UNIT I

INTRODUCTION

International business is defined as commercial transactions that occur across country

borders. When a company sells products in the US, Japan and throughout Europe, this is an
example of international business.

1. The exchange of goods and services among individuals and businesses in multiple
countries.
2. 2. A specific entity, such as a multinational corporation or international business
company that engages in business among multiple countries. International Business
conducts business transactions all over the world. These transactions include the
transfer of goods, services, technology, managerial knowledge, and capital to other
countries. International business involves exports and imports.

It is defined as the process of extending the business activities from domestic to any
foreign country with an intention of targeting international customers; it is also defined as
the conduction of business activities by any company across the nations. It can also be
defined as the expansion of business functions to various countries with an objective of
fulfilling the needs and wants of international customers.

International Business is also known, called or referred as a Global Business or an

International Marketing.

Process of Internationalization

1. Domestic company: Most international companies have their origin as domestic

companies. The orientation of a domestic company essentially is ethnocentric. A
purely domestic company operates domestically because it never considers the
alternative of going international. A domestic company may extend its products to
foreign markets by exporting, licensing and franchising.

2. International companies: They are importers and exporters; they have no

investment outside of their home country.

3. Multinational companies have investment in other countries, but do not have

coordinated product offerings in each country. More focused on adapting their
products and service to each individual local market.

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 4. Global companies have invested and are present in many countries. They market
their products through the use of the same coordinated image/brand in all markets.
Generally one corporate office that is responsible for global strategy. Emphasis on
volume, cost management and efficiency.

5. Transnational companies are much more complex organizations. They have

invested in foreign operations, have a central corporate facility but give decision-
making, R&D and marketing powers to each individual foreign market.

6. Multinational Corporation In a report of the International Labour Organisation

(ILO), it is observed that, "the essential of the MNC lies in the fact that its managerial
headquarters are located in one country (home country), while the enterprise
carries out operations in a number of the other countries (host countries)."

A "multinational corporation" is also referred to as an international, transactional or

global corporation. Actually, for an enlarging business firm, multinational is a beginning
step, as it gradually becomes transnational and then turns into a global corporation. For,
transnational corporation represents a stage where in, the ownership and control of the
concerned organization crosses the national boundaries.
Features of MNCs:

1. MNCs have managerial headquarters in home countries, while they carry out
operations in a number of other (host) countries.
2. A large part of capital assets of the parent company is owned by the citizens of the
company's home country.
3. The absolute majority of the members of the Board of Directors are citizens of the
home country.
4. Decisions on new investment and the local objectives are taken by the parent
company.
5. MNCs are predominantly large-sized and exercise a great degree of economic
dominance.
6. MNCs control production activity with large foreign direct investment in more than
one developed and developing countries.
7. MNCs are not just participants in export trade without foreign investments.

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 MAIN DRIVERS OF INTERNATIONAL BUSINESS (Globalization)

 Cost driver: companies consider the various lifestyle of the country before
considering the price of the product and services to rendered
 Technology driver: increasing technology system, transportation, advancing in the
level of world trade system
 Government driver: reducing trade tariffs and non trade tariffs, reducing the role
of political policies
 Competition driver: organization becoming a global center, shift in open market
system, Privatization, Liberalization

Nature of International Business:

1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

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Scope of International Business:

1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange

Need for International Business:

1. To achieve higher rate of profits

2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalisation, Privatisation and Globalisation (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing
costs in telecommunications and transportation; and freer capital markets.

Features of International Business:

1. Large scale operations: In international business, all the operations are conducted on a
very huge scale. Production and marketing activities are conducted on a large scale. It first
sells its goods in the local market. Then the surplus goods are exported.

2. Integration of economies: International business integrates (combines) the economies

of many countries. This is because it uses finance from one country, labour from another
country, and infrastructure from another country. It designs the product in one country,
produces its parts in many different countries and assembles the product in another
country. It sells the product in many countries, i.e. in the international market.

3. Dominated by developed countries and MNCs: International business is dominated by

developed countries and their multinational corporations (MNCs). At present, MNCs from
USA, Europe and Japan dominate (fully control) foreign trade. This is because they have
large financial and other resources. They also have the best technology and research and
development (R & D). They have highly skilled employees and managers because they give
very high salaries and other benefits. Therefore, they produce good quality goods and
services at low prices. This helps them to capture and dominate the world market.

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4. Benefits to participating countries: International business gives benefits to all
participating countries. However, the developed (rich) countries get the maximum benefits.
The developing (poor) countries also get benefits. They get foreign capital and technology.
They get rapid industrial development. They get more employment opportunities. All this
results in economic development of the developing countries. Therefore, developing
countries open up their economies through liberal economic policies.

5. Keen competition: International business has to face keen (too much) competition in
the world market. The competition is between unequal partners i.e. developed and
developing countries. In this keen competition, developed countries and their MNCs are in
a favorable position because they produce superior quality goods and services at very low
prices. Developed countries also have many contacts in the world market. So, developing
countries find it very difficult to face competition from developed countries.

6. Special role of science and technology: International business gives a lot of

importance to science and technology. Science and Technology (S & T) help the business to
have large-scale production. Developed countries use high technologies. Therefore, they
dominate global business. International business helps them to transfer such top high-end
technologies to the developing countries.

7. International restrictions: International business faces many restrictions on the inflow

and outflow of capital, technology and goods. Many governments do not allow international
businesses to enter their countries. They have many trade blocks, tariff barriers, foreign
exchange restrictions, etc. All this is harmful to international business.

8. Sensitive nature: The international business is very sensitive in nature. Any change in
the economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and study
these changes. They must adjust their business activities and adapt accordingly to survive
changes.

Approaches in International Business

1. Ethnocentric orientation:
The ethnocentric orientation of a firm considers that the products, marketing
strategies and techniques applicable in the home market are equally so in the overseas
market as well. In such a firm, all foreign marketing operations are planned and carried out
from home base, with little or no difference in product formulation and specifications,
pricing strategy, distribution and promotion measures between home and overseas
markets. The firm generally depends on its foreign agents and export-import merchants for
its export sales.

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2. Regiocentric orientation:
In regiocentric approach, the firm accepts a regional marketing policy covering a
group of countries which have comparable market characteristics. The operational
strategies are formulated on the basis of the entire region rather than individual countries.
The production and distribution facilities are created to serve the whole region with
effective economy on operation, close control and coordination.

3. Geocentric orientation:
In geocentric orientation, the firms accept a worldwide approach to marketing and
its operations become global. In global enterprise, the management establishes
manufacturing and processing facilities around the world in order to serve the various
regional and national markets through a complicated but well co-ordinate system of
distribution network. There are similarities between geocentric and regiocentric
approaches in the international market except that the geocentric approach calls for a
much greater scale of operation.

4. Polycentric operation:
When a firm adopts polycentric approach to overseas markets, it attempts to
organize its international marketing activities on a country to country basis. Each country
is treated as a separate entity and individual strategies are worked out accordingly. Local
assembly or production facilities and marketing organizations are created for serving
market needs in each country.
Polycentric orientation could be most suitable for firms seriously committed to
international marketing and have its resources for investing abroad for fuller and long-
term penetration into chosen markets. Polycentric approach works better among countries
which have significant economic, political and cultural differences and performances of
these tasks are free from the problems created primarily by the environmental factors.

Problems in International Business

1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy

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Forms of international business

1. Exporting: Exporting means producing/procuring in the home market and selling

in the foreign market. Exporting is not an activity just for large multinational
enterprises; small firms can also make money by exporting. In recent days,
exporting has become easier though it remains a challenge for many firms.

2. Licensing: A licensing is an agreement whereby a licencor grants the rights to

intangible property (patents, intentions, formulas, processes, designs, copyrights
and trademarks) to another entity (licensee) for a specified period and in return the
licencor receives a royalty/fee from the licensee.

3. Franchising: Franchising is basically o specialized form of licensing in which the

franchiser not only sells intangible property to the franchisee but also insists that
the franchisee agrees to abide by strict rules as to how it does business.

4. Joint venture: A joint venture entails establishing a firm that is jointly owned by
two or more independent firms.

5. Management Contracts: A firm in one country agrees to operate facilities or

provide other management services to a firm in another country for an agreed upon
fees.

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 6. Turnkey projects: In a turnkey project, the contractor agrees to handle every
details of the project for a foreign client, including the training of operating
personnel. At completing of the contract the foreign client handles the ‘key’ of a
plant that is ready for full operation.

7. Strategic international alliances: A strategic international alliance is a business

relationship established by two or more companies to cooperate out of mutual need
and to share risk in achieving a common objective.

8. Direct foreign investment: Direct foreign investment is another important form of

international business. Companies may manufacture locally to capitalize on low cost
labor, to avoid high import taxes, to reduce the high cost of transportation to
market, to gain access to raw materials or gaining market entry.

Main difference between Domestic and International Business is as follows:

S.No International Business Domestic Business

1. It is extension of Domestic Business and The Domestic Business Follow the
Marketing Principles remain same. marketing Principles
2. Difference is customs, cultural factors No such difference. In a large countries
languages like India, we have many
languages.
3. Conduct and selling procedure changes Selling Procedures remain unaltered
4. Working environment and management No such changes are necessary
practices change to suit local
conditions.
5. Will have to face restrictions in trade These have little or no impact on
practices, licenses and government Domestic trade.
rules.
6. Long Distances and hence more Short Distances, quick business is
transaction time. possible.
7. Currency, interest rates, taxation, Currency, interest rates, taxation,
inflation and economy have impact on inflation and economy have little or no
trade. impact on Domestic Trade.
8. MNC’s have perfected principles, No such experience or exposure.
procedures and practices at
international level
9. MNCs take advantage of location No such advantage once plant is built it

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 economies wherever cheaper resources cannot be easily shifted.
available.
10. Large companies enjoy benefits of It is possible to get this benefit through
experience curve collaborators.
11. High Volume cost advantage. Cost Advantage by automation, new
methods etc.
12. Global Standardization No such advantage
13. Global business seeks to create new No such advantage
values and global brand image.
14. Can Shift production bases to different No such advantage and get competition
countries whenever there are problems from some spurious or SSI Unit who get
in taxes or markets patronage o

INTERNATIONAL BUSINESS ENVIRONMENT

Micro external forces have an important effect on business operations of a firm.

However, all micro forces may not have the same effect on all firms in the industry. For
example, suppliers, an important element of micro level environment, are often willing to
provide the materials at relatively lower prices to big business firms.

They do not have the same attitude towards relatively small business firms.
Similarly, a competitive firm will start a price war if its rival firm in the industry is
relatively small. If the rival firm is a big one which is a capable of retaliating any adverse
action from its rival, a competitive firm will hesitate to start a price war. We explain below
important factors or forces of micro-level external environment.

Suppliers of Inputs:
An important factor in the external environment of a firm is the suppliers of its
inputs such as raw materials and components. A smooth and efficient working of a business
firm requires that it should have ensured supply of inputs such as raw materials. If supply
of raw materials is uncertain, then a firm will have to keep a large stock of raw materials to
continue its transformation process uninterrupted. This will unnecessarily raise its cost of
production and reduce its profit margin.

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 External micro environment factors

To ensure regular supply of inputs such as raw materials some firms adopt a
strategy of backward integration and set up captive production plants for producing raw
materials themselves.

Customers:
The people who buy and use a firm’s product and services are an important part of
external micro-environment. Since sales of a product or service is critical for a firm’s
survival and growth, it is necessary to keep the customers satisfied. To take care of
customer’s sensitivity is essential for the success of a business firm.

A firm has different categories of customers. For example, a car manufacturing firm
such as Maruti Udyog has individuals, companies, institutions, government as its
customers. Maruti Udyog, therefore, has catered to the needs of all these types of customers
by producing different varieties and models of cars.

Marketing Intermediaries:
In a firm’s external environment marketing intermediaries play an essential role of
selling and distributing its products to the final buyers. Marketing intermediaries include
agents and merchants such as distribution firms, wholesalers, retailers.

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 Marketing intermediaries are responsible for stocking and transporting goods from
their production site to their destination, that is, ultimate buyers. There are marketing
service agencies such as marketing research firms, consulting firms, advertising agencies
which assist a business firms in targeting, promoting and selling its products to the right
markets.

Competitors:
Business firms compete with each other not only for sale of their products but also
in other areas. Absolute monopolies in case of which competition is totally absent are
found only in the sphere of what are called public utilities such as power distribution,
telephone service, gas distribution in a city etc. More generally, market forms of
monopolistic competition and differentiated oligopolies exist in the real world.

In these market forms different firms in an industry compete with each other for
sale of their products. This competition may be on the basis of pricing of their products. But
more frequently there is non-price competition under which firms engage in competition
through competitive advertising, sponsoring some events such as cricket matches for sale
of different varieties and models of their products, each claiming the superior nature of its
products.

For example, competition for a firm producing TVs does not come only from other
brands of TV manufacturers but also from manufacturers of air conditioners, refrigerators,
cars, washing machines etc. All these goods compete for attracting disposable incomes of
the final consumers. Competition among these diverse products is generally referred to as
desire competition as all these goods fulfill the various desires of the consumers who have
limited disposable incomes.

Publics:
Finally, publics are an important force in external micro environment. Public,
according to Philip Kotler “is any group that has an actual or potential interest in or impact
on a company’s ability to achieve its objective”. Environmentalists, media groups, women
associations, consumer protection groups, local groups, citizens associations are some
important examples of publics which have an important bearing on environment of the
firms.

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 For example, a consumer protection firm in Delhi headed by Sunita Narain came out
with an amazing fact that cold drinks such as Coca Cola, Pepsi Cola, Limca, Fanta had a
higher contents of pesticides which posed threat to human health and life. This produced a
good deal of adverse effect on the sale of these products in 2003-04. The Indian laws are
being amended to ensure that these drinks must not contain pesticides beyond European
safety standards.

Similarly, environmentalists like Arundhi Roy have been campaigning against industries
which pollute the environment and cause health hazards. Women in some villages of
Haryana protested against liquor shops being situated in their localities.

External Macro Environment:

Apart from micro-environment, business firms face large external environmental
forces. The external macro environment determines the opportunities for a firm to exploit
for promoting its business and also presents threats to it in the sense that it can put
restrictions on the expansion of business activities. The macro-environment has thus both
positive and negative aspects.

An important fact about external macro-environmental forces is that they are

uncontrollable by the management of a firm. Because of the uncontrollable nature of macro
forces a firm has to adjust or adapt itself to these external forces.

External macro-environmental factors are classified into:

1. Economic
2. Social
3. Technological
4. Political and legal,
5. Demographic.
We explain below all these factors determining external macro-environment:

1. Economic Environment:
Economic environment includes the type of economic system that exists in the
economy, the nature and structure of the economy, the phase of the business cycle (for
example, the conditions of boom or recession), the fiscal, monetary and financial policies of
the Government, foreign trade and foreign investment policies of the government. These

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economic policies of the government present both the opportunities as well as the threats
(i.e. restrictions) for the business firms.

The type of the economic system, that is, socialist, capitalist or mixed provides
institutional framework within which business firm have to work. For example, before
1991, the Indian economic system was of the type of a mixed economy with pronounced
orientation towards the public sector. Prior to 1991 private sector’s role in India’s mixed
economy was greatly restricted. Many industries were reserved exclusively for investment
and production by the public sector.

Many industries, except only a few industries of strategic importance, which were
earlier reserved for the public sector have been thrown open for the private sector. Import
duties have been greatly reduced due to which domestic industries face competition from
the imported products. Incentives have been given to boost exports. Rupee has been made
convertible into foreign currencies on current account. It is thus evident that new economic
reforms carried out since 1991 has significantly changed the business environment.

2. Social and Cultural Environment:

Members of a society wield important influence over business firms. People these
days do not accept the activities of business firms without question. Activities of business
firms may harm the physical environment and impose heavy social costs. Besides, business
practices may violate cultural ethos of a society. For example, advertisement by business
firms may be nasty and hurt the ethical sentiments of the people.

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 Businesses should consider the social implications of their decisions. This means
that companies must seriously consider the impact of its actions on the society. When a
business firm in their decision making take care of social interests, it is said to be socially
responsible.

Social responsibility is the felt obligation or self-enforced duty of business firms to

serve or protect social interests. By doing so they promote social well-being. Good
corporate governance should be judged not only by the productivity and profits earned by
a business firm but also by its social-welfare promoting activities.

It is worth noting that in modern management science a new concept of social

responsiveness has been developed. By social responsiveness we mean “the ability of a
corporate firm to relate its operations and policies to social environment in way that are
mutually beneficial to the company and society at large”.

3. Political and Legal Environment:

Businesses are closely related to the government. The political philosophy of the
government wields a great influence over business policies. For example, after
independence under the leadership of Jawahar Lal Nehru India adopted ‘democratic
socialism as its goal. In this political framework provide business firms worked under
various types of regulatory policies which sought to influence the directions in which
private business enterprises had to function.

Thus, Industrial Regulation Act 1951, Industrial Policy Resolution 1956, Foreign
Exchange Regulation Act (FERA), Monopolistic and Restrictive Practices (MRTP) Act were
passed to control the business activities of the private sector. Besides, role of foreign direct
investment was restricted to only few spheres.

To encourage the growth of the private sector in India, licensing has now been abolished,
role of public sector greatly reduced and foreign capital, both direct and portfolio is being
encouraged to raise the rate of capital formation in the Indian economy. FERA has been
replaced by FEM A (Foreign Exchange Management Act) It is evident from above that with
the change in the nature of political philosophy business environment for private firms has
greatly changed.

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4. Technological Environment:
The nature of technology used for production of goods and services is an important
factor responsible for the success of a business firm. Technology consists of the type of
machines and processes available for use by a firm and the way of doing things. The
improvement in technology raises total factor productivity of a firm and reduces unit cost
of output.

The use of a superior technology by a firm gives it a competitive advantage over its rival
firms. The use of a particular technology by a firm for its transformation process
determines its competitive strength. In this age of globalisation the firms have to compete
in the international markets for sales of their products. The firms which use outdated
technologies cannot compete globally. Therefore, technological development plays a vital
role in enhancing the competitive strength of business firms.

5. Demographic Environment:
Demographic environment includes the size and growth of population, life
expectancy of the people, rural-urban distribution of population, the technological skills
and educational levels of labour force. All these demographic features have an important
bearing on the functioning of business firms. Since new workers are recruited from outside
the firm, demographic factors are considered as parts of external environment.

The skills and ability of a firm’s workers determine to a large extent how well the
organization can achieve its mission. The labour force in a country is always changing. This
will cause changes in the work force of a firm. The business firms have to adjust to the
requirements of their employees. They have also to adapt themselves to their child care
services, labor welfare programmes etc.

The demographic environment affects both the supply and demand sides of
business organizations. Firms obtain their working force from the outside labour force. The
technical and education skills of the workers of a firm are determined mostly by human
resources available in the economy which are a part of demographic environment.

Demographic environment is also important for business firms as it determines the

choice of technology by them. Other things being equal, if labor is abundant and relatively
cheaper than capital, business firms will prefer relatively labor-intensive techniques for
production of goods.

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6. Natural Environment:
Natural environment is the ultimate source of many inputs such as raw materials,
energy which business firms use in their productive activity. In fact, availability of natural
resources in a region or country is a basic factor in determining business activity in it.
Natural environment which includes geographical and ecological factors such as minerals
and oil reserves, water and forest resources, weather and climatic conditions, port facilities
are all highly significant for various business activities.

For example, the availability of minerals such as iron, coal etc. in a region influence
the location of certain industries in that region. Thus, the industries with high material
contents tend to be located near the raw material sources. For example, steel producing
industrial units are set up near coal mines to save cost of transporting coal to distant
locations.

Besides, certain weather and climatic conditions also affect the location of certain
business units. For example, in India the firms producing cotton textiles are mostly located
in Bombay, Madras, and West Bengal where weather and climatic conditions are conducive
to the production of cotton textiles.

Natural environment also affects the demand for goods. For example, in regions where
there is high temperature in summer there is a good deal of demand for dessert coolers, air
conditioners, business firms set up industrial units producing these products. Similarly,
weather and climatic conditions influence the demand pattern for clothing, building
materials for housing etc. Furthermore, weather and climatic conditions require changes in
design of products, the type of packaging and storage facilities.

7. Ecological Effects of Business:

Until recently businesses had generally overlooked the serious ecological effects of
its activities. Driven purely by the motive of maximizing profits, they cause irreparable
damage to the exhaustible natural resources, especially minerals and forests. By their
careless attitude they caused pollution of environment, especially air and water which
posed health hazards for the people.

By creating external detrimental diseconomies they imposed heavy costs on the society.
Thanks to the efforts by environmentalists and international organisations such as World
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Bank, the people and the governments have now became conscious of the adverse effects of
depletion of exhaustible natural resources and pollution of environment by business
activity.

Accordingly, laws have been passed for conservation of natural resources and prevention
of environment pollution. These laws have imposed additional responsibilities and costs
for business firms. But it is socially desirable that these costs are borne by business firms if
we want sustainable economic growth and also healthy environment for human beings.

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 UNIT II
INVESTMENT THEORIES
For the success of business, it is important to understand all the key types of
international trade theories. The concept of international trading is not limited to, just
sending and receiving products and services and putting all of the profits in the pockets.
Instead, it’s a lot more complicated thing.

Types of International Trade Theories

1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life Cycle Theory
6. Global Strategic Rivalry Theory
7. National Competitive Advantage Theory

1. Mercantilism

The oldest of all international trade theories, Mercantilism, dates back

to 1630. At that time, Thomas Mun stated that the economic strength of any country
depends on the amounts of silver and gold holdings. Greater are the holdings, more
economically independent a country is.

Furthermore, the idea of favoring greater exports and promoting efforts to

minimize imports also belongs to the same theory. Well! The thinking behind this
concept is evident since you pay for the imports from the pay that you get from
exports. So, if you a country has a lot to pay for the imported products then it will
get from exported products, its economy will get inclined towards declination. Even
though the view is old but the roots of modern thinking towards the financials is
deeply embedded in it.

2. Absolute Advantage
The Theory of Absolute Advantage is based on the notion of increasing the
efficiencies in the production processes. In 1776, Adam Smith, a renowned financial
expert of the time being, proposed the theory that the manufacturing a product with
high efficiency as compared to any other country on the globe is highly
advantageous.

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 The concept can just be understood by the idea that if two countries
specialize in exactly same kind of product. But the product of one country being
better in quality or lower in price will bring tremendous absolute advantage to the
country as compared to the other one. From another point of view, if two countries
specialize in entirely different products, then they can quickly increase their
influence in their localities by having trade with each other (by creating absolute
advantages at both ends).

3. Comparative Advantage

As compared to absolute advantage, Comparative Advantage favors relative

productivity. According to this concept, as put forward by David Ricardo in 1817, a
country with maximum absolute advantage in the creation of more than one
product as compared to other, can still trade with another country with less efficient
ways to create that product, that’s readily available in first, to boost its productivity.

To illustrate this idea with an example, let’s say that I have expertise in two
fields like graphics designing and writing, where designing lets me earn a lot more
than writing. Keeping in mind that I can work on only one side at a time, I will most
likely hire a writer, and we both will work in a comparative atmosphere.

4. Heckscher-Ohlin Theory

Both the Absolute as well as Comparative international trade theories

assume that the choice of the product that can prove itself to be of great advantage
is led by free and open markets instead of using the resources available inland.
That’s what caused Bertil Ohlin and Eli Heckscher to put forward the idea of
determination of the prices that relies on the differences in supply and demands.

This can just be understood as, if the supply of a product grows greater than
it is in demand in the market, its price falls and vice versa. So, export of a country
should mainly consist of the product that is abundantly available in it, and imports
should count the products that are in high demand. Since, this concept ensures
utilization the country’s factors like labor, land and funding sources for the purpose
of product manufacturing that’s why it is also known by the name of “factor
proportion theory.”

5. Product Life Cycle Theory

In the 1970s, Raymond Vernon introduced the notion of using a product’s

life cycle to explain global trade patterns, in the field of marketing. According to

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 theory, as the demand for a newly created product grows, the home country starts
exporting it to other nations. Where when the demand grows, local manufacturing
plants are opened to meet the request. And the scenario covers the whole globe time
to time, thus making that product a standardization.

You can take the example of computers in consideration to understand how

this works. The earlier personal computers appeared in 1970’s available only in a
few countries and from 1980’s to 1990’s, the product was moving through the
stage of maturity where the production spread to many other nations. And now in
21st century, every third house has a PC in it.

6. Global Strategic Rivalry Theory

The continuous evolutionary behavior of international trade theories brings

us back in the 1980’s whereKalvin Lancaster and Paul Krugman introduced the
concept of strategies, based on global level rivalries, targeting multinational
corporations and the struggle needed in achieving higher advantages as compared
to other international companies.

According to the concept, a new firm needs to optimize a few factors that will
lead the brand in overcoming all the barriers to success and gaining an influential
recognition in that global market. In all these factors, a thorough research and timed
developmental steps are crucial. Whereas, having the complete ownership rights of
intellectual properties is also necessary. Furthermore, the introduction of unique
and useful methods for manufacturing as well as controlling the access to raw
material will also come handy in the way.

7. National Competitive Advantage Theory

Michael Porter in 1990’s suggested that the success of any business in

international trade depends on upgradable and innovational capacities of the
industry as well as four other factors, which determine how that firm is going to
perform in this global level race. The main concept behind this theory gives the feel
of holding factor proportion as well as many other international trade theories in it.

8. Country similarity Theory:

The country similarity theory is based on the following principles:

a) If two countries have similar demand patterns, then their consumers would demand
the same goods with similar degrees of quality and sophistication. This

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 phenomenon is also known as preference similarity. Such a similarity leads to
enhanced trade between the two developed countries.

b) The demand patterns in countries with a higher level of per capita income are
similar to those of other countries with similar income levels, as their residents
would demand more sophisticated, high quality, ‘luxury’ consumer goods, whereas
those in countries with lower per capita income would demand low quality, cheaper
consumer goods as a part of their ‘necessity’.

Since developed countries would have a comparative advantage in the

manufacture of complex, technology-intensive luxury goods, they would find export
markets in other high income countries.

c) Since most products are developed on the demand patterns in the home market,
other countries with similar demand patterns due to cultural or economic similarity
would be their natural trade partners.

d) Countries with the proximity of geographical locations would also have greater
trade compared to the distant ones. This can also be explained by various types of
similarities, such as cultural and economic, besides the cost of transportation. The
country similarity theory goes beyond cost comparisons. Therefore, it is also used in
international marketing.

ETHICS IN GLOBAL BUSINESS:

REGIONAL ECONOMIC INTEGRATION:

Regional economic integration refers to cooperation 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. It is a type of inter-governmental
agreement, in which barriers to trade are reduced among participating countries. It is a

21
collaborative arrangement between different countries in order to take advantage of
market opportunities and to promote economic growth and stability.

There are four main types of regional economic integration.

1. Free trade area. This is the most basic form of economic cooperation. Member
countries remove all barriers to trade between themselves but are free to
independently determine trade policies with nonmember nations. An example is the
North American Free Trade Agreement (NAFTA).

2. Customs union. This type provides for economic cooperation as in a free-trade zone.
Barriers to trade are removed between member countries. The primary difference
from the free trade area is that members agree to treat trade with nonmember
countries in a similar manner. The Gulf Cooperation Council (GCC) is an example.

3. Common market. This type allows for the creation of economically integrated markets
between member countries. Trade barriers are removed, as are any restrictions on the
movement of labor and capital between member countries. Like customs unions, there
is a common trade policy for trade with nonmember nations. The primary advantage to
workers is that they no longer need a visa or work permit to work in another member
country of a common market. An example is the Common Market for Eastern and
Southern Africa (COMESA).

4. Economic union. This type is created when countries enter into an economic
agreement to remove barriers to trade and adopt common economic policies. An
example is the European Union (EU).

In the past decade, there has been an increase in these trading blocs with more than one
hundred agreements in place and more in discussion. A trade bloc is basically a free-trade
zone, or near-free-trade zone, formed by one or more tax, tariff, and trade agreements
between two or more countries. Some trading blocs have resulted in agreements that have
been more substantive than others in creating economic cooperation. Of course, there are
pros and cons for creating regional agreements.

Pros
The pros of creating regional agreements include the following:

 Trade creation. These agreements create more opportunities for countries to trade
with one another by removing the barriers to trade and investment. Due to a reduction
or removal of tariffs, cooperation results in cheaper prices for consumers in the bloc
countries. Studies indicate that regional economic integration significantly contributes
to the relatively high growth rates in the less-developed countries.

22
 Employment opportunities. By removing restrictions on labor movement, economic
integration can help expand job opportunities.
 Consensus and cooperation. Member nations may find it easier to agree with smaller
numbers of countries. Regional understanding and similarities may also facilitate closer
political cooperation.

Cons
The cons involved in creating regional agreements include the following:

 Trade diversion. The flip side to trade creation is trade diversion. Member countries
may trade more with each other than with nonmember nations. This may mean
increased trade with a less efficient or more expensive producer because it is in a
member country. In this sense, weaker companies can be protected inadvertently with
the bloc agreement acting as a trade barrier. In essence, regional agreements have
formed new trade barriers with countries outside of the trading bloc.
 Employment shifts and reductions. Countries may move production to cheaper labor
markets in member countries. Similarly, workers may move to gain access to better
jobs and wages. Sudden shifts in employment can tax the resources of member
countries.
 Loss of national sovereignty. With each new round of discussions and agreements
within a regional bloc, nations may find that they have to give up more of their political
and economic rights. In the opening case study, you learned how the economic crisis in
Greece is threatening not only the EU in general but also the rights of Greece and other
member nations to determine their own domestic economic policies.

MAJOR AREAS OF REGIONAL ECONOMIC INTEGRATION AND

COOPERATION

There are more than one hundred regional trade agreements in place, a number that
is continuously evolving as countries reconfigure their economic and political interests and
priorities. Additionally, the expansion of the World Trade Organization (WTO) has caused
smaller regional agreements to become obsolete. Some of the regional blocs also created
side agreements with other regional groups leading to a web of trade agreements and
understandings.

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NORTH AMERICA: NAFTA

North American Free Trade Agreement (NAFTA) established a free-trade zone in

North America; it was signed in 1992 by Canada, Mexico, and the United States and took
effect on Jan. 1, 1994. NAFTA immediately lifted tariffs on the majority of goods produced
by the signatory nations. It also calls for the gradual elimination of all trade barriers
between these three countries.

Goals of the NAFTA

1. To reduce barriers to trade
2. To increase cooperation for improving working conditions in North America
3. To create an expanded and safe market for goods and services produced in North
America
4. To establish clear and mutually advantageous trade rules
5. To help develop and expand world trade and provide a catalyst to broader
international cooperation

24
NAFTA structure
1. Free Trade Commission: Made up of ministerial representatives from the NAFTA
partners.
2. NAFTA Coordinators: Senior trade department officials designated by each
country.
3. NAFTA Working Groups and Committees: Over 30 working groups and
committees have been established to facilitate trade and investment and to ensure
the effective implementation and administration of NAFTA.
4. NAFTA Secretariat : Made up of a ―national section‖ from each member country.
Responsible for administering the dispute settlement , Maintains a tri-national
website containing up-to-date information on past and current disputes.
Commission for Labor Cooperation : Created to promote cooperation on labor
matters among
5. NAFTA members and the effective enforcement of domestic labor law.
www.naalc.org.
6. Commission for Environmental Cooperation :Established to further cooperation
among NAFTA partners in implementing the environmental side accord to NAFTA
and to address environmental issues of continental concern, with particular
attention to the environmental challenges and opportunities presented by
continent-wide free trade.

EUROPE: EU
Brief History and Purpose
The European Union (EU) is the most integrated form of economic cooperation. As
you learned in the opening case study, the EU originally began in 1950 to end the frequent
wars between neighboring countries in the Europe. The six founding nations were France,
West Germany, Italy, and the Benelux countries (Belgium, Luxembourg, and the
Netherlands), all of which signed a treaty to run their coal and steel industries under a
common management. The focus was on the development of the coal and steel industries
for peaceful purposes.

In 1957, the six nations signed the Treaty of Rome, which established the European
Economic Community (EEC) and created a common market between the members. Over
the next fifty years, the EEC added nine more members and changed its name twice—to
European Community (EC) in the 1970s and the European Union (EU) in 1993.

25
 The entire history of the transformation of the EEC to the EU has been an
evolutionary process. However, the Treaty of Maastricht in 1993 stands out as an
important moment; it’s when the real economic union was created. With this treaty, the EU
identified three aims. The first was to establish a single, common currency, which went into
effect in 1999.

The second was to set up monetary and fiscal targets for member countries. Third,
the treaty called for a political union, which would include the development of a common
foreign and defense policy and common citizenship. The opening case study addressed
some of the current challenges the EU is facing as a result of the impact of these aims.

Despite the challenges, the EU is likely to endure given its historic legacy.
Furthermore, a primary goal for the development of the EU was that Europeans realized
that they needed a larger trading platform to compete against the US and the emerging
markets of China and India. Individually, the European countries would never have the
economic power they now have collectively as the EU.

Today, the EU has twenty-seven member countries. Croatia, Iceland, Macedonia,

and Turkey are the next set of candidates for future membership. In 2009, the twenty-
seven EU countries signed the Treaty of Lisbon, which amends the previous treaties. It is
designed to make the EU more democratic, efficient, and transparent and to tackle global
challenges, such as climate change, security, and sustainable development.

The European Economic Area (EEA) was established on January 1, 1994, following
an agreement between the member states of the European Free Trade Association (EFTA)
and the EC (later the EU). Specifically, it has allowed Iceland (now an EU candidate),
Liechtenstein, and Norway to participate in the EU’s single market without a conventional
EU membership. Switzerland has also chosen to not join the EU, although it is part of
similar bilateral agreements.

26
EU Governance
The EU is a unique organization in that it is not a single country but a group of
countries that have agreed to closely cooperate and coordinate key aspects of their
economic policy. Accordingly, the organization has its own governing and decision-making
institutions.

 European Council. The European Council provides the political leadership for the EU.
The European Council meets four times per year, and each member has a
representative, usually the head of its government. Collectively it functions as the EU’s
“Head of State.”

 European Commission. The European Commission provides the day-to-day

leadership and initiates legislation. It’s the EU’s executive arm.

 European Parliament. The European Parliament forms one-half of the EU’s legislative
body. The parliament consists of 751 members, who are elected by popular vote in
their respective countries. The term for each member is five years. The purpose of the
parliament is to debate and amend legislation proposed by the European Commission.

 Council of the European Union. The Council of the European Union functions as the
other half of the EU’s legislative body. It’s sometimes called the Council or the Council
of Ministers and should not be confused with the European Council above. The Council
of the European Union consists of a government minister from each member country
and its representatives may change depending on the topic being discussed.

 Court of Justice. The Court of Justice makes up the judicial branch of the EU. Consisting
of three different courts, it reviews, interprets, and applies the treaties and laws of the
EU.

South Asian Association for Regional Cooperation (SAARC)

South Asian nations, which was established on 8 December 1985 when the
government of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka formally
adopted its charter providing for the promotion of economic and social progress, cultural
development within the South Asia region and also for friendship and co-operation with
other developing countries. It is dedicated to economic, technological, social, and cultural
development emphasizing collective self-reliance. Afghanistan joined the organization in
2007. Meetings of heads of state are usually scheduled annually.

27
Objectives of SAARC
1. To promote the welfare of the people of South Asia and to improve their quality of
life;
2. To accelerate economic growth, social progress and cultural development in the
region and
3. To provide all individuals the opportunity to live in dignity and to realise their full
potential ;
4. To promote and strengthen selective self-reliance among the countries of South
Asia;
5. To contribute to mutual trust, understanding and appreciation of one another's
problems;
6. To promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields;
7. To strengthen co-operation with other developing countries;
8. To strengthen co-operation among themselves in international forums on matters of
common interest; and
9. To co-operate with international and regional organizations with similar aims and
purposes.

SAARC organizational structure:

1. SAARC Council: At the top, there is the Council represented by the heads of the
government of the member countries.
2. Council of Minister: It is to assist the council. It is represented by the foreign
ministers of the member countries.
3. Standing Committee: It is comprised by the foreign secretaries of the member
government.
4. Programming Committee: It consists of the senior official of the member
governments.
5. Technical Committee: It consists of the represented of the member nations.
6. Secretarial: The SAARC secretariat is located in Nepal.

ASEAN

On 8 August 1967, five leaders - the Foreign Ministers of Indonesia, Malaysia, the
Philippines, Singapore and Thailand - sat down together in the main hall of the Department
of Foreign Affairs building in Bangkok, Thailand and signed a document. By virtue of that
document, the Association of Southeast Asian Nations (ASEAN) was born.

28
ASEAN STRUCTURES AND MECHANISMS
1. ASEAN Summit, ASEAN Coordinating Council
2. ASEAN Community Councils , ASEAN Sectoral Ministerial Bodies
3. Committee of Permanent Representatives , National Secretariats
4. Committees Abroad , ASEAN Chair
5. ASEAN Secretariat, The highest decision-making organ of ASEAN is the Meeting of
the ASEAN Heads of State.

PRINCIPLES of ASEAN

1. Mutual respect for the independence, sovereignty, equality, territorial integrity, and
national identity of all nations;
2. The right of every State to lead its national existence free from external interference,
Subversion or coercion;
3. Non-interference in the internal affairs of one another;
4. Settlement of differences or disputes by peaceful manner;
5. Renunciation of the threat or use of force; and
6. Effective cooperation among themselves

Objectives :
1. To accelerate the economic growth, social progress and cultural development in the
region through joint endeavors in the spirit of equality and partnership in order to
strengthen the foundation for a prosperous and peaceful community of Southeast
Asian nations
2. To promote regional peace and stability through abiding respect for justice and the
rule of law in the relationship among countries in the region and adherence to the
principles of the United Nations.

APEC – ASIA PACIFIC ECONOMIC COOPERATION

APEC also referred to member economies and accounting approximately 60% of the
world’s GDP. It is responsible for facilitating economic growth, cooperation, trade and
investment in this region. APEC consists of 21 member countries including Brunei
Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico,
New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taipei, Thailand,
United States and Vietnam. APEC exports of goods stood at USD 8021 billion and imports
stood at USD 7997 billion during the year 2016. China and United States are the biggest
trading countries.

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AFTA (ASEAN FREE TRADE AREA)

In January 1992, the ASEAN member states signed the Singapore Declaration,
marking the commitment to intensify economic cooperation in the entire region. At the
heart of the Declaration is the creation of the ASEAN FREE TRADE AREA (AFTA) in 15
years.

A Free Trade Area in ASEAN means the removal of obstacles to freer trade among
member states. This includes the abolition of high tariffs or taxes on traded goods and the
scrapping of quantitative restrictions (QRs) and other nontariff barriers (NTBs) that limit
the entry of imports. At the same time, each member is still free to set its own level of tariffs
o imports from nonmembers.

Mechanism of AFTA

The Common Effective Preferential Tariff (CEPT) scheme is the main implementing
mechanism of AFTA. Under the CEPT member countries gradually lower tariffs on each
other's imports

ASEAN will truly be a free trade area once obstacles to trade are removed and taxes
or tariffs on goods traded among member countries are reduced to zero to five percent.

This will be achieved gradually over a 15-year period or by the year 2008 through a
schedule of tariff reductions under the Common Effective Preferential Tariff
(CEPT) scheme.

At the same time, CEPT allows each country to exclude certain products under the
following categories: (1) unprocessed agricultural products; (2) general exceptions,
particularly those with health and security reasons; and (3) temporary exclusions for
"sensitive products" that would be subject to review by the eight year or year 2001.

AFTA involved other areas of cooperation, including the harmonization of

standards, the reciprocal recognition of tests and certification, the removal of barriers to
foreign investments, macroeconomic consultations, rules for fair competition, and the
promotion of venture capital.

There are two forms of tariff reductions under the CEPT:

1. Fast Track. Fifteen (15) products identified at the Fourth ASEAN Summit shall be
covered by a fast track scheme, which sees a lowering of tariffs to 0-5 percent within
7-lO years.

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 Tariffs above 20 percent will be reduced to 0-5 percent within ten years.
Tariffs 20 percent and below will be reduced to 0-5 percent within seven years.
Product-groups under the fast-track program are the following

Vegetable Oil Cement

Chemicals Pharmaceutical

Fertilizers Plastics

Rubber Products Leather Products

Textiles Ceramic and Glass Products

Gems and Jewelry Copper Cathodes

Electronics Wooden and Rattan Furniture

2. Normal Track. Products under the normal track will see their tariffs reduced over a
period between 10-15 years.

Tariffs above 20 percent will be reduced in two stages: a) a cut within 5-8
years; b) a final reduction to 0-5 percent after another seven years, or a total of 15
years. Tariffs of 20 percent and below will be reduced to 0-5 percent in ten years.

Each ASEAN member may exclude certain products from CEPT coverage
under the various exclusion lists.

Unlike other ASEAN members, the Philippines did not have to start implementing CEPT as
scheduled last January 1, 1993. CEPT for the Philippines takes effect only after tariff
reforms under Executive Order 470 are completed.

A member country enjoys the rates under CEPT if at least 40 percent of the value of
its products originates from any one or more member states. Once a product is included in
the CEPT, quantitative restrictions should be eliminated immediately upon the enjoyment
of concessions whlle other non-tariff barriers should be removed within 5 years from the
enjoyment of concessions.

Once a product is included in the CEPT, other forms of trade restrictions (ie.,
quantitative restrictions and foreign exchange restrictions and other nontariff barriers )
are removed within five years.

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 For the Philippines, the good news is that most of its top exports are included in the
CEPT. And even if a top exporter like automobile parts is temporary excluded, it is not a
clear loser because other ASEAN countries have likewise excluded this same product
group.

Potential exports, however, such as cocoa products and fruit juices, which have
potential competitive advantages, are excluded. Garment manufacturers, on the other hand,
are potential winners, but could not develop the export market as only textile, an input, is
included while finished goods are excluded. This situation is similar in footwears, inputs
like raw hides, were included but shoes were excluded, this preventing shoe manufacturers
from exporting freely to ASEAN.

Advantages of Regional Trading Blocs

1. Free trade within the bloc: Knowing that they have free access to each other’s
markets, members are encouraged to specialize. This means that, at a regional level,
there is the wider application of the principle of the comparative advantage.

2. Market access & trade creation: Easier access to each other’s markets means that
trade between members is likely to increase. Trade creation exists when free trade
enables high-cost domestic producers to be replaced by lower cost, & more efficient
imports. Because low-cost imports lead to lower-priced imports, there is a
‘consumption effect’, with increased demand resulting from lower prices. These
agreements create more opportunities for countries to trade with one another by
removing the barriers to trade & investment. Due to a reduction or removal of
tariffs, cooperation results in cheaper prices for consumers in the bloc countries.

3. Economies of scale: Producers can benefit from the application of scale economies,
which will lead to lower costs & lower prices for consumers.

4. Jobs: Jobs may be created as the consequence of increased trade among the member
economies. By removing the restrictions on labor movement, the economic
integration can help expand the job opportunities.

5. Protection: Firms inside the bloc are protected from cheaper imports from outside,
such as the protection of the EU shoe industry from cheap imports from China &
Vietnam.

6. Consensus & cooperation: Member nations may find it easier to agree with smaller
numbers of countries. Regional understanding & similarities may also facilitate
closer political cooperation.

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DISADVANTAGES OF REGIONAL TRADING BLOCS

1. Loss of benefits: The benefit of the free trade among the countries in different blocs
is lost.

2. Distortion of trade: Trading blocs are likely to distort world trade, & reduce the
beneficial effects of specialization & the exploitation of comparative advantage.

3. Inefficiencies & trade diversion: Inefficient producers within the bloc can be
protected from more efficient ones outside the bloc. For example, the inefficient
European farmers could be protected from the low-cost imports from the
developing countries.

WORLD TRADE ORGANIZATION:

Meaning
The World Trade Organization (WTO) is a Multi-lateral organization which facilitates
the free flow of goods and services across the world and encourages fair trade among
nations. It is a 149-member organization that represents all the trading nations of the
world, who import-export goods & services. The basic objective of WTO is to increase the
global income as a result of increased trade and the overall enhancement of the prosperity
levels of the member nations. WTO came into formal existence on January 1st 1995. As an
organization it has vast powers and functions than its predecessor GATT (General
Agreement on Tariffs and Trade). GATT came into existence in the year 1948, immediately
after the Second World War with 23 countries became the founder members. GATT
provided platform for 8 trade negotiations until 1994, the last trade negotiations – the
Uruguay Round, resulted in the creation of WTO.
Objectives of WTO
The objective of the World Trade Organization is to help trade flow smoothly, freely, fairly
and predictably in order to meet its objective, WTO performs the following functions:

1. Administers WTO trade agreements;

2. Acts as a forum for trade negotiations;
3. Settles and handles trade disputes;
4. Monitors and reviews national trade policies;
5. Assists the member in trade policies through technical assistance and training
programmes;
6. Provides technical assistance and training for developing countries;
7. Co-operates with other international organization.

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Functions:

1. Administering WTO trade agreements

2. Forum for trade negotiations
3. Handling trade disputes
4. Monitoring national trade policies
5. Technical assistance and training for developing countries

Organizational structure

1. Council for Trade in Goods: There are 11 committees under the jurisdiction of the
Goods Council each with a specific task. All members of the WTO participate in the
committees. The Textiles Monitoring Body is separate from the other committees
but still under the jurisdiction of Goods Council. The body has its own chairman and
only 10 members. The body also has several groups relating to textiles.

2. Council for Trade-Related Aspects of Intellectual Property Rights : Information

on intellectual property in the WTO, news and official records of the activities of the
TRIPS Council, and details of the WTO's work with other international organizations
in the field.

3. Council for Trade in Services: The Council for Trade in Services operates under
the guidance of the General Council and is responsible for overseeing the
functioning of the General Agreement on Trade in Services (GATS). It is open to all
WTO members, and can create subsidiary bodies as required.

4. Trade Negotiations Committee: The Trade Negotiations Committee (TNC) is the

committee that deals with the current trade talks round. The chair is WTO's
director-general. As of June 2012 the committee was tasked with the Doha
Development Round.

United Nations Conference on Trade and Development (UNCTAD)

1. It was established in 1964 as a permanent intergovernmental body. It is the

principal organ of the United Nations General Assembly dealing with trade,
investment, and development issues.

2. The organization's goals are to "maximize the trade, investment and development
opportunities of developing countries and assist them in their efforts to integrate
into the world economy on an equitable basis.

3. The primary objective of the UNCTAD is to formulate policies relating to all aspects
of
4. Development including trade, aid, transport, finance and technology. The conference
ordinarily meets once in four years. The first conference took place in Geneva in

34
 1964, second in New Delhi in 1968, One of the principal achievements of UNCTAD
has been to conceive and implement the Generalized System of Preferences (GSP).
Currently, UNCTAD has 194 member states and is headquartered in Geneva,
Switzerland. UNCTAD has 400 staff members. It is a member of the United Nations
Development Group

Principles
The agreements of WTO cover everything from trade in goods, services and agricultural
products. These agreements are based on the principles mentioned as below:
(i) Non-Discrimination:
This principle requires every member country must treat all its trading partners
equally without any discrimination. It means that if a country offers any special concession
to one trading partner, such concessions need to be extended to its other trading partners
as well in entirety. This principle effectively gets translated into "MFN" or the Most Favored
Nation.
(ii) Reciprocity:
This Principle reflects that any concession extended by one country to another need
to be reciprocated with an equal concession such that there is not a big difference in the
countries payments situation. This was further relaxed for developing countries facing
severe Balance of Payments crisis. This principle along with the first principle would
actually result in more and more liberalization of the world trade as any country relaxing
its trade barriers need to extend it to all other members and this would be reciprocated.
(iii) Transparency:
This principle requires that there is transparency in the domestic trade policies of
member countries. The member countries are required to sequentially phase out the tariff
barriers and non-tariff barriers through negotiations.
These principles are designed to serve the purpose of freer and fair trade and also to
encourage competitive environment in the global market.
Implications of WTO on Members Countries:
The World Trade organization was established with an objective of enhancing the
free and fair trade, improve growth rate of world trade by encouraging members to reduce
trade barriers and to increase the overall prosperity in the global economies. The
implication of WTO can be mentioned as follows:
Promote Peace in the world trade as the disputes are handled at WTO forum constructively.
 Free trade reduces the costs of living.
 Wider choice of products and services.
 Promotes Economic Growth as result of increased trade.
 Encourages Efficiency

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TRIMS and TRIPS:

The WTO administers the implementation of a set of agreements, which include the
General Agreement on Tariffs and Trade, other agreements in the goods sector (e.g., agriculture,
textiles, sanitary and psycho-sanitary measures, Trade Related Investment Measures- TRIMs,
anti-dumping, etc.), and in addition, agreements in two other areas, viz., trade in services, and
Trade Related Intellectual Property Rights (TRIPs) , TRIPs deals with the following IPRs:

 Copyright and related rights;

 Patents, Trademarks, Geographical indications, including appellations of origin;
 Industrial designs, Integrated circuit layout-designs;
 Protection of undisclosed information, Control of anti-competitive practices in
contractual licenses
 Term of patents 20 years, Limited compulsory licensing, no license of right
 Almost all fields of technology patentable. Only area conclusively, excluded from
patentability is plant varieties; debate regarding some areas in agriculture and
biotechnology, Very limited scope for governments to use patented inventions.

TRIMS:

Trade Related Investment Measures (TRIMs) are rules that apply to the domestic regulations a
country applies to foreign investors, often as part of an industrial policy. The agreement was
agreed upon by all members of the World Trade Organization. The agreement was concluded in
1994 and came into force in 1995.

1. The Agreement on Trade-Related Investment Measures TRIMs Agreement, one of the

Multilateral Agreements on Trade in Goods, prohibits trade-related investment measures,
such as local content requirements, that are inconsistent with basic provisions of GATT
1994.
2. The General Agreement on Trade in Services addresses foreign investment in services as
one of four modes of supply of services

WTO and India:

India is a founder member of World Trade Organization and also treated as the part
of developing countries group for accessing the concessions granted by the organization. As
a result, there are several implications for India for the various agreements that are signed
under WTO discussed as follows:

1. Reduction of Tariff and Non-Tariff Barriers: The agreement involves an overall

reduction of peak and average tariffs on manufactured products and phasing out the

36
 quantitative restrictions over a period. The important implication is that the firms
that have competitive advantage would be able to survive in the long run.

2. Trade Related Investment Measures (TRIMS): The agreement prohibits the host
country to discriminate the investment from abroad with domestic investment i.e.
agreement requires investment to be freely allowed by nations.
3. Trade Related Intellectual Property Rights (TRIPS): An intellectual property
right seeks to protect and provide legal recognition to the creator of the intangible
illegal use of his creation. This agreement includes several categories of property
such as Patents, Copyrights, Trademarks, and Geographical indications, Designs,
Industrial circuits and Trade secrets. Since the law for these intangibles vastly
varied between countries, goods and services traded between countries which
incorporated these intangibles faced severe risk of infringement. Therefore the
agreement stipulated some basic uniformity of law among all trading partners. This
required suitable amendment in the domestic International Property Rights (IPR)
laws of each country over a period of time. As a result Patents Act, Trade and
Merchandise Mark Act and the Copyright Right Act were amended in India. The
main impact of this is on industries such as pharma and bio-technology. Further, the
technology transfer from abroad is expected to become costly and difficult.

4. Agreement on Agriculture (AOA): The agreement on agriculture broadly deals

with providing market access, reduction of export subsidies and government
subsidies on agriculture products by member countries. The reduction of tariffs and
subsidy in export and import items would open up competition and provide a better
access to Indian products abroad.
5. Agreement on Sanitary and psyto-sanitary measures (SPM): This agreement
refers to restricting exports of a country that do not comply with the international
standards of germs/bacteria etc. Since allowing such products inside the country,
there would be spread of disease and pest in the importing country. The implication
of these agreements is that there is an urgent need to educate the exporters
regarding the changing scenario and standards at the international arena especially
in food processing, marine food and other packed food industries.
6. Multi-Fiber Agreement (MFA): This agreement is dismantled with effect from 1
January 2005. The result was removal of quantitative restrictions (QRs) on the
textile imports in several European countries. As a consequence a huge textile
market is opened up for developing countries like India. In order to take advantage
of opening up better preparedness is required in terms of modernization,
standardization, cost efficiency, and customization to meet challenges of foreign
customers.

37
 7. Besides these major agreements there are several other agreements such as
agreement on Market Access, which propagates free market access to products and
reduction of tariff and non-tariff barriers; agreement to have Safeguard
Measures if there is an import surge and it is liable to affect the domestic industries
in the transition economies. These measures can include imposing Quantitative
Restrictions (QRs) for a certain period and also imposing tariffs on the concerned
products, Agreement on Counter-Veiling Duties (CVD), Anti-Dumping Duty
(ADD) against imported products if the charges of Dumping are proved against the
exporting country.

Conclusion:

The Indian economy has experienced a major transformation as a result of the changing
multilateral trade discipline within WTO framework. It is expected that the sectors such as
textiles, clothing, leather and leather products, and food, beverages, and tobacco etc would
experience growth in output and exports. However, there is a serious and urgent need to
re-look the strategies followed by individual firms in the changing context of increasing
competition and opened markets.

FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) is an important factor in acquiring investments and

grows the local market with foreign finances when local investment is unavailable. There
are various formats of FDI and companies should do a good research before actually
investing in a foreign country.

It has been proved that FDI can be a win-win situation for both the parties involved.
The investor can gain cheaper access to products/services and the host country can get
valuable investment unattainable locally.

There are various vehicles through which FDI can be acquired and there are some
important questions the firms must answer before actually implementing a FDI strategy.

FDI – Definition
FDI, in its classic definition, is termed as a company of one nation putting up a
physical investment into building a facility (factory) in another country. The direct
investment made to create the buildings, machinery, and equipment is not in sync with
making a portfolio investment, an indirect investment.

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 In recent years, due to fast growth and change in global investment patterns, the
definition has been expanded to include all the acquisition activities outside the investing
firm’s home country.

FDI, therefore, may take many forms, such as direct acquisition of a foreign firm,
constructing a facility, or investing in a joint venture or making a strategic alliance with
one of the local firms with an input of technology, licensing of intellectual property.

FDI and its Types

Strategically, FDI comes in three types −

 Horizontal − In case of horizontal FDI, the company does all the same activities
abroad as at home. For example, Toyota assembles motor cars in Japan and the UK.

 Vertical − In vertical assignments, different types of activities are carried out

abroad. In case of forward vertical FDI, the FDI brings the company nearer to a
market (for example, Toyota buying a car distributorship in America). In case
of backward Vertical FDI, the international integration goes back towards raw
materials (for example, Toyota getting majority stake in a tyre manufacturer or a
rubber plantation).

 Conglomerate − In this type of investment, the investment is made to acquire an

unrelated business abroad. It is the most surprising form of FDI, as it requires
overcoming two barriers simultaneously – one, entering a foreign country and two,
working in a new industry.

FDI can take the form of green field entry or takeover.

 Greenfield entry refers to activities or assembling all the elements right from
scratch as Honda did in the UK.

 Foreign takeover means acquiring an existing foreign company – as Tata’s

acquisition of Jaguar Land Rover. Foreign takeover is often called mergers and
acquisitions (M&A) but internationally, mergers are absolutely small, which
accounts for less than 1% of all foreign acquisitions.

This choice of entry in a market and its mode interacts with the ownership strategy. The
choice of wholly owned subsidiaries against joint ventures gives a 2x2 matrix of choices –
the options of which are −

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  Greenfield wholly owned ventures,
 Greenfield joint ventures,
 Wholly owned takeovers, and
 Joint foreign acquisitions.
These choices offer foreign investors options to match their own interests, capabilities,
and foreign conditions.

Why is FDI Important?

FDI is an important source of externally derived finance that offers countries with
limited amounts of capital get finance beyond national borders from wealthier countries.
For example, exports and FDI are the two key ingredients in China's rapid economic
growth.

According to the World Bank, FDI is one of the critical elements in developing the
private sector in lower-income economies and thereby, in reducing poverty.

Vehicles of FDI
 Reciprocal distribution agreements − This type of strategic alliance is found
more in trade-based verticals, but in practical sense, it does represent a type of
direct investment. Basically, two companies, usually within the same or affiliated
industries, but from different nations, agree to become national distributors for
each other’s products.

 Joint venture and other hybrid strategic alliances − Traditional joint venture is
bilateral, involving two parties who are within the same industry, partnering for
getting some strategic advantage. Joint ventures and strategic alliances offer access
to proprietary technology, gaining access to intellectual capital as human
resources, and access to closed channels of distribution in select locations.

 Portfolio investment − For most of the 20th century, a company’s portfolio

investments were not considered a direct investment. However, two or three
companies with "soft" investments in a company could try to find some mutual
interests and use their shareholding for management control. This is another form
of strategic alliance, sometimes called shadow alliances.

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FDI – Basic Requirements
As a minimum requirement, a firm will have to keep itself abreast of global trends
in its industry. From a competitive perspective, it is important to be aware if the
competitors are getting into a foreign market and how they do that.

It is also important to see how globalization is currently affecting the domestic

clients. Often, it becomes imperative to expand for key clients overseas for an active
business relationship.

New market access is also another major reason to invest in a foreign country. At some
stage, export of product or service becomes obsolete and foreign production or location
becomes more cost effective. Any decision on investing is thus a combination of a number
of key factors including −

 assessment of internal resources,

 competitiveness,
 market analysis, and
 Market expectations.
A firm should seek answers to the following seven questions before investing abroad −

 From an internal resources standpoint, does the firm have senior management
support and the internal management and system capabilities to support the setup
time and an ongoing management of a foreign subsidiary?

 Has the company done enough market research in the domains, including industry,
product, and local regulations governing foreign investment?

 Is there a realistic judgment in place of what level of resource utilization the

investment will offer?

 Has information on local industry and foreign investment regulations, incentives,

profit sharing, financing, distribution, etc., completely analyzed to determine the
most suitable vehicle for FDI?

 Has an adequate plan been made considering reasonable expectations for

expansion into the foreign market via the local vehicle?

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 If applicable, have all the relevant government agencies been contacted and
concurred?

 Have political risk and foreign exchange risk been judged and considered in the
business plan?

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