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IBO – 01/2020-21
International Business Environment

1.Critically examine the modern theory of international trade. 20

The modern theory of international trade is an extension of the general equilibrium theory of
value.

This theory has been put forward by Bertil Ohlin, a Swedish economist, and it has replaced
the traditional comparative cost theory.

Just as individuals specialize in economic activity in which they have comparative

advantages, similarly countries specialize in the production of certain commodities in which
they have comparative advantage on the basis of factor endowments.

Just as differences in individual capabilities are the cause of exchange between individuals,
similarly differences in factor prices is the cause of international trade. Bertil Ohlin thus
extends the analysis which is applicable to a single market to the determination of values
internationally i.e. exchange between different countries.

Thus, Ohlin observes “International trade is but a special case of inter-local or inter-regional
trade.” Hence, according to Ohlin, there is no need to have separate theory of international
trade. He says that the same fundamental principle holds good of all trade, whether it is
internal trade or international trade. The classical theory of comparative cost is based on the
assumption of comparative immobility of the factors of production as between different
countries. But Ohlin points out that this immobility is to be found even in different regions
of the same country.
According to Ohlin, the immediate cause of international trade is the difference in
commodity prices which in turn is due to the differences in factor prices. Goods are
purchased because it cheaper to buy them from outside the country.

The establishment of the rate of exchange between the two countries facilitates the
comparison between the commodity prices prevailing in the two countries. Thus, in Ohlin’s
opinion there are no fundamental differences but only quantitative differences between
inter-regional and international trade. Ohlin’s theory represents a departure from the
classical theory and marks a great improvement on it.

Gain from International Trade:

The gain from international trade depends on the Terms of Trade i.e., the rate at which the
goods of one country are exchanged for the goods of the other country.

In the example in the above section, in countries A and B, production with equal units of
labour and capital would be:

A—20 tooth-brushes and 20 kg of sugar.

B—15 tooth-brushes and 10 kg. of sugar.

Total production in A and B = 35 tooth-brushes and 30 kg. of sugar.

But if they specialize, A will use both units of productive power for sugar and B for tooth-
brushes.

A will thus produce with 2 units of productive power—40 kg. of sugar.

B will produce with 2 units of productive power—30 tooth-brushes.

Comparing the two positions, we find that with specialization, there is a gain of 10 kg. of
sugar and a loss of 5 tooth-brushes on the whole. Referring back to our equation, we see
that 10 kg. of sugar is equal to 10 tooth-brushes in country A and 15 tooth-brushes’ in B.
Deducting the loss of 5 tooth-brushes from this profit, there is a net gain of 5 to 10 tooth-
brushes.

How this Gain is Distributed:

This net gain will be normally shared by the two countries.

In the above case, the rate of exchange of the two commodities will be somewhere
between:

20 kg. of sugar = 20 tooth-brushes, and

20 kg. of sugar = 30 tooth-brushes.

2.What do you mean by globalization? Describe major forces of globalization with suitable
examples. 4+16

Globalization is the spread of products, technology, information, and jobs across national
borders and cultures. In economic terms, it describes an interdependence of nations around
the globe fostered through free trade.

On the upside, it can raise the standard of living in poor and less developed countries by
providing job opportunity, modernization, and improved access to goods and services. On
the downside, it can destroy job opportunities in more developed and high-wage countries
as the production of goods moves across borders.

Globalization motives are idealistic, as well as opportunistic, but the development of a

global free market has benefited large corporations based in the Western world. Its impact
remains mixed for workers, cultures, and small businesses around the globe, in both
developed and emerging nations
major forces of globalization with suitable examples

International Trade, and Globalization

International trade has grown substantially over the years. The growth experienced is in the
range of 4-10 per cent per annum. In fact, international trade has grown more faster than
the world economy in recent years. For developing countries, trade is the primary vehicle
for realizing the benefits of globalization. Growing trade has contributed to the ongoing shift
of some manufacturing and service activities from industrial to developing countries, which
further accelerates the process of globalization. The Creation of World Trade Organization in
1995 is another step toward creating an environment conducive to the exchange of goods
and services. Another significant and more important indicator of globalization is the rate of
of Gross Domestic Product (GDP) of the world. The world merchandise trade and the world
GDP have been steadily growing since 1990. The rate of growth in merchandise exports is
faster than the rate of growth in the world GDP. Look at Table 5.1 which shows that world
merchandise exports and world, GDP have been.steadily growing till the year 1997. The
world merchandise trade has beeq $go growing faster than the world merchandise
production.. Of course, world merchandiser/idk, world merchandise production and world
GDP have decelerated sharply in the y8hf998 due to oil crisis, fall in prices of int~rnational
trade of goods and sewickley and sever$] other factors. able 5.1: Growth In the Volume of
World Merchandise Exports, Production and GDP I Annual Percentage Change Trade
expansion does not confine to merchandise trade alone. Even international trade in services
has grown tremendously. Trade in commercial services continued to be stronger than the
merchandise trade throughout the entire 19904 998 period. . The world merchandise
exports, world merchandise.production, world GDP and international trade in services have
Witness substantial growth as a result of the globalization
International Capital Flows
Apart from expansion of international trade, the massive capital flows among countries has
further strengthened globalization of capital by a large number of countries. The catalyst for
globalization in the late eighties and nineties is not international trade, but cross border
international finance flows. World inflow and outflow of FDI have been growing
significantly. The inflow of FDI has increased from 359 billion dollar in the year 1996 to 644
billion dollars in the year 1998. Likewise the outflow of m). the has also increased from 380
billion dollar to 649 billion dollar. These levels were reached despite the unfavour~ble
conditions in the world economy. FDI flows grew in 1998 by 39% in case of inflows and 37%
in case of outflows. This is the highest growth rate attained in FDI since 1987. On an average,
virtually all of the increase in FDI in the year 1998 was concentrated in , developed
countries, FDI inflows to and outflows from developed countries reached new heights of 460
billion dollar and 595 billion dollar. In case of developing countries, FDI inflows decreased
slightly from 173 billion dollar in 1997 to 166 billion dollar in the year 1998. Most of the FDI
is located in the developed world. Although the share of developing countries had been
growing steadily until1 the year 1997, when it reached to 37%. It subsequently declined to
28% in the year 1998 due to the strong performance of the developed countries. The flows
to the economies in transition of Central and Eastern Europe remained almost stable. The
continuous growth in FDI will further accelerate the process of globalization. Look at Table
5.2 which shows the world FDI inflows and outflows
Globalization and Technology
Technological revolutions in transport and communications over the last three centuries ,
have integrated the world economy. The advances of technology in transport and
communication have also brought peoples of the word nearer, The revolution of technology
that has taken place in transport, communication and information is of qualitative difference
during the last ten years from that of previous-generation of technology. It is not only
integrating but also bringing into existence a common culture, common political system ets.
It has also id experts like Ohame kink that there is not concept and Force. of national
consumer. Consumer preference can be global and regional. Technological revolution has
been rapidly transforming all productive systems and facilitating the process of
globalization. Technology has become one of the most important element of the
competitiveness. In modern production activities, competitiveness entails new, more rapid
product innovation, flexible response, greater networking and closely integrated production
systems across firms and regions. The leaders of technological change are evolving new
strategies in response. Apart from investing heavily in innovation they are moving their
technological assets around the world to match them to immobile factors, entering new
alliances and reorganising production relations. This has further facilitated the process of
globalization

3.Explain the structure and functions of WTO. Is WTO helpful to international business or
is it a hindrance? Substantiate your answer with Examples. 14+6

Structure of the World Trade Organisation:

The WTO secretariat (numbering 625 of many nationalities) is headed by Director General.
However, the WTO is headed by the Ministerial Conference who enjoys absolute authority
over the institution. It not only carries out functions of the WTO but also takes appropriate
measures to administer the new global trade rules. In addition to these, the structure of the
WTO consists of a General Council to oversee the WTO agreement and ministerial decisions
on a regular basis.

The Council sits in its headquarters Geneva, Switzerland usually once a month. Besides
General Council, there is the Council for Trade in Goods, the Council for Trade in Services,
the Council for Trade Related Intellectual Property Rights (TRIPS). These Councils and their
respective subsidiary bodies perform their respective functions.

Decision-making is made by consensus. If consensus is not reached then majority voting

plays the crucial rate. The significant task facing the WTO is that of making the new
multilateral trading system truly global. Implementation of WTO agreements and ministerial
decisions are crucial to credibility of the multilateral trading system and indispensable for
expanding global trade, creating additional jobs and improving the standard of living.

Functions of the World Trade Organisation:

At the heart of the Organisation are the WTO agreements, negotiated and signed by the
bulk of the world’s trading nations. The goal is to help producers of goods and services,
exporters, and importers conduct their business. The WTO’s overriding objective is to help
trade flow smoothly, frets, fairly, and predictably.

With these objectives in mind, we can state the following six specific functions:

i. It shall facilitate the implementation, administration and operation of the WTO trade
agreements, such as multilateral trade agreements, plurilateral trade agreements.

ii. It shall provide a forum for negotiations among its members concerning their multilateral
trade relations.
iii. It shall administer the ‘Understanding on Rules and Procedures’ so as to handle trade
disputes.

iv. It shall monitor national trade policies.

v. It shall provide technical assistance and training for members of the developing countries.

vi. It shall cooperate with various international organisations like the IMF and the WB with
the aim of achieving greater coherence in global economic policy-making.

The WTO was founded on certain guiding principles—non-discrimination, free trade, open,
fair and undistorted competition, etc. In addition, it has special concern for developing
countries.

Role of WTO in international trade

● WTO’s aim is to liberalise international trade.

● It establishes rules regarding international trade and sees that these rules are
obeyed.
● 161 countries of the world are its members currently.
● It is seen that the developed countries have unfairly retained trade barriers. On the
other hand, WTO rules have forced developing countries to remove trade barriers.

4.Comment on the following statements.

(a) Instability of export earnings of developing countries is caused by both demand and
supply factors.
The exports of developing countries considered individually are unstable in the sense that
they show a recession and shortfalls in relation to the trend. Any measure of the instability
of exports is, therefore, relative to this trend. Instability means the absolute deviation of
exports from the trend, whether linear or exponential, giving the best fit.

The average export instability is greater considered individually during the period 1960-81.
Demand for primary products depended on the industrial production of developed
countries. Most developing countries produced primary products for exports. The industrial
production of developed countries was substantially influenced by the business cycles.
When there was boom, there would be high demand for primary products, Prices would
rise. This rise was also caused by the inelastic nature of supply of primary products. This is
for the following two reasons: supply of ores and metals cannot be contracted immediately,
when demand falls because the mine owners cannot close the mines.

(b) Culture cannot be easily isolated from factors such as economic and political
conditions and institutions.

The importance of culture is readily apparent when things go wrong. When two large

companies merged last year, for example, it became clear that one company had a culture

of “low cost” while the other had a culture of “quality service.” Employees received mixed

signals for months until the new management team took the time to carefully diagnose and

redefine many business processes throughout the company.

Given the importance of culture and the consequences of cultural issues, many companies

are proactively defining culture and issuing culture

“manifestos.” The Netflix culture presentation,often used as an example, has been

downloaded more than 12 million times since 2009. The presentation clearly

describes a culture that combines high expectations with an engaging employee

experience: Generous corporate perks such as unlimited vacation, flexible work

schedules, and limited supervision balance a strong focus on results with freedom

and appreciation for the expected achievement.

The financial services industry, still restoring its brand after the 2008 financial crisis,

is sharply focused on culture. One organization is using a variety of initiatives to help

employees understand “how the bank does business,” including offering speaker series

on topics such as compensation packages, customer satisfaction, and maintaining

regulatory standards. Citigroup has an entire committee focused on ethics and culture

and has implemented a series of web-based videos detailing real workplace ethical

dilemmas. Bank of America is focusing its corporate culture transformation on encouraging

employees to report and escalate issues or concerns, as well as incorporating a risk “boot

camp” into their current training. Wells Fargo is increasing its efforts to gather employee

survey feedback to understand current trends and potential areas of weakness in its

culture.

(c) ECGC enhances credit worthiness of not only export business but also of exporters.
ECGC Offers insurance protection to exporters against payment risks. This means they
charge a premium for covering your credit risks.
Provides guidance in export-related activities

Makes available information on different countries with it's own credit ratings.

They also cover the credit in case of a political turmoil or drastic situations like war in the
other country depending on the type of policy you choose.

Makes it easy to obtain export finance from banks/financial institutions as the lending
institutions feel secure

Assists exporters in recovering bad debts as a part of their policy

Provides information on credit-worthiness of overseas buyers. Infact its mandatory to
ascertain the credit worthiness of a party before ECGC will cover it.

(d) Ethical dilemmas and ethical lapses are the same. 5x4
An ethical dilemma (ethical paradox or moral dilemma) is a problem in the decision-making
process between two possible options, neither of which is absolutely acceptable from an
ethical perspective. Although we face many ethical and moral problems in our life, most of
them come with relatively straightforward solutions.
 On the other hand, ethical dilemmas are extremely complicated challenges that cannot be
easily solved. Therefore, the ability to find the optimal solution for ethical dilemmas is
critical to everyone.

Every person can encounter an ethical dilemma in almost every aspect of their life, including
personal, social, and professional.

Examples of ethical dilemmas

Some examples of ethical dilemma examples include:

● Taking credit for others’ work

● Offering a client a worse product for your own profit
● Utilizing inside knowledge for your own profit

ethical lapses

An ethical lapse is a mistake or error in judgment that produces a harmful outcome. A lapse
in ethics doesn't show a complete lack of integrity, just an oversight or an ethical blind spot.
Routinely producing harmful results is not considered a “lapse”, that’s just considered
unethical. Ethical lapses can be large or small scale, kept private or publicized and be illegal
or within the realm of the law, but immoral. In academia, the causes of these lapses (in a
regularly ethical person) are sometimes called fallacies.

5.Write notes on the following:

(a) Political Environment

● A political system has been defined by Dahl (1976) as a "persistent pattern of human
relationship that involves, to a significant extent, control, influence, power, or
authority." (p. 4).
 ● Political environments may range from a democratic system to communism with
other variations between these ideological extremes. In international construction,
like in international business, one has to deal with governments as they are presently
structured with all their diversity, and even regressiveness.

THE POLITICAL SPECTRUM

A country's political structure is one of the key issues considered by a company or an

individual entering a foreign environment for conducting business. Political constructs are
integrated bodies of ideas (ranging from simple to very complex) that constitute
sociopolitical platforms for different societies. A variety of political ideologies may exist in
the same society. It may, therefore, be a good idea to identify the key features of some
prevalent political ideologies:

Democracy

● Involves wide participation by citizens in the decision-making process

● Freedom of expression
● Voting rights for selection of representatives
● Independence of judiciary
● Nonpolitical and nonpartisan bureaucracy and defense infrastructure
● Limited terms of elected officials
● Empowerment of the citizens
● Assurance of political rights of citizens as indicated by:
○ Fair and competitive elections
○ Power for elected representatives
○ Safeguards on rights of minorities
● Assurance of civil liberties as indicated by:
○ Freedom of press
○ Equal rights of everyone under the law
○ Personal social freedom
 ○ The degree of freedom from governmental indifference or corruption

Democracy in its purest form hardly exists. Various forms of representative government
exist in which citizens vote for individuals to represent them and make collective decisions.
The major forms include:

● Parliamentary: Party with a majority of elected representatives forms a government.

The leader of the majority party becomes the prime minister and selects a cabinet.
● Presidential: Direct election of a president who is in power for a limited period of
time.

Democratic system can range from being radical to reactionary. Those with liberal to radical
approach tend to advocate political reforms to include a large number of social programs
among other things and support more federal control. Democrats with shades ranging from
conservative to reactionary ideologies advocate a return to past conditions and are more
orthodox.

Totalitarianism

Totalitarianism is the other side of the political spectrum. Major features include:

● An individual, a single party, or a select group of individuals monopolizes political

power
● Non-recognition of any opposition
● Decision making is restricted to an individual or a select group of individuals
● All societal resources are monopolized by the state

It typically falls on one of the two following categories:

● Theocratic: Political control is vested on religious leaders.

● Secular: Secularism is based on the principle that affairs of this world should be the
most important concerns for ethics and human life. Secular totalitarianism,
therefore, is based on worldly rather than religious concepts.

Totalitarianism ranges from communism to fascism. Features of communism include:

 ● Complete integration of political and economic systems
● Political revolution is preceded by social revolution
● Long-term transformation of the society based largely on removal of economic
inequalities
● Social revolution guided by the working class
● Dictatorship by the proletariat during the transformation stage

Features of fascism include:

● Subordination of the individual to a "totalitarian" state that controls all aspects of

national life
● Elimination of class struggle through nationalism and the corporate state
● Political control rests mostly with military oligarchy

INTERNATIONAL POLITICAL SYSTEM

The international political system is not a rigidly definable system in the sense of well-
regulated operations among different nation-states. Tepstra (1991) defines it as a
relationship of "accommodation, negotiation, capitulation, deterrence, and threat." (p. 192).
The sovereign nation states are not the only members of the system; it also includes
international governmental (NGO) as well as non-governmental organizations (INGO). Large
labor unions and multinational enterprises also affect global politics. The IGOs (e.g. The
World Bank) usually play a more dominant role than the INGOs (e.g. The International
Federation of Free Trade Unions) in global politics because of the obvious reason that they
derive their importance from the character of their associations with states

(b) UNCTAD’s Integrated Programme on Commodities

One of the main tasks of the UNCTAD was to find a solution to the commodity problems. As
has already been noted, the UN had transferred the task of international commodity
agreements to UNCTAD. It has an important committee to study problems of commodities
of interest ta developing countries and suggest various ways of ameliorating adverse effects
of the prevailing commodity trade. The UNCTAD has done substantial work in studying the
problems of commodities. In UNCTAD IV (Nairobi) the developing countries made
commodity problem the centrepiece of negotiations with the developed world, and fought
hard for two things: an Integrated Programme of Commodities (IPC) and the establishment
of a Common Fund for financing buffer stock.

1 The Common Fund

The second component of the IPC. i.e. establishment of a Common Fund to support buffer
stocking operations, was considered lobe very important "The Common Fund has widely
been considered by the South as a beat case for the willingness of the North to start imple-
menting n new intervention/economic order". The Common Fund was supposed to have
two windows. The first was expected to have a capital of $400 million which could have
resources of the international commodity agree-ments. It could also borrow from world
money markets. Since only three mom ICAs were working - tin, cocoa and tubber - limited
money was available co the Common Fund. The second window of the Fund was to have
resources to the tune of $350 million of which $70 million was to come from direct
contribution from the governments and the rest was to come voluntarily. The second
window funds were to be used to promote research into improving productivity and
competitiveness of primary commodities. It is significant to note that when the Fund was
proposed it was expected to have power to cell upon $18 billion. Later it was reduced to $6
billion. As against this the agreed Fund was to begin with $400 million. In the mid-eighties
the Common Fund came into exist-ence when the required number of UN members ratified
it. It is now located in Netherlands and focussing on functions assigned to the Second
window. i.e., research and development. The MC did not achieve its objectives because of
four major reasons: Fust, there was no agreement between the developed and the
developing countries. Second, there was also not adequate agreement among the
developing countries themselves. Third, the world economic scene changed dramatically in
the eighties. The developing counties were highly indebted and dependent on developed
countries. Fourth, the enthusiasm about the possi-bility of entering into a large number of
international commodity agreements was unrealis-tic given the historical experience.

2 Compensatory Financing Facility

It is one of the five elements of the Integrated Programme of Commodities. The compensa-
tory financing facility meant that the facility would lend countries in the years in which their
expon receipts were below the 'trent and the countries would repay when their receipts we
up. While this proposal was being considered in the UNCTAD, the IMF had already
introduced this facility to developed and developing member countries. The IMF has
enlarged this facility from 25 per cent quota of the members to 100 per cent. Thus
UNCTAD's Integrated Programme of Commodities does not operate this financing facility.
There are a number of criticisms against the IMFs Compensatory Financing Facility.

i) It is argued that quota linked limits on drawings meant that drawings have been much
less than required.

ii) The Compensatory Financial Facility does not achieve the objective of stabilizing export
earnings. But this is not a valid criticism. The objective of CFA is to provide hinds but not to
reduce instability.
(c) WTO and Environmental Agenda
Before describing some of the important environmental agreements, especially those with
trade measures and also the global disputes which have surfaced on trade related
environmental issues. it would be pertinent to mention briefly, how the environmental
agenda came to assume almost centre/cage in GATT negotiations.
Firstly. as mentioned earlier. with increasing consumer awareness in Western Countries on
the harmful effects of environmental pollution and degradation, there was also a greater
consumer resistance to purchase of products which were considered as environmentally
uncknn or buying goods from countries which continuously degraded or destroyed scarce
natural resources. There was almost spontaneous reaction to the worldwide debate on the
destruction of tropical forests or reduction of the ozone layer by Western consumers
through reducing the consumption of furniture from tropical timbers refusal to buy
products like aerosol sprays etc. which made use of CFCs. In other words, environmental
considerations began to exert increasing pressure on international trade. and GATT could no
longer consider sidelining such important issues in its deliberations.
It needs to be mentioned thot GATT, has never seen itself as an institution specifically
geared to the protection of the environment. Its main purpose has been to make and keep
international wade as open as possible and impose a certain discipline on the trade policies
of the contracting parties. They should avoid protectionist methods, in particular
quantitative restrictions, and they should reduce and eventually remove trade barriers. In
case of conflict, they should avoid unilateral measures and follow the GATT rules for dispute
settlement.
This does not imply that GATT has been insensitive to the growing environmental concerns
or that it had no specific mandate in this regard. GATT had felt that by fostering the
integration of developing countries into the open trading system and with this the economic
development of the third world, it would contribute to the improvement of environment
also. Developing nations which become prosperous as a result of freer trade, would be able
to allocate more resources to environmental protection. In addition by preventing the
developed nations from resorting to protectionist measures for environmental reasons, the
GATT would necessitate the search for better alternatives which would be both more
efficient and equitable for the protection of the environment
A GATT Report on Trade and Environment has mentioned that "its rules place no constraints
on a country's right to protect its own environment against damage from either domestic
production or the consumption of domestically produced or imported products. Generally
speaking, a country can do anything to imports that it does to domestically produced
products."
Some environmentalists however were of the opinion that GATT rules do in several cases
stand in the way of environmental protection. Some of their objections to GATT were as
follows:

• Trade lIterolisaton ',Met °ATI' ertco tretter economic growth, arti to damage; the
owlionment

• GATT does not allow cats to keep a product tease of the way it is produced heated.

• GATT prevents a coventry imp:ming countervailing duties on imports produced under

Iowa environmental sandents than its own.

• GATT prevents countries from ImproIng anon bons. which they may want to invoke to
protect for example. their ma forests or tome ocher resource

• GATT die:caroms on the use of track mows to influence environmental policy outside u
country's Mallory.

• GATTmay bedetrimental to iaminanonal effsiroarnail agreements thmoth its prohibition of

trade mamma that nrecOnsideted distal/minatory against invisiseal adorn. Nevertheless
mob measures may be at MOH effective way for amnia that play by the rules of an
international agreement to penalise etas that do nut.

(d) Multilateral Investment Guarantee Agency (MIGA) 5x4

The Multilateral Investment Guarantee Agency (MIGA) is an international financial
institution which offers political risk insurance and credit enhancement guarantees. These
guarantees help investors protect foreign direct investments against political and non-
commercial risks in developing countries. MIGA is a member of the World Bank Group and is
headquartered in Washington, D.C. in the United States.

A large-scale study on hundreds of active energy projects commissioned by The World Bank
Group has concluded that the body is currently financing $21bn of fossil fuel projects,
compared to $7bn in the renewables sector. Commissioned by German NGO Ungewald, the
study analysed the 675 global energy sector projects which have been funded by Group and
are still in operation and are listed in the body's public databases. It found that for every
dollar the Bank currently holds in the clean power sector, it holds three across coal, oil and
gas. The author of the study, Intergovernmental Panel on Climate Change (IPCC) member
and US-based finance analyst Heike Mainhardt, said the findings served to evidence the fact
that The World Bank is “getting around” its 2013 no-coal policy.