economic terms but also, significantly in the political and social advantages to the nation.
The loans generally are medium-term to long-term and carry concessional rates.
Even though most lending is done directly to a government, this type of financing has two implications for the
private sector. First, the projects require goods and services which corporations can produce. Secondly, by
establishing an infrastructure, new investment opportunities become available for multinational corporations.
The World Bank or the International Bank for Reconstruction and Development (IBRD) was established in
1945 under the Bretton Woods Agreement of 1944. An International Monetary and Financial Conference was held
at Bretton Woods, New Hampshire during July 1-22, 1944. The main purpose of the conference was finalisation
of the Articles of Association of IMF and establishment of an institution for the reconstruction of the war shattered
world economies. Thus, the conference has given birth to World Bank or International Bank for Reconstruction
and Development (IBRD). World Bank was established to provide long-term assistance for the reconstruction
and development of the economies of the member countries while IMF was established to provide short-term
assistance to correct the balance of payment disequilibrium.
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The World Bank is an inter-governmental institution, corporate, in form, the capital stock of which is
entirely owned by its members-governments. Initially, only nations that were members of the IMF could be members
of the World Bank. This restriction on membership was subsequently relaxed. The World Bank makes loans at
nearly conventional terms for projects of high economic priority. To qualify for financing, a project must have costs
and revenues that can be estimated with reasonable accuracy. A government guarantee is a necessity for World
Bank funding. The Bank’s main emphasis has been on large infrastructure projects such as roads, dams, power
plants, education and agriculture. However, in recent years the Bank has laid greater emphasis on quick loans to
help borrower countries to alleviate their balance of payments problems. These loans are tied to the willingness of
the debtor nations to adopt economic policies that will spur growth, free trade, more open investment, and a more
vigorous private sector. Besides its members subscriptions, the World Bank raises funds by issuing bonds to
private sources.
FUNCTIONS OF THE WORLD BANK : The principal functions of the IBRD are set forth in Article I of the
agreement and are as follows:
1. To assist in the reconstruction and development of the territories of its members by facilitating the investment
of capital for productive purposes.
2. To promote private foreign investment by means of guarantee of participation in loans and other investments
made by private investors and, when private capital is not available on reasonable terms, to make loans for
productive purposes out of its own resources or from funds borrowed by it.
3. To promote the long term balanced growth of international trade and the maintenance of equilibrium in balance
of payments by encouraging international investment for the development of the productive resources of members.
4. To arrange loans made or guaranteed by it in relation to international loans through other channels so that more
useful and urgent projects, large and small alike, will be dealt first. It appears that the World Bank was created to
promote and not to replace private foreign investment. In this respect the Bank considers its role to be a marginal
one, to supplement and assist private foreign investment in the member countries.
MEMBERSHIP OF THE WORLD BANK :

All the members of the IMF are also the members of the World Bank. Any country can join as a member of
the IBRD by signing in the Charter of the Bank as its subscriber. It had 184 members in 2003. Bank has the
authority to suspend any member, if the country concerned fails to discharge its responsibilities to the IBRD.
Similarly, every member is free to resign from the membership but it has to pay back all loans with interest on due
dates. The member is also required to pay its share of the loss on demand if the Bank incurs a financial loss in the
year in which a member resigns.
CAPITAL STRUCTURE OF THE WORLD BANK :

The World Bank or IBRD started with an authorised capital of US $ 10 billion divided into 1,00,000 shares
of US $ 1,00,000 each. The subscribed capital at that at time was US $9.4 billion. The authorised capital was
increased to 7,16,500 shares of the par value of SDR 1,00,000 each in 1985. In July 1992, the total authorised
capital of the bank was $14.1 billion with a capital increase of $9.3 billion. This increase of 77,159 shares was
subscribed by the republics of the former Soviet Union. The bank has raised capital worth $23 billion in 2002.
The member countries contribute their share capital to the Bank as follows:
(1) 2% of the share in the form of gold and US dollars. The World Bank utilizes this amount freely for granting
loans.
(2) 18% of the share capital in the form of own currency. This amount is also used by Bank for granting loans.
54
80% of the share capital is payable at the request of the Bank. This amount is also used by Bank for granting
loans. But it can use this amount in discharging its responsibilities.
ORGANISATION STRUCTURE OF THE WORLD BANK : The World Bank like IMF is also managed by a three-
tier structure including Board of Governors, Executive Directors and President.
(1) Board of Governors : The Board of Governors has full authority and control over the Bank’s activities.
Normally, each country appoints its Finance Minister as a Governor and the Governor of its Central Bank as
Alternate Governor on the Board of Governors for a period of 5 years. The strength of the voting rights to the
Governors depends upon the subscribed capital by the member country. In the absence of Governor, the Alternate
Governor can exercise the voting right. Normally the Board of Governors meets annually.
(2) Executive Directors : The bank has 24 Executive Directors. They supervise the entire operations of the
Bank. Out of these 24 Directors, are appointed by USA, UK, Germany, Finance and Japan. The remaining 19
Directors are elected by the remaining member countries.
The Executive Directors normally meet regularly once in a month. The 24 Directors elect the President of the
Bank who presides over the meetings of the Board of Executive Directors.
The Scope of Decisions of the Executive Directors Include:
(a) Policy making within the framework of the Articles of Agreement.
(b) Loans and credit proposals.
Function of Board of Executive Directors :
(a) To Present audited annual reports.
(b) To prepare administrative budget.
(c) To prepare and present to Board of Governors annual reports on the operation and policies of the Bank.
(3) President : Normally the president does not have any voting right except in case of exercising equal rights. He
is assisted by senior Vice-Presidents and Directors of various departments and regions.
FUNDING STRATEGY OF THE WORLD BANK : There are the four basic objectives of the World Bank’s
funding strategy:
(1) To make sure availability of funds in the market.
(2) To provide the funds at the lowest possible cost to the borrowers through appropriate currency mix of its
borrowing and opting to borrow when interest rates are expected to rise.
(3) To control volatility in net income and overall loan changes.
(4) To provide an appropriate degree of maturity transformation between its lending and the borrowing. Maturity
transformation depicts the Bank’s capacity to lend for longer period than it borrows.
Bank’s Borrowings : Bank’s main function is to lend the money to the needy member. For lending activities, it
needs money and therefore it has to borrow.
Sources of Borrowing : The bank borrows from the following sources:

(1) The Bank borrows from international market both for long-term and short-term periods.
(2) The Bank also borrows under currency swap agreements (CSA).
(3) The Bank also borrows under the Discount-Note Programme by two methods. First, it places bonds and
notes directly with its member countries. Second, it offers issues to investors and in public markets.
Two new borrowings instruments were evolved by the Bank. The first one is Central Bank Facility and US
Dollar Dominated Facility. The second instrument is Floating Rate Notes. The World Bank borrows from the
commercial banks and other financial institutions with the help of this instrument.
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(a) Bank’s Lending Activities : The Bank grants loans to members in any one or more of the following ways:
(1) By participating or granting indirect loans out of its own funds;
(2) By granting loans out of funds raised in the market of a member or otherwise borrowed by the Bank; and
(3) By guaranteeing in whole or part, loans made by private investors through the investment channels.
The total outstanding amount of the total direct and indirect loans made or guaranteed by the Bank is not to
exceed 100 per cent of its total unimpaired subscribed capital, resources and surpluses. Bank imposes following
conditions in granting loans:
(1) The bank is satisfied that the borrower is unable to borrow under reasonable conditions in the prevailing
market conditions.
(2) The project for which loan is required should be recommended by the competent authority in the form of a
written report after careful examination of the project.
(3) The loan is required for productive purpose.
(4) The borrower or guarantor has reasonable prospects of repaying loans and interest on loans.
(5) If the project is located on the territory of the member but itself is not a borrower, then the member or its central
bank has to guarantee the repayment of loan, interest on loans and other charges on loan.
In 1991, the Executive Board of the Bank modified the repayment terms which include extension of repayment
period from 3 to 5 years for middle income countries and review of repayment terms for middle income countries
within 3 years. The cumulative lending of the Bank is of $ 383 billion and in the fiscal year 2003, it has lended $
11.2 billion for 99 new operations in 37 countries.
FACILITIES TO MEMBER COUNTRIES : The Bank provides the following facilities to member countries:
(1) Structural Adjustment Facility (SAF) : In order to reduce their balance of payment deficit and maintaining or
regaining the economic growth of member countries, the World Bank has introduced SAF in 1985. These funds are
used to finance the general imports with a few agreed exceptions such as luxury and military imports. These funds are
released in two parts and in a series of upto five SAFs to a borrowing country. Generally, the bank imposes stiff
conditions for these. These are provided to support to programmes running from 5 to 7 years.
(2) Enhanced Structural Adjustment Facility (ESAF) : In order to increase the availability of concessional resources
to the low income member countries, ESAF was established in December 1987. It provides new concessional
resources of SDR 6 billion which will be financed by special loans and contributions from developed and OPEC
countries. The purposes for advancing the amount is same, i.e., to reduce balance of payment deficits of borrowing
member countries and encourage growth. The interest rate charged by the Bank is 0.5 per cent to be repaid in ten
semi-annual installments beginning after 5½ years of disbursements.
(3) Special Action Programme (SAP) : The Special Action Programme (SAP) has been started in 1983 to
strengthen the IBRD’s ability to assist member countries in adjusting to the current economic environment. It has
four major elements:
(i) Provide lending for structural adjustment, policy changes, export-oriented production, fullutilisation of existing
capacity and maintenance of critical infrastructure.
(ii) Provide advisory services regarding policies.
(iii) Enlisting familiar efforts by other donors for fast disbursing assistance.
OTHER ACTIVITIES OF THE WORLD BANK : In addition to lending activities, the Bank also undertakes the
following activities:
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(1) Training : In 1956, the Bank set up a staff college to provide training to senior officials of the member countries.
This college is known as Economic Development Institute (EDI).
The Institute helps the officials in improving the management of their economies and to increase the
efficiency of their investment programmes. The EDI also organises seminars in Washington and in different
regions of the World in Cooperation with regional institutes.
(2) Technical Assistance : The World Bank also provides technical assistance to its member countries. This
assistance includes:
(i) Engineering – related: It includes feasibility studies, engineering design and construction supervision;
(ii) Institution-related: It includes diagnostic policy and institutional studies, management
The primary way of providing technical assistance is through loans made for supervision, implementation
and engineering services, energy, power, transportation, water supply, etc.
In 1975, the Bank created Project Preparation Facility (PPF) for meeting gaps in project preparation and
for institution building. The Bank also acts as executing agency for project financed by the United Nations
Development Programme (UNDP).
(3) Inter-Organisational Co-operation : The World Bank is also engaged in inter-organisational cooperation. It
is based on formal agreement between it and international organisations, such as, the cooperative programmes
between it and FAO, the UNESCO, the WHO, the GATT, the UNCTAD, the UNEP (United Nation Environment
Programmes), The UNDP, The UNIDO (United Nations Industrial Development Organisation) the ILO, the African
Development Bank, the Asian Development Fund, the International Fund for Agriculture Development (IFAD), etc.
(4) Economic and Social Research : In 1983, the Bank established a Research Policy Council (RPC). It provides
leadership in the guidance, co-ordination and evaluation of all bank research. The Bank’s own research staff
undertakes research activities and also in collaboration with outside researchers.
(5) Operations Evaluation : The Bank has set up the Operations Evaluation Department (OED) to help borrowers
in the post-evaluation of Bank assisted projects. Borrowers visit this Department for seeking help in the preparation
of project completion report.
(6) Settlement of Investment Disputes : The Bank has set up the International Centre of Settlement of Investment
Disputes (ICSID) between states and nationals of other states. The Bank has successfully mediated in solving
many international investment disputes such as the River Water Dispute between India and Pakistan, and the
Suez Canal dispute between Egypt and the U.K.
CRITICISM OF THE WORLD BANK : The modus operandi of the Bank has been criticised on various counts by
different quarters as follows:
1. It is alleged that bank charges a very high rate of interest on loans. For example, some of the loans which India
has received in recent years bear an interest of 5.75 per cent including the commission at 1% which is put in the
Bank’s special reserve.
2. The Bank’s insistence, prior to the actual grant of loan, on the country having the capacity to transfer or repay,
is open to criticism. The Bank should not apply orthodox standards to judge the transfer capacity of any borrowing
country. Transfer capacity follows rather than precede the loan.
3. The financial help given by the Bank does not amount to more than a drop in the big ocean of financial
requirements so essential for various development projects.
INDIA AND THE WORLD BANK : India is the founder member of the Bank and held a permanent seat for number of
years on its Board of Executive Directors. India is one of the largest receivers of assistance since 1949. Upto June 2002,
cumulative lending of the World Bank to India amounted to $ 26.69 billion in 187 loans. The total amount borrowed by India
57
from the World Bank and the IDA till June 2002 amounted to $ 58.54 billion in 434 loans. This amounted to 11.6 per cent of
the total loans and credits approved by the World Bank groups. During 2001-02, India received $ 893 million from the
World Bank accounting for 11.22 per cent of its total loans.
India is helped by the World Bank in its planned economic development through granting loans, conducting field
surveys, sending study terms and missions and through rendering expert advice. The Bank also provides training to
Indian personnel at EDI. There is also a Chief of Missions of the Bank at New Delhi. He is representing the Bank for its
aided projects in India for monitoring and consultations. The Bank has been helping India in various objects like
development of ports, oil exploration including the Bombay high and gas power projects, aircrafts, coal, iron, aluminum,
fertilizers, railway modernisation and technical assistance etc. It also helped India to solve its river water dispute with
Pakistan. The benefits desired by India from the World bank are:
(i) India has received a lot of assistance from the World Bank for its development projects.
(ii) Aid India Club was founded in 1950 by the efforts of the World Bank with a view to help India. This club is now
called India Development Forum. This Forum had decided to give loans amounting to $ 600 crore to India for
implementing its structural adjustment.
(iii) The bank’s role in solving the Indus water dispute between India and Pakistan has been invaluable.
(iv) General loans have also been granted by the World Bank to India, to be utilised as per its own discretion.
(v) As a member of the World Bank, India has become the members of International Finance Corporation,
International Development Association and Multilateral Investment Guarantee Agency also.
(vi) India has received technical assistance from time to time from the World Bank for its various projects. The
Expert Team of the Bank has visited India and given valuable suggestions also.
(vii) The massive population of India has always created problems in the economic development of the country.
World Bank has been helping India in the population control programmes and urban development. For this purpose
loans amounting to $ 495 crore have also been given to India.
(viii) World Bank has been giving financial assistance to NGOs operating in India e.g. Leprosy Elimination,
Education Projects, Child development service projects etc.
On the other hand, critics argue that the World Bank have endangered the economic freedom of India. The basic
points of criticism are as follows:
(i) The World Bank has laid a great deal of emphasis on measures of economic liberalisation and more free play
of market forces.
(ii) A lot of stress has been laid on going very slow on the setting up of public sector enterprises including financial
intermediaries and encouraging private sector.
(iii) India’s dependence on World Bank has been increasing which is adversely affecting its economic freedom.
(iv) The attitude of World Bank reflects the preference for free enterprise and a market oriented economy. It shows
dissatisfaction with the general performance of economies which are based on planning and regulation. At different
occasions the Bank has tried to undermine the Significance of our Planning Commission.
(v) The devaluation of Indian rupee in 1966 and 1991 was done at the insistence of the World Bank only.
India’s main problem till now has been the government’s incapacity to act rightly, firmly and effectively in time, on
account of being more emotional to set ideologies and compromising attitude to safeguard the political party’s
interest more than the national interest.
58
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT :

The International trade is considered to be the engine of economic growth. There has been continuous
and rapid growth in world trade due to liberalization of tariffs, quotas and other restrictions. The share of
manufacturers in world trade has increased from about 50 per cent to 70 per cent over the last few decades. The
developed countries dominate the world trade though the share of developing countries has increased over the
years. World trade in services has been increasing fast. World trade has become increasingly multilateral due to
the efforts of various international trading blocks, which exercise a significant influence on world trade.
The United Nations Conference on Trade and Development (UNCTAD) was established by U.N. General
Assembly in 1964 in order to provide a forum where the developing countries could discuss the problems relating to
their economic development. It was set up essentially because it was felt that the then existing institutions like IMF
and GATT were not properly organized to handle the peculiar problems related to the developing countries. These
institutions favored the developed countries and failed to tackle the special trade and development problems of less
developed countries. With more than 170 members, UNCTAD presently is the only body where developed as well
as erstwhile centrally planned countries are its members.
Since 1964, eleven rounds or conferences of UNCTAD have taken place, i.e. UNCTAD I held at Geneva in
1964, UNCTAD II at New Delhi in 1968, UNCTAD III at Santiago in 1972, UNCTAD IV at Nairobi in 1976, UNCTAD
V at Manila in 1979, UNCTAD VI at Belgrade in 1983, UNCTAD VII at Geneva in 1987, UNCTAD VIII at Cartagena
(Columbia) in 1992, UNCTAD IX at Midland (South Africa) in 1996, UNCADX at Bangkok in 2000, and UNCAD XI
at Sao Paulo (Brazil) in 2004.
ORGANISATION OF UNCTAD : The UNCTAD was established as a permanent organ of General Assembly of
the United Nations. However, it has its own subsidiary bodies and also a full time secretariat to serve it. It has
permanent organ called Trade and Development Board as the main executive body. The Board functions between
the plenary sessions of the conference. It meets twice annually. It is composed of 55 members on the basis of
equitable geographical distribution.
The Trade and Development Board have four subsidiary organs to assist it in its functions. These are:
1. The Committee on Commodities.
2. The Committee on Manufacturers.
3. The Committee on Shipping.
4. The Committee on Invisible Items and Financing related to Trade.
Generally, these committees meet annually. However, they may be called in special session to consider urgent
matters.
FUNCTIONS OF UNCTAD : The UNCTAD was instituted mainly to reduce and eventually eliminate the gap
between the developed and developing countries and to accelerate the economic growth of the developing world.
Its main functions are as follows:
1. To promote international trade between the developed and the developing countries with special emphasis on
the development of underdeveloped countries.
2. To formulate principles and policies of international trade and related problems of economic development.
3. To make proposals for putting the said principles and policies into effect and to take such steps which may be
relevant towards this end.
4. To negotiate multilateral trade agreements to review and facilitate the coordination of activities of other institutions
within the fold of United Nations related to international trade and related problems of economic development.
5. To be available as a center for harmonious trade related development policies of governments, and regional
economic groupings in pursuance of Article 7 of the charter of the United Nations.
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MAJOR ACTIVITIES OF UNCTAD : The major activities of UNCTAD as follows:

1. Research and support in connection with the negotiation of commodity agreements.
2. Technical elaboration of new trade schemes, such as a new import preference system.
3. Various promotional activities designed to assist developing countries in the area of trade and capital flows.
BASIC PRINCIPLES OF UNCTAD : UNCTAD action program and priorities have been laid down in the various
recommendations adopted by the first conference in 1964. These recommendations are based on the following
basic principles:
(a) Every country has the sovereign right to freely dispose its natural resources in the interest of the economic
development and well being of its own people and freely to trade with other countries.
(b) Economic relations between countries, including trade relations, shall be based on respect for the principles
of sovereign equality of states, self-determination of people, and non-interference in the internal affairs of other
countries, and
(c) There shall be no discrimination on the basis of differences in socio-economic systems, and the adoption of
various methods and trading policies shall be consistent with this principle.
ACHIEVEMENTS OF UNCTAD : Despite the disagreements over the years, UNCTAD has played a key role
various sphere. The more important of these are as follows:
1. Trade in Primary Commodities :- The UNCTAD has been active in the International Commodity Agreement
since its inception, LDC’s (Last Developed Countries) wanted to expand their market for their traditional exports of
primary commodities. Developed countries placed restrictions of the exports of the latter in such form as licensing,
quotas, tariffs etc. and provided subsidies to domestic producers. Such trade restrictions tend to be higher for
processed products than for unprocessed ones. Besides, exports form LDC’s have been subject to wide fluctuations.
Thus, there has been a continual deterioration in the terms of trade of primary products of the LDC’s in relation to the
export of manufactured products from the developed countries. Since UNCTAD-II, the LDC’s have been insisting on
International Commodity Agreements to stabilize the prices and markets for their exports of primary products. At
UNCTAD IV in 1976, it was proposed to have an Integrated Program for Commodities (IPC) and to create common
fund for buffer stock financing. This fund was meant to provide a considerable benefit to the exporters and importers
of developing countries. Exporters of primary products would be able to realize higher prices for primary products
like rubber, cocoa, tin etc. Similarly, exporters of such primary products also would not be subjected to the uncertainties
of price fluctuations which sometimes are the results of speculative activity.
2. Trade in Manufactured Goods :- LDC’s have strongly urged the developed countries to give them tariff
preferences on their manufactured and semi-manufactured goods. At UNCTAD-I, the G-77 urged the develop
countries to grant generalized system of preferences (GSP) to the exports of such goods to the developed
countries. It was at UNCTAD-II that all members unanimously agreed for the early establishment of a mutually
acceptable system of generalized, non-reciprocal and non-discriminatory preferences. Under GSP, most
manufactured and semi-manufactured goods from LDC’s to developed countries enjoy tariff reduction or
exemptions from custom duties. A majority of developed countries grant duty free treatment for all or most products
eligible for GSP. But there are certain limitations to the scheme of GSP:-
(a) Despite efforts made to expand the coverage of GSP, there are items like textiles, clothing, steel, footwear
etc., which are excluded by a number of developed countries.
(b) Many developed countries have devolved their own schemes which subject the preferences to variety of
restrictions.
(c) There is no long term guarantee in the case of GSP concessions which can be altered or withdrawn at short
notice.
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(d) Among the LDC’s, the benefit of GSP have been consistently concentrated among a few more advanced
developing countries.
Thus, the scope for the extension of GSP is quite limited, as producers in the LDC’s have to face a tough
competitive position in the world market.
3. Development Finance :- UNCTAD is also endeavoring to reduce the debt burden of the developing countries.
These countries have taken large amount of loans from bilateral and multilateral sources. As a result, the servicing
of the accumulated debts, i.e. the interest payments and repayments, now account for a very substantial proportion
from exports. In fact, for some of the developing countries the outgo of foreign exchange on account of debt
servicing is more than the current inflows of loans and credits. UNCTAD is trying to persuade the developed
countries, to write off a part of the accumulated debts. Some of the developed countries, mostly Scandinavian
group, have accepted the proposal.
4. Technology Transfer :- In UNCTAD, measures were adopted to strengthen technology capability of LDC’s. It was
pointed out that better research facilities, training programmes and establishment of local and regional centers for
technology transfer would serve the purpose. Thus, the UNCTAD VI held at Belgrade in June 1983 emphasized the
need for transfer of technology to LDC’s in order to promote their speedy and self reliant development. UNCTAD VI
passed a resolution relating to the transfer of technology to LDC’s on the lines of the policy paper approved at UNCTAD
VI. The UNCTAD has simply laid down the broad principles for transfer of publicity funded technologies at the
intergovernmental level. It may facilitate the process of technology transfer by freer access to sources of information,
cutting down barriers to free flow of technology etc.
5. Economic Co-operation :- UNCTAD-II held at Delhi in 1968 emphasized for the first time the need for promoting
international co-operation and self-reliance among the LDCs. UNCTAD VI again emphasized the need for co-
operative efforts among the LDCs through widening the scope of preferential trading arrangements, harmonizing
industrial development programmes through infrastructural facilities particularly in respect of shipping services
and simple payment mechanism under common clearing system. GSTP is major initiative of developing countries
to expand mutual trade through grant of tariff and non-tariff concessions and other measures such as long term
contracts under UNCTAD.
PROBLEMS OF UNCTAD : The following are the problems of UNCTAD :

1. UNCTAD has had problems from its inception, which have kept the organization from being fully effective in
achieving its objectives. It has been dominated by two organisations: The U.N. type and G-77. The interest of
each of the major political-economic classifications create so much friction that the rule-by-consensus method of
negotiating issues results in few concrete accomplishments.
2. UNCTAD has failed to adopt or implement a trade policy for development.
3. UNCTAD seems to be an international organization which, rather than to do a proper job with short-meetings
and clear focus on its objectives and international realities, appears to be among those institutions which huff and
puff for weeks while revealing their own importance.
INTERNATIONAL COMMODITY AGREEMENTS (ICA) :

International commodity agreements are inter-governmental arrangements concerning the production and
trade of certain primary products. Many developing countries which have embarked upon ambitious development
programmes are in need of large foreign exchange resources to finance some of their development requirements
like capital goods imports. But they have been facing the important problem of wide-fluctuations in the export prices
of the primary goods i.e. agricultural products and minerals, which form a major part of their total exports. Apart from
making the export earnings unstable, it has also been causing a deterioration in their terms of trade. Hence, there
has been a growing demand for adopting stabilization measures to protect especially the interests of developing
countries. International commodity agreements, it is believed, can help stabilize prices of the respective commodities.
61
OBJECTIVES OF ICA : The main objectives of the international commodity agreements are:-
1. Price Stabilization : Price stabilization is a very important purpose for which commodity agreements have
been entered into.
2. The Promotion of Health and Morals: The outstanding example of international agreements for the purpose
of promoting health and morals is the international regulation of trade in opium and narcotics.
3. Security Objectives: Inter governmental commodity agreements may also be useful as a preventive of war
by preventing scramble for scarce strategic materials for national stock-piling or other security purposes.
4. The Conservation of Resources: The conservation of natural resources is a direct or indirect objective of
nearly all international raw material schemes.
5. The management of surplus: Commodity agreements are sometimes entered into to manage the surplus
during times of bumper crops, there may arise a problem of surplus. Such should be properly handled to avoid
serious adverse effects on price and also to hold stock for the lean period.
FORMS OF COMMODITY AGREEMENTS : Commodity Agreements may take any of the four forms, namely,
quotas, buffer stock, bilateral contract, and multilateral contract.
I. Quota Agreements : International quota agreements seek to prevent fall in commodity price by regulating their
supply under the quota agreement. Export quota are determined and allocated to participating countries according
to some mutually agreeable formula and they undertake to restrict the export or production by a certain percentage
of the basic quota as decided by the central committee or council. For instance, the coffee agreement among the
major producers of Latin America and Africa limits the amount that can be exported by each country.
Quota agreements have already been tried in case of coffee and sugar, and commodities like tea and
bananas have been suggested as prospective candidates for new agreements.
II. Buffer Stock Agreements : International Buffer Stock Agreements seek to stabilize the commodity prices by
maintaining the demand-supply balance.
Buffer stock agreements stabilize the price by increasing the market supply by selling the commodity
when the price tends to rise and by absorbing the excess supply to prevent a fall in the price. The buffer stock
plan, thus, requires an international agency to set a range of prices and to buy the commodity at the minimum and
sell at the maximum. The buffer pool method has already been tried in case of Tin, and Sugar, and commodities
like Rubber, Tea and Copper have been suggested as prospective candidates for new agreements. The buffer
stock arrangement, however, has certain limitations. It can be effected only in case of those products, which can
be stored at relatively low cost without the danger of deterioration. Further, large financial resources and stock of
the commodity are required to launch the programme successfully.
III. Bilateral/Multilateral Contracts : Bilateral contract to purchase and sell certain quantities of a commodity at
agreed prices may be entered into between the major importer and exporter of the commodity. In such an agreement,
an upper price and a lower price are specified. If the market price throughout the period of the agreement remains
within these specified limits, the agreement becomes operative. But, if the market price rises above the upper
limit specified, the exporting country is obliged to sell to the importing country a certain specified quantity of the
commodity at the upper prices fixed by the agreement. On the other hand, if the market price falls below the lower
limit specified, the importer is obliged to purchase the contracted quantity at the specified lower price.
Such international sale and purchase contracts may also be entered into by two or more exporters and
importers. The bilateral/multilateral agreements are usually concluded between the major suppliers and major
importers of the commodities. The best example of this type of agreement are the International Wheat Agreement.
The contract has disadvantage of creating a two price system. It requires domestic controls of some sort
and buffer stock to implement it. And it is quite apt to put the participating governments into the commodities
business. In an extreme case, it may become nothing but a payment by the government of one country to that of
another without even touching the producer or consumer.
62
The experience of the post-war market stabilization schemes indicates that a combination of different
control techniques is likely to be more effective than reliance on a single technique alone.
NAFTA :
The North American Free Trade Agreement or NAFTA, which came into force on January 1, 1994, is not
just another treaty that aims to facilitate trade between its member nations. It is one of the world’s most powerful
and successful treaties comprising the United States, Canada and Mexico.
The North American Agreement for Labor Cooperation (NAALC) and North American Agreement for
Economic Cooperation (NAAEC) are major additions to this treaty. Following the unfortunate September 11/2001
attack in the US, the Security and Prosperity Partnership of North America (SPPNA) was also added to NAFTA.
Interestingly, the goods that are traded between the NAFTA members feature labels. These labels are
printed in three languages, namely, English, Spanish and French. No doubt, NAFTA has been highly beneficial for
consumers, farmers and ranchers.
STRUCTURE OF NAFTA :
NAFTA’s governance structure is minimal and cantered on two institutions, the Free Trade Commission
(FTC) and the Secretariat.
THE FREE TRADE COMMISSION (FTC) :

The Free Trade Commission (FTC) is the principal body of NAFTA, and oversees NAFTA’s performance
and evolution. It is also responsible for dispute settlement, and is composed of the US Trade Representative, the
Canadian Minister for International Trade, and the Mexican Secretary of Commerce and Industrial Development.
The day-to-day work of the FTC is carried out by expert working groups and committees. This authority was laid
out in Article 2001 (2) of the NAFTA, which gave express power to the FTC to oversee, resolve, and supervise the
work of “all committees and working groups established under…[the NAFTA]…Agreement”. The FTC also has
implied power in Section 2001 (3) to “establish…delegate, seek the advice of non-governmental…groups and
take…other [unspecified] action”. These powers are enforced annually at trilateral cabinet-level meetings as
prescribed by Article 2001, or in actions that review national court decision affecting North American Trade.
The powers of the FTC can be characterized as technical, specific, and obligatory. The FTC operates by
consensus and has no effective method of amending NAFTA rules. Lacking the ability to delegate power or vote
by majority rule as a legislature might, the FTC suffers from a democratic deficit and this could damage its long
term legitimacy (Maryse 2006). While this minimal institutionalization will need to be reformed in the long run if
NAFTA is to be viable, the technical nature of NAFTA is in keeping with the functionalist approach. Also in view of
this, it is no surprise that NAFTA focuses on precision and obligation and eschews delegation of power (Abbott
2000). At the time NAFTA was negotiated, political constraints among North American leaders prohibited greater
regional democratization.
THE SECRETARIAT :
The Secretariat serves as an administrator for the FTC and is organized on a national basis, with each
member responsible for supporting its own staff. Operationally, the secretariat assists the FTC, along with the
dispute panels, committees, and working groups. The Secretariat is located in separate national offices in Mexico
City, Ottawa and Washington (Lopes Lima 1997). This decentralized structure does not mean the secretariat has
any real power of its own through delegation from the FTC. Instead, it takes care of the day-to-day affairs that are
prescribed by Article 2002. If the FTC directs it under Article 2002 (a)(c) to administer a trade dispute panel, it
must adhere to the guidelines of Article 2012. This high level of legalization constrains the secretariat from acting
independently and insures real decisions are made by the FTC or panels rather than at the discretion of secretariat
staff. This low level of delegation limits the responsiveness of the secretariat to exogenous groups such as labour
63
or environmental groups and guarantees that free trade and investor interests will be guarded vociferously. As
interests inevitably collide with greater interactions, this democratic deficit may need to be remedied by a court or
legislature with regional authority.
The national secretariats are also complemented by a NAFTA Coordinating Secretariat (NAFTACS) based
in Mexico. This trilateral secretariat was created on January 14, 1995. The main purpose of the central secretariat
is to help administer labour and environmental issues that fall under NAFTA. In reality, due to limited enforceability
and lax regulation, this body has not been very active, and is unequal in power to the investment and free trade
lobbies. Going forward, US domestic opposition to NAFTA is great among the environmental and labour communities
and will grow as interests clash. This means that the international secretariat needs greater authority to overcome
the narrow interests of business elites in each country, and thus endow NAFTA with democratic legitimacy.
The major functions of NAFTA are:

• Eliminate trade barriers in various service sectors belonging to its member nations.
• Reduce high Mexican tariffs and help to promote agricultural exports.
• Assist firms spanning the three nations to bid on government contracts.
• Assure fair market value to investors by reducing risk and offering the same legal rights that are enjoyed by local
investors.
• Help investors to claim against a government by offering legal help.
EC :
European Commission (EC), an institution of the European Union (EU) and its constituent entities that makes
up the organization’s executive arm.
The EC also has legislative functions, such as proposing new laws for the European Parliament, and judicial
functions, such as finding legal solutions to business and trade issues between countries within the EU.
FUNCTIONS :
1. Administration and implementation of EU and community policies and legislation, including formulation and
spending of the budget
2. Initiation and drafting of community legislation
3. Enforcement of EU and community law
4. Representation of the EU and the communities at the international level, including negotiation of international
treaties
STRUCTURE OF EC :
The EC is composed of members called commissioners, who are citizens of and are nominated by the
respective governments of each member state. However, the EC is charged with representing the EU or community
interest, not the interests of the member states, and the commissioners are called to act independently in that
interest. They are expressly forbidden to take instructions from their member state. Because of its responsibility
to represent the European interest and enforce the treaties and legislation that provide the legal foundation for the
EU and communities, the EC is known as the guardian of the treaties. The EC is made up of one member from
each of the EU’s 27 member states. The Lisbon Treaty, which reformed the governance of the EU, went into
effect on December 1, 2009. One of the treaty’s key provisions was to reduce the number of commissioners to
two-thirds of that number by 2014 so that thereafter member states would provide the EC with commissioners on
a rotating basis.
A new EC is appointed every five years, within six months of the elections to the European Parliament,
which occur in June. The procedure is that the governments of the member states jointly select a commission
president, who is then approved by Parliament. The president of the EC is chosen by the European Council, a
body made up the heads of state of each of the countries in the EU, for a term lasting two and one-half years. The
commission president-designate, in discussion with the member state governments, chooses the other members
64
of the EC. The new Parliament then interviews each member and gives its opinion on the new EC as a body. After
approval the EC officially begins its work. Its term of office runs until October 31 of the fifth year.
The EC is politically accountable to Parliament, which has the power to dismiss the whole EC by adopting
a motion of censure. Individual members of the EC must resign if asked to do so by the president, provided that
the other commissioners approve. The EC attends sessions of Parliament and is responsible for formulating
regulations governing political parties at the European Parliament level and providing for public funding for the
party campaigns for Parliament.
REGIONAL ECONOMIC GROUPINGS IN PRACTICE :

Regional economic integration refers to co-operation between various countries of a particular region in
order to develop that particular area. It includes economic integration of various trading areas of different countries.
It is also known as Regional trade block, Regional economic forces and Regional Grouping. A regional trade block
is a type of inter-governmental agreement, in which barriers to trade are reduced or eliminated among participating
countries. Regional economic integration is a collaborative arrangement between different countries in order to
take advantage of market opportunities and to promote economic growth and stability.
LEVELS OF REGIONAL ECONOMIC INTEGRATION :
1. Preferential Trading Agreement - It is a loosest form of economic integration where a group of countries
make a formal agreement to trade goods and services on preferential terms. It results in reduced tariffs and
sometimes a special quota is allowed for preferential access. These agreements are generally made between
developed and developing counties to promote economic development of developing nations. Example –The
European Union has a preferential trading agreement with the Middle East and Latin America.
65
2. Free Trade Agreement - It is a permanent arrangement usually between the neighboring countries. It involves
complete removal of tariffs on goods. However, it is not applied to agricultural sector, fishing or services. The
member countries are free t charge their own external tariffs from countries outside the free trade area. Therefore
each member country has full freedom over trade with external countries. Example-North American Free Trade
Agreement (NAFTA) and European Free Trade Association (EFTA).
3. Customs Union - Just like the members of Free Trade Area, the members of Custom Union also remove
barriers among themselves. In addition they also have a common trade policy with respect to non-member
countries and revenue is shared among the member countries. Example-Association of Southeast Asian Nations
(ASEAN).
4. Common Market - The common market has no barriers to trade among the member countries and there is
also a common external policy for trade with non-member countries. In addition the restriction in the movement of
the factors of production is also removed. Factors of production include Labour, Technology, Capital etc. The
restriction is abolished on immigration, emigration and cross border investments. This is done to employ the best
resources in the best possible manner. Example-European Economic Community.
5. Economic Union - Economic Union involves full integration between two or more economies. There are no
trade restrictions between member countries, they follow a common external tariff policy and the restriction on
the Mobility of factors of production is also abolished. In addition there is coordination between the member
countries on their economic policies such that the nations have coordinated monetary policy, fiscal policy, social
welfare programs etc., and usually a common currency is used in trade. Example-European Union.
6. Political Union - Political Union involves all features of Economic and also completes political integration
between member countries. The member countries share a common decision making and judicial body and
there is complete unity between member nations. The best example is United States of America which includes
thirteen separate colonies operating under Article of Consideration.
REGIONALISM VS. MULTILATERALISM :

Multilateralism is represented by the efforts on worldwide liberalization of international relations, which
started in the field of trade in goods when General Agreement on Tariffs and Trade (GATT) was signed, and
developed into broader fields of trade in services, investment, agricultural products, public procurement, and
intellectual property rights with its more sophisticated successor – World Trade Organization (WTO). However
this development is generally known, its connections to globalization and changing global conditions are not
usually analysed; even though they influenced the position of multilateralism as a principal part of economic
governance comprehensively: Together with Tussie (2003, p. 99), we can assume that “globalization is having
a profound effects on the political economy of trade. More countries than ever before have been persuaded to
push aside protective barriers and compete for world markets. These new entrants include a wide range of
developing countries and the former Soviet or Eastern bloc economies.” As a matter of this fact, multilateralism
changes qualitatively (even GATT became broader scale, which was definitively confirmed by the signature of
GATS and TRIPS under the WTO framework), quantitatively (from original 23 GATT countries, WTO had 150
members in 2007 and further countries (i.e. Russian Federation) are waiting for full membership), and formally
(institutional framework of the WTO is much stronger and tries to influence state authority significantly). These
three types of changes (qualitative, quantitative and formal) are traditionally designated to regionalism when
New Regionalism is defined. Respecting the fact, that also multilateralism has gone through a profound change
since late 1980’s, it is more easily understandable that its interaction with regionalism must be treated in
another manner than before.
THE CONCEPT OF MULTILATERALISM : Collectively, the agreements included in Annexes 1, 2 and 3 are
referred to as the “Multilateral Trade Agreements”, since they comprise the substantive trade policy obligations
which ALL the Members of the WTO have accepted. They form part of the “single undertaking” applied in the
66
Uruguay Round. That is, all agreements form part of a single package that was accepted by the Members as a
Whole (or as negotiators like to say “noting is agreed until everything is agreed”). (From WTO website)
THE CONCEPT OF REGIONALISM : By definition, parties to a regional trade agreement (RTA) offer each other
more favourable treatment in trade matters than to the rest of the world (including WTO Members). As you know,
this is contrary to the MFN principle. The number of RTAs involving WTO Members has increased notably in the
recent years. Free trade areas are more prevalent than customs unions. The purpose of a customs union or a
free trade area should be to facilitate trade among the parties to the RTA and not to raise barriers to the trade with
other WTO Members. RTAs shall be in line with the objectives of the MTS, and not constitute obstacles to it.
Other requirements comprise provisions on interim agreements and transition periods and transparency provisions.
The Enabling Clause (paragraph 2c) allows developing Members to conclude among themselves agreements on
trade in goods (South-South agreements) subject to more flexible requirements than those contained in Article
XXIV of the GATT. It is worth noting that the Transparency Mechanism for RTAs (transparency requirements)
applies to all RTAs, whether notified under the GATT, the GATS or the Enabling Clause.
Multilateralism Vs regionalism and major trading blocks in the world economy:-

The popular perception of trading blocs is one of discriminatory regional organizations whose principal
role is to advance the common economic agenda of member countries by protecting domestic markets from
foreign competition (Bhagwati 1990). In this sense, trading blocs are regarded as a direct threat to multilateralism
and to the goal of free trade established at Bretton Woods. According to this interpretation, the international
framework embodied by the GATT/WTO, International Monetary Fund (IMF), and the World Bank has been, or is
in the process of being, replaced by a more limited goal of partial trade liberalization centered upon regionalism.
Accordingly, the decline of commitment to multilateralism may lead to a break-up of the global trading system and
promote protectionist trading blocs whose competing geo-economics objectives could lead to an international
crisis. The principal trading blocs-NAFTA (perhaps extended to Latin America), the EU (including East-Central
Europe), and the emerging Asian bloc centering on Japan (and conceivably China)-will become the triad of dominant
actors in future conflicts, while the rest of the world will become increasingly isolated. As a prominent economist
noted, “given the inevitable trade frictions that will arise between large regional trading blocs-with those left outside,
such as the East Asian newly industrializing countries and Japan trying to form their own defensive blocs-the
whole multilateral trading system built up since the Second World War could un- ravel”. Closer investigation of
this pessimistic scenario suggests that the consequences of the emergence of trading blocs are far from clear.
In the 1960s and 1970s, numerous attempts to promote regional arrangements faltered. The Central American
Common Market (CACM), the Andean Pact, and a number of regional arrangements between African countries
failed to achieve significant intraregional liberalization and integration. This discouraging history not- withstanding,
regionalism experienced a resurgence during the Uruguay Round negotiations in the 1980s and 1990s. During
the four-year period between 1990-1994, no fewer than 33 new regional integration arrangements were notified to
the GATT (WTO 1995), and many existing regional arrangements, especially in Western Europe, were deepened
and widened. Of the total of 109 regional agreements notified to GATT between 1948-1994, Western European
countries participated in 76. The collapse of the communist Council for Mutual Economic Assistance (CMEA) in
Eastern and Central Europe in 1991 was an additional incentive to expand regional integration in Europe. This
surge of regionalism made the Uruguay negotiations more difficult and contributed to its compromise outcome.
Al- though the establishment of the WTO in place of GATT was hailed as a great success and proof that
multilateralism was alive and well, serious doubts remain over its ability to resolve trade disputes and to achieve
the goal of global free trade . The Uruguay negotiations led to a series of compromises which, in the end, merely
delayed the decisions necessary to maintain the multilateral framework. For example, agreements on financial
services, direct foreign investment, intellectual property, and agriculture were postponed not resolved. Nor is it
clears how effective WTO will be in dealing with intra and inter-bloc tensions. Mexico’s financial crisis, Japan’s
deflating economy, America’s currency, and Europe’s uncertain progress toward monetary union collectively
ensure a difficult climate for future negotiations on multilateral trade liberalization. Although there are still geographers
and economists who discount the significance of regionalism and trading blocs, the fact remains that by the time
67
the WTO was created, nearly all its members had notified GATT that they were parties to at least one regional
integration agreement. If the Asia-Pacific Economic Cooperation’s (APEC) announced objective (November 1995)
of achieving free trade by 2020 is formalized, all WTO members including Hong Kong and Japan will be parties to
one or more trading blocs. Although economic integration theory and preferential trading agreements have attracted
much attention in economics and political science, geographers have had little to say on these issues. Their
neglect is premised on two mistaken assumptions:
(1) That there is little or no evidence for the regionalization of world trade around separate regional nodes;
(2) That evidence of restructuring the world economy around Western Europe, North America, and Japan is not
the same as three emerging trading blocs.
As to the first point, the relative importance of regional nodes is evident from an examination of trading
transactions using the IMF’s Direction of Trade statistics. Our brief summary begins with the caveat that there
are many methods, and associated problems, for measuring global trading patterns. While this is not the place to
review the relative merits of those different approaches, Grant has pointed out that the traditional measures and
perspectives employed here provide a useful tool for interpreting and forecasting trade trends. Figure 1 depicts
world merchandise trade and the key roles therein of three regional groupings: the EU (of twelve); NAFTA; and
Association of South-East Asian Nations (ASEAN) plus Hong Kong, Japan, South Korea, and Taiwan. This triad of
regional blocs dominated trade in the world economy of 1991. In that year, intra-regional trade accounted for 38
percent of all the world’s merchandise imports and exports. Intra-EU trade alone accounted for 24 percent of all
such trade. Inter-regional trade is quite modest by comparison, representing just 10 percent of the world’s
merchandise imports and exports. Nearly 50 percent of all world trade occurs within or between the three major
regional nodes (representing only twenty-five countries). When trade between this triad of regional blocs and third
countries are taken into account (amounting to 19 percent), regionalism’s dominant role becomes clear. This
empirical evidence thus makes a strong prima facie case for regionalism as one of the most influential factors
determining world-trade flows.
CONCLUSION :
Regionalism versus multilateralism is growing as economists and political scientists grapple with the
question of whether regional integration arrangements are good or bad for the multilateral System. Are regional
integration arrangements “building blocks, or stumbling blocks,” in Jagdish Bhagwati’s phrase, or stepping stones
toward multilateralism? As economists worry about the ability of the World Trade Organization to maintain the
GATT’s unsteady yet distinct momentum toward liberalism, and as they contemplate the emergence of world-
scale regional integration arrangements (the EU, NAFTA, FTAA, APEC, and, possibly, TAFTA), the question has
never been more pressing.
IMPORTANT REGIONAL ECONOMIC GROUPINGS IN THE WORLD : Economies may follow different forms
of agreement to remove barriers of trade. These forms are discussed below in increasing degree of integration:
1. Preferential Trade Arrangements: In Preferential Trade Arrangements, there are lower barriers on trade for
member nations in comparison to non member nations. It implies that member countries decide to reduce though
not completely eradicate the different barriers to trade. It is oldest types of economic integration. British
Commonwealth Preference Scheme which was established in 1932 by UK was one of the earlier examples of
Preferential Trade Arrangements. Its aim was to reduce tariffs on imports for member nations but retain higher
tariffs on imports from non member nations.
2. Free Trade Areas: In this form of economic integration, member countries remove all trade barriers like tariffs,
quotas, or administrative hindrances for member nations but each nation maintains its own tariffs rate with the
rest of world. European Free Trade Association (EFTA), North American Free Trade Agreement (NAFTA) and
Southern Common Market (SCM), Latin American Free Trade Area (LAFTA), Latin American Integration Association
(LAIA) are some of the examples of Free Trade Areas.
68
3. Customs Unions: In Custom Unions, member nations abolish all trade barriers among each other and also
adopt common trade policy with respect to the rest of world. They also attempt to harmonize their trade policies
with rest of the world. The best example of Custom union is European Union (EU) or European Common Market
which was formed in 1957.
4. Common Markets: It has the same quality like Customs Union but it also allows the free movements of factors
of production like labor and capital among the member nations. European Union (EU) has achieved
the status of common market.
5. Economic Union: It is one of the highest forms of economic integration. Apart of free movement of goods,
services and also factor of production, it harmonizes the monetary and fiscal policies of member nations. This is
the most advanced economic integration among nations. Benelux was one of the examples of economic union
which was formed by Belgium, the Netherlands and Luxembourg after World War II. Unites States is also an
example of Economic Union in present world. European Union (EU) also aims to become economic union in
future.
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NIR/KW/18/5562
Bachelor of Business Administration (B.B.A.) Semester–V Examination
Compulsory Paper–3
Time : Three Hours] [Maximum Marks : 80
N.B. :— (1) All questions are compulsory.

(2) All questions carry equal marks.
1. (A) What are the different modes of entry into international business giving examples ? 8
(B) State the processes that are followed for internationalization and give the managerial implications of it.
8
OR
(C) Explain in detail how international collaborative arrangements and strategic alliances play an important role in
international business. 8
(D) Explain the various issues in foreign investment with respect to technology, pricing and regulations.
8
2. (A) Explain in detail how economic environment plays an important role in international business. 8
(B) Explain in detail how Political environment can impact the decision in international business. 8
OR
(C) How can cultural environment impact the decision of investment in international business ? 8
(D) Legal environment plays an important role when it comes to international business decision making. Discuss.
8
3. (A) Discuss the major trends and development in Global Trading and Investment Environment. 8
(B) Explain Non-tariff barriers giving suitable examples. 8
OR
(C) Discuss various tariff barriers with examples. 8
(D) How do foreign exchange rates and interest rates impact the Trade and Investment ? 8
4. (A) Explain the role of WTO and reforms WTO has for developing countries. 8
(B) Differentiate between Regionalism and multilateralism. 8
OR
(C) Discuss how EC and NAFTA perform their roles. 8
(D) Discuss the function of IMF and World Bank. 8
5. Write short notes :

(a) Balance of Payments (BOP)
(b) Framework of International Business
(c) Tariff barriers
(d) UNCTAD. 4×4
70
NRT/KS/19/5562
Bachelor of Business Administration (B.B.A.) Semester–V Examination
Compulsory Paper–3
Time : Three Hours] [Maximum Marks : 80
N.B. :— (1) All questions are compulsory.

(2) All questions carry equal marks.
1. (a) Highlight the importance of International Business. 8

(b) What are the different issues one faces while investing in foreign markets ? 8
OR
(c) “International Business Management is a dynamic process”– comment on the statement. 8
(d) What are the two major modes of entry in foreign markets ? Analyse their advantages and disadvantages.
8
2. (a) What are the important aspects of economic environmental factors in international business ? 8
(b) “Stability of political environment is a key to success in international business”– comment. 8
OR
(c) Highlight the importance of legal factors in international business. 8
(d) “Cultural factors can make or break a business”. Comment on the given statement. 8
3. (a) What are the major foreign investment trends and patterns ? 8
(b) Which are the major tariff barriers for protectionism ? 8
OR
(c) Discuss in detail non-tariff barriers. 8
(d) What are the important factors that affect foreign exchange rates ? 8
4. (a) Highlight the importance of WTO. What are the main objectives of WTO ? 8
(b) Write a note on functioning and working of IMF. 8
OR
(c) What are the major functions of World Bank ? 8
(d) “International Commodity Trading and agreement is important for economy”. Discuss. 8
5. Write short notes on :

(a) Balance of Payments.
(b) Framework for analysing international business.
(c) Non-Tariff Barriers.
(d) NAFTA. 4×4
71
NOTES
72
INTERNATIONAL BUSINESS
ENVIRONMENT
For
BBA - III
SEMESTER - V
Compiled by
Dr. Sayali Javkhedkar
B.Ed., MBA, M.Com., MCM, P.hd
GP
88, New Ramdaspeth, Near Lendra Park,
Nagpur - 440 010 Phone - 0712 - 2563689
73
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1st Edition - July, 2018
2nd Edition - July, 2019
3rd Edition - July, 2020
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74
ENVIRONMENT
BBA - III
SEMESTER - V
INDEX
UNIT TOPICS PAGE NO.
UNIT - I INTRODUCTION TO INTERNATIONAL BUSINESS 01 - 29
UNIT - II INTERNATIONAL BUSINESS ENVIRONMENT 30 - 36
UNIT - III GLOBAL TRADING AND INVESTMENT ENVIRONMENT 37 - 47
UNIT - IV INTERNATIONAL ECONOMIC INSTITUTIONS & AGREEMENTS 48 - 69
UNIVERSITY QUESTION PAPER 70 - 71
75
SYLLABUS
BBA - III
Semester - V
Unit I: Introduction to International Business: Importance, Nature and Scope of International Business;
Modes of Entry into International Business; Internationalization Process and Managerial Implications; Issues
in Foreign Investments, Technology Transfer, Pricing and Regulations; International Collaborative
Arrangements and Strategic Alliances; Concept and Significance of Balance of Payments Account.
Unit II: International Business Environment: Economic, Political, Cultural and Legal Environments in
International Business. Framework for Analyzing International Business Environment.
Unit III: Global Trading and Investment Environment: World trade in Goods and Services – Major
Trends and Developments; World trade and Protectionism – Tariff and Non-Tariff Barriers; Foreign
Investments-Pattern, Structure and Effects; Movements in Foreign Exchange and Interest Rates and Their
Impact on Trade and Investment Flows.
Unit IV: International Economic Institutions and Agreements: WTO, WTO and Developing Countries,
IMF, World Bank, UNCTAD, International Commodity Trading and Agreements. Structure and Functioning
of EC and NAFTA, Regional Economic Groupings in Practice: Levels of Regional Economic Integration;
Regionalism vs. Multilateralism; Important Regional Economic Groupings in the World.
76
ENVIRONMENT
BBA - III
SEMESTER - V
QUESTION PAPER PATTERN
Question No. Unit Nature Nature
1 I a. Theory Question 8 Marks

b. Theory Question 8 Marks
OR
c. Theory Question 8 Marks
d. Theory Question 8 Marks
2 II a. Theory Question 8 Marks

OR
3 III a. Theory Question 8 Marks

OR
4 IV a. Theory Question 8 Marks

OR
5 I Short Answer Theory Question 4 Marks Each

II Short Answer Theory Question
III Short Answer Theory Question
IV Short Answer Theory Question
TOTAL MARKS 80
77

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INTRODUCTION TO INTERNATIONAL BUSINESS

DEFINITION OF INTERNATIONAL BUSINESS :

3. Importance from Other Points of View :

NATURE OF INTERNATIONAL BUSINESS :

Reasons Underlying International Business

Pull Factors Push Factors

Stage1: International Marketing Strategy Scope and Framework

Managerial Implications of Internationalisation

NEED FOR FOREIGN INVESTMENT :

Types of Foreign Investment

Fig. Categories of Foreign Capital in India

TECHNOLOGY TRANSFER COMPRISES SIX CATEGORIES :

IMPORTING NONPROPRIETARY TECHNOLOGY :

IMPORTING PROPRIETORY TECHNOLOGY :

The Market Model

Right and Wrong Technology

Parties in the Transfer Process

PRICING & REGULATION :

SIGNIFICANCE MEANING AND APPLICABILITY :

International Pricing Objectives

Price Differentiation Price Standardisation

Fig. Structural Factors of Standardised versus Differentiated Pricing in European

INTERNATIONAL COLLABORATIVE ARRANGEMENTS AND STRATEGIC ALLIANCES

TYPES OF COLLABORATIVE ARRANGEMENTS : While collaborative arrangements allow for a greater

IMPORTANCE OF INTERNATIONAL COLLABORATIVE ARRANGEMENTS

Types of Srategic Alliances

ADVANTAGES OF STRATEGIC ALLIANCES

Disadvantages of Strategic Alliance:

PROBLEMS OF COLLABORATIVE ARRANGEMENTS : Dissatisfaction with the results of collaboration can

CONCEPT OF BALANCE OF PAYMENTS ACCOUNT :

Current Account Capital Account

Official Reserve Account Other Items in the

SIGNIFICANCE OF BALANCE OF PAYMENT ACCOUNT (BOP) :

POLITICAL AND LEGAL ENVIRONMENT :

Legal Factors affecting International Marketing:

The Frame Work for Analyzing International Business Environment

GLOBAL TRADING AND INVESTMENT ENVIRONMENT

WORLD TRADE IN GOODS AND SERVICES – MAJOR TRENDS AND DEVELOPMENTS

WORLD TRADE & PROTECTIONISM – TARIFF & NON-TARIFF BARRIERS

There are two main ways of implementing a tariff:

VERS - VOLUNTARY EXPORT RESTRAINTS

FOREIGN INVESTMENT – PATTERN, STRUCTURE & EFFECTS

DIRECT VS INDIRECT FOREIGN INVESTMENTS :

OTHER TYPES OF FOREIGN INVESTMENT

STRUCTURE OF FOREIGN INVESTMENT

A liaison office can engage in the following activities:

This project must be:

Otherwise, RBI permission is required.

WHOLLY OWNED SUBSIDIARY :

Important concepts in determining a permanent establishment include:

Automatic vs. government approval route

1. Sectors Prohibited for FDI:

2. Activities requiring an industrial license

EFFECTS OF FOREIGN INVESTMENT :

MOVEMENTS IN FOREIGN EXCHANGE & INTEREST RATES

Factors affecting movement in foreign exchange and interest rates:

IMPACT ON TRADE & INVESTMENT :

INTERNATIONAL ECONOMIC INSTITUTIONS AND AGREEMENTS