International Business

International business refers to those business activities that take place beyond the
geographical boundaries of a country. It involves not only the international movements of
goods and services but also capital, technology, IP like patents, trademarks, copyright, etc.

For example, India selling agricultural products to foreign countries is an international

business. Advancements in technology and better communication facilities have increased
international business with great success in various countries. International business provides a
wide market range to organizations and gives them an opportunity to satisfy the needs of
customers all over the world.

Reason for International Business

 Uneven Distribution of Natural Resources: Due to unequal distribution of natural
resources, all countries cannot produce goods at a low cost. As a consequence, it has an
impact on their productivity levels. Therefore, the countries with less quantity of a natural
resource either purchase the resource or the actual product itself from the countries with an
abundance of these. For example, crude oil is exported from the USA as it is found in
abundance there.
 Availability of Productivity Factors: The numerous production variables, like labor,
capital, and raw materials, that are required to produce and distribute diverse commodities
and services are found in different quantities in different countries. It gives rise to buying
and selling of productivity factors among the countries. For example, due to
unemployment in India, foreign countries can employ labor at chap rates from India.
 Specialization: Some countries specialize in producing goods and services for which they
have advantages such as education, favorable climatic circumstances, and so on. It results
in the business between different countries for the purchase and sale of specialized
products. For example, the Indian market specializes in handcraft products which
increases its exports to other countries.
 Cost Advantages: Production costs vary according to geographical, political, and
socioeconomic situations in different countries. Some countries are in a better position to
manufacture certain commodities at a lower cost than others. Firms participate in
international trade to purchase products that are cheaper in other countries and to sell things
that they can supply at a lower cost. For example, China sells various goods at a low price
to different countries all over the world because of the cost advantage.

Scope of International Business

The scope of international business is wider than domestic business as it includes the
following:
 Imports and Exports of Merchandise: Merchandise refers to physical products, such as
those that can be seen and felt. Therefore, imports and exports of merchandise mean the
transfer or exchange of tangible goods from and to different countries of the world. It is
also called trade in goods as it excludes buying and selling of services.

 Imports and Exports of Services: Imports and exports of services involve intangible
goods that cannot be seen, felt, or touched. It is also known as invisible trade. Services such
as tourism and travel, transportation, communication, etc. are imported and exported.
 Licensing and Franchising: Licensing is a contractual agreement between two firms,
where the licensor (one firm) grants the licensee (another firm), access to trademarks,
copyrights, patents, etc. in a foreign country in exchange for a fee. The fee charged by the
licensor is known as royalty. For example, Microsoft grants a license to different
companies in exchange for royalty.
Franchising is also similar to licensing. However, it provides services rather than access to
patents, etc. For example, Subway has various franchises all over the world where it
provides the same services to the customers.
 Foreign Investment: It means investing money into a foreign country in exchange for a
profit. Foreign investment can be of two types Direct and Portfolio Investment.
Direct investment occurs when a firm invests directly in the machinery and plant in another
country to produce and market goods and services in that country.
A portfolio investment is a foreign investment where a company buys shares of another
company in a different country or lends money to another company. The return on portfolio
investment is received in the form of dividends or interest respectively.

Benefits of International Business

Benefits to countries
 Foreign Exchange: It assists a country in earning foreign exchange, which may then be
utilized to buy capital goods, technology, and other products from foreign countries.
 More Efficient Resource Utilization: It is based on the comparative cost advantage
theory. It entails producing what your country can produce more efficiently and trading the
surplus production with other countries to purchase what they can produce more efficiently.
In this way, countries can make better use of their resources.
 Growth Possibilities and Job Opportunities: Countries can enhance their manufacturing
capacity to supply commodities to other countries through external trade. If external trade
holds, the production will rise, increasing the GDP level of the country, resulting in
economic growth. With more production, the demand for more labor also rises. Therefore,
the international business also creates job opportunities.
 mproved Standard of Living: International business allows individuals to consume goods
and services from other countries. Consumption of a variety of goods and services
improves the standard of living of the people.
Benefits to firms
 Profit Opportunities: When compared to local business, international business is more
profitable. When domestic prices are lower, businesses can make more money by selling
their products in other countries.
 Increased Resource Utilization: Many enterprises anticipate international growth and get
orders from foreign clients to set up production capabilities for their products that are more
in demand in the local market. It enables them to better utilize their excess resources.
 Growth Prospects: When demand falls or the domestic market reaches saturation point,
business enterprises become irritated. By expanding internationally, such businesses can
increase their growth potential significantly.
 Decrease Competition: When domestic competition is fierce, internationalization appears
to be the only option to achieve success and required growth. Many businesses are
motivated to expand into overseas markets because of the fierce competition in the
domestic markets.
 Improved Business Vision: Many firms’ existence and goodwill depend on their ability to
expand their worldwide business. The desire to expand and diversify, as well as to take
advantage of the strategic advantages of internationalization, is expressed in the desire to
become more international.

Drivers of International Business

The production of goods and services has increased around the world due to a number of factors,
particularly globalization. Many companies have gone beyond their national borders to have
operations, even in remote corners of the world. McDonald’s, Subway, Kellogg’s, Walmart,
Tesco, Coca Cola, and Pepsi are some of the best examples in this regard. The drivers of
international business are as follows.

Limited Home Market:

When the size of the home market is limited either due to the smaller size of the population or
due to the lower purchasing power of all people or both, the companies internationalize their
operations. Similarly, A company, which is mature in its domestic market, is driven to sell in
more than one country because the sales volume achieved in its own domestic market is not large
enough to fully capture the manufacturing economies of scale. For example, ITC Indian cigarette
major captured the European market.

Excess of Production:

Some of the domestic companies expand their production capacities more than the demand for
the product in the domestic market. In such cases, these companies are forced to sell their extra
production in foreign developed countries. For example, Nokia is an international company
based in Finland whose production capabilities were very large compared to the population of
Finland. Similarly, Toyota of Japan has a large export market.

Global Marketplace:

International business has become easier since the advent of the internet and the emergence of e-
business. In order to do business internationally, a company must have a good product, the right
strategy, and an appetite to take a risk at the global marketplace.

Emerging Markets:

Compared to developed countries, developing countries are growing at a healthy pace, thus
reducing the barriers of trade. Emerging markets provide an unexplored marketplace with
unlimited potential and scope for business. Any company with good or innovative products and
services cannot afford to ignore the opportunities provided by these emerging markets. Car
manufacturers like Toyota, Suzuki, Mercedes, etc. have set the production facilities in India.
Growth in Market Share:

Some companies would like to enhance their market share in the global market by expanding &
intensifying their operations in various foreign countries. The Smaller companies expand
internationally for survival while the larger companies expand to increase their market share. For
example, Coca Cola has bottling plants almost all over the world.

Higher Rate of Profits:

The main objective of any business is to achieve profits. When the domestic markets don’t
promise a higher rate of profits, business firms search for foreign markets where there is a scope
for a higher rate of the profits. TCS of India earns more profit through its global operations than
through the domestic operations.

Political Stability:

The Political stability means that continuation of the same policies of the Government for a quite
long period. Business firms prefer to enter the politically stable countries & are restrained from
locating their own business operations in politically unstable countries.

Technology and Communication:

Technology is the principal drivers of international business. The Availability of advanced

technology & competent human resources in some countries acts like pulling factors for business
firms from other countries. Advanced information technology has transformed our economic life
as well as in the businesses sector. Advanced communication technology, such as the internet
allowed the customer to get information for new goods and services easily. Besides, falling
communication costs allow information move quickly and inexpensively, For example,
American & European companies, in recent years, have been depended on Indian companies for
the software products & the services through their business process outsourcing (BPO).

Transportation

We live in a ‘global village’. Improvement in transportation technology in air, sea and rail
systems helped in the growth of the international business. The transport system has reduced the
travelling time and increase the efficiency of transferring goods. A businessman from Mumbai
can go to Dubai to do his ‘business’ and come back to Mumbai on the same day. Similarly,
goods can be transported beyond the national border on the same day. The costs of ocean
shipping have come down, due to containerization, bulk shipping, and other efficiencies. The
lower unit cost of shipping products around the global economy helps to bring prices in the
country of manufacture closer to those in export markets.

Changing Demographics:

Most developed countries face challenges in sourcing workforce as the average age of the
population is getting older. In the next 10 years, most of the industrialized nations will have to
depend on sourcing its workforce from countries like India, China and other countries, where the
population is young, with an abundance of skilled labour. India is the chief source of workforce
with English speaking graduates and other diploma holders.

Liberalization of Economic Policies:

Most of the countries around the globe liberalized their economies &opened their countries to the
rest of the globe. Old forms of non-tariff protection such as import licensing and foreign
exchange controls have gradually been dismantled. Borders have opened, and average import
tariff levels have fallen. These change in the policies attracted multinational companies to the
extent their operations to these countries. Many of the world trades are currently done through
free trade, bilateral, and multilateral agreements. Interestingly, countries which were very hostile
or unfriendly to foreign investment a few years ago, are inviting other countries for inward
(FDI). China is a very good example in this regard.

Trading Blocs:

Formation of various regional and international trading blocs like the European Union, World
Trade Organisation, South Asian Free Trade Agreement and the North American Free Trade
Agreement have resulted in increased regional cooperation. These trading blocs promote
business within their scope by facilitating free trade zones, which literally eliminates any trade or
investment barriers. Regional trading blocs like SAARC also facilitate easy movement of goods,
services, and human resources within the region, thus providing a uniform opportunity to all the
countries (in the region) for proper allocation of resources.

Differences in Tax System:

The desire of businesses to benefit from lower unit labour costs and other favourable production
factors abroad has encouraged countries to adjust their tax systems to attract foreign direct
investment (FDI). Many countries have started tax holiday schemes for foreign investment
projects.

Cultural exchange

People travel to different countries and share their cultural beliefs and practices with each other.
Through this process, cultural assimilation takes place which drives globalization and
international business. McDonald’s and KFC were unknown to India a few years back, now they
have become part of India’s life.

Factors Affecting International Business

The exchange rate, geographical position, level of development, national income, legal and
political framework are some factors which influence the international business.

Influence of Politics and Protectionism:

A country’s government can have a major effect on its balance of trade due to its policies on
subsidizing exporters, restrictions on imports, or lack of enforcement on piracy. The government
may adopt a policy of protectionism and restrict trade through tariffs to safeguard the domestic
economy. Different ways of protectionism are licensing, anti-dumping laws, quota restrictions,
and tariffs for their business operations in a foreign country or region.

Legal and regulatory framework:

Companies involved in international business may have to comply with laws of more than one
country. This certainly poses a challenge as each country has its own set of laws. These
companies have to ascertain that their scope of business is within the regulatory framework set
by the authorities of that country.

Lengthy Legal Procedures:

Import or export of goods involves a lengthy and complicated procedure. Prior permission of the
government has to be obtained before exporting or importing goods or services. One has to fill
many documents, get customs clearance, conversion of rupee into foreign currency, booking of
the ship, etc. All of these are time-consuming activities.

Inflation:

Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. Inflation affects
imports and exports primarily through their influence on the exchange rate. Higher inflation
typically leads to higher interest rates, and this leads to a weaker currency. A currency with a
higher inflation rate will depreciate against a currency with lower inflation. A stronger domestic
currency can have an adverse effect on exports and on the trade balance. Inflation leads to a
reduction in exports due to which the goods and services become more costlier in the
international market. Higher inflation increases the input costs of raw materials and labor. These
higher costs can have a substantial impact on the competitiveness of exports in the international
market. But imports become cheaper.

Balance of Payments Position:

If a country is facing balance of payment crisis, it has to adopt measures intended to restrict the
import and increase On the other hand in case of balance of payment surplus imports are
supported.

National Income:

National income means the value of goods and services produced by a country during a financial
year. Thus, it is the net result of all economic activities of any country during a period of one
year and is valued in terms of money. In an open economy consumers of a country also spend
some income on imported goods. The imports of a country depending on their level of income.
The higher the level of income, the prices of imported goods and tastes of consumers remaining
the same, the greater will be its imports.

Exchange Rate:

The currency unit varies from nation to nation. This may sometimes cause problems of currency
convertibility, besides the problems of exchange rate fluctuations. Each country’s currency is
valued in terms of other currencies through the use of the exchange rate so that currencies can be
exchanged to facilitate international transactions. The balance of trade
impacts currency exchange rates as supply and demand can lead to an appreciation or
depreciation of currencies. A country with a high demand for its goods tends to export more than
it imports, increasing demand for its currency. The monetary system and regulations may also
vary from country to country.

Market forces:

Demographics of each country have its own perceptions about different products and services.
The availability and nature of the marketing facilities available in different countries may vary
widely. The local, political, economic, and technological environments differ from country to
country. Similarly, we have to consider several other factors. They may be in terms of customer
preferences, product placement, pricing, advertising, distribution channels and so on. An
international company has to face the challenges of multiple regional customers, each with
unique requirements.

Geographical Position:

Common borders, ease of transportation, coastal areas, climate, etc. affect international trade. If
the distance between the markets is large, the transport cost becomes high and the time required
for affecting the delivery tends to become longer. Distance tends to increase certain other costs
also. This factor impacts international trade greatly.

Level of Economic Development:

The developed countries have a large share of international business. They trade in finished and
high quality good. The developing countries trade in raw materials and agricultural goods.

Culture:

The cultural differences are one of the most difficult problems in international marketing. In a
domestic market, a business deals with a homogenous culture whereas in international business
the company has to deal with heterogeneous cultures in multiple countries. The company’s
management has to get accustomed to different languages, culture, sentiments, and traditions of
the foreign country in order to conduct business effectively. Different languages are spoken and
written in different countries. Traders must appoint someone who can read and understand the
foreign language to read the price list, terms, and conditions of trade, etc.
Advancement in technology

The changes in technology bring about the change in the working conditions and the quality of
the product. It also helps to produce the goods on a large scale at a lower cost. The company can
have major advancements due to the latest technology and techniques. With the help of
technology, there is an increase in the earnings of the company.

International Business Environment (IBE)

International business refers to trading services and goods in a worldwide market. It can also be
recognised as the globalisation of trade. An International Business Environment (IBE) refers to
the surroundings in which international companies carry on their businesses. It plays a critical
role in the development and growth of a country.

An International Business Environment (IBE) involves different aspects like political risks,
cultural differences, exchange risks, and legal and taxation issues.
Thus, it is mandatory for the people at the managerial levels to work on factors comprising the
international business environment as it is crucial for a country’s economy.

Forms of International Business Environment (IBE)

Cross border Trade
Franchising
Licensing
Joint venture
Foreign Direct Investment (FDI)

Types of International Business Environment (IBE)

The various types or aspects of the international business environment are provided below
The political environment
The economic environment
The technological environment
The cultural environment
The competitive environment

The political environment

The political environment means the political risk, the government’s relationship with a business,
and the type of government in the country. Conducting business internationally implies dealing
with different kinds of governments, levels of risk and relationships.
There are different types of political systems, such as one-party states, multi-party democracies,
dictatorships (military and non-military) and constitutional monarchies. Thus, an organisation
needs to take into account the following aspects while planning a business plan for the overseas
location:

 Political system of the business

 Approach of the government towards business, i.e. facilitating or restrictive

 Incentives and facilities offered by the government

 Legal restrictions for licensing requirements and reservations to a specific sector like the

private, public or small-scale sector

 Restrictions on importing capital goods, technical know-how and raw materials

 Restrictions on exporting services and products

 Restrictions on distribution and pricing of goods

 Required procedural formalities in setting the business

The economic environment

The economic environment refers to the factors contributing to the country’s attractiveness to
foreign businesses. It can differ from one nation to another. Better infrastructure, education,
healthcare, technology, etc., are also often associated with high levels of economic development.
The levels of economic activities combined with infrastructure, education, and the degree of
government control affect the facets of doing a business.
Usually, countries are divided into three main economic categories, i.e. more industrialised or
developed, less developed or third world, and the newly emerging or industrialising economies.
There are significant variations within each economic category. Overall, the more developed
countries are rich, the less developed are poor, and the newly industrialising are those moving
from poor to rich. These distinctions are made based on the Gross Domestic Product per capita
(GDP/capita).
A business needs to recognise the economic environment to operate in international markets
successfully. While analysing the economic environment, an organisation intending to work in a
particular business sector should consider the following aspects:

 Economic system to enter the business sector

 Stage and pace of economic growth

 Level of national GDP and per capita income

 Incidents of taxes, direct and indirect tax

 Available infrastructure facilities and the difficulties

 Availability of components, raw materials and their cost

 Sources of financial resources and their costs

 Availability of workforce, managerial and technical workers, their salary and wage

structures
The technological environment includes factors related to the machines and materials used in
manufacturing services and goods. As organisations do not have control over the external
environment, their success depends on how they will adapt to the external environment. A
significant aspect of the international business environment is the level and acceptance of
technological innovation in countries.
The last decade of the twentieth century saw significant advances in technology, and it is also
continuing in the twenty-first century. Technology often gives organisations a competitive
advantage. Hence, organisations compete to access the latest technology, and international
organisations transfer technology to be globally competitive.
Due to the internet, it is easier even for a small business plan to have a global presence, which
grows its exposure, market, and potential customer base. For political, economic and cultural
reasons, some countries are more accepting of technological innovations, while others are less
accepting. In analysing the technological environment, the organisations should consider the
following aspects:

 Level of technological developments in the country as a whole and specific business sector

 Pace of technological changes and obsolescence

 Sources of technology

 Facilities and restrictions for technology transfer

 Time taken for the absorption of technology

The cultural environment is one of the crucial components of the international business
environment. It is the most difficult to understand as the cultural environment is unseen. It has
been described as a commonly held and shared body of general values and beliefs that determine
what is right for one group, according to Kluckhohn and Strodtbeck.
National culture is defined as the body of general values and beliefs shared by a nation. Beliefs
and values are usually formed by factors such as language, history, geographic location, religion,
education and government. Thus, organisations begin a cultural analysis by understanding these
factors. The well-known model is the one developed by Hofstede in 1980.

The model by Hofstede proposes four dimensions of cultural values, which are as follows:
 Individualism – It is the degree to which a nation encourages and values individual

decision making and action

 Uncertainty avoidance – It is the degree to which a nation is willing to deal with and

accept uncertainty

 Power distance – It is the degree to which a nation sanctions and accepts differences in

power

 Masculinity – It is the degree of the gender gap in a society

Hofstede’s model of cultural values has been extensively used as it provides data for a wide array
of countries. Many managers and academics found this model helpful in exploring management
approaches appropriate in different cultures.
For example, in a country that is high on individualism, one expects individual tasks, goals and
individual reward systems to be effective, while the reverse would be the case in a country that is
low on individualism. While analysing cultural factors, the organisation should consider the
following aspects:

 Approaches to society towards business in specific and general areas

 Influence of cultural, social, and religious factors on the acceptability of the product

 Lifestyle of people and the products used by them

 Level of acceptance and resistance to change

 Demand for a specific product for a specific occasion

 Values attached to particular products, i.e. possessive or the functional value of products

 Consumption pattern of the buyers

The competitive environment differs from country to country. The political, economic, and
cultural environmental factors help determine the degree and type of competition that exists in a
country. The most likely sources of competition can be well understood for a domestic
organisation, but it isn’t the case when an organisation moves to compete in a new environment.

Competition can come from various sources, such as it can come from the private or public
sector, large or small organisations, domestic or global organisations and traditional or new
competitors.

Benefits of the International Business Environment

 It unites and brings countries together, making the world a big global village

 It increases employment opportunities as it results in the exchange of information, ideas,

capital across borders and services

 There is equal growth in wealth, availability of goods and services and price stability

 It brings a new environment of development, alliance, affluence, stability, modernisation,

and technology across the globe

https://www.geeksforgeeks.org/international-business-meaning-reason-scope-and-benefits/

https://thefactfactor.com/facts/management/international-business/drivers-of-international-
business/1586/

https://thefactfactor.com/facts/management/international-business/exchange-rate/1581/

https://cleartax.in/s/international-business-environment
Origin and History of United Nations Conference on Trade and Development (UNCTAD)

The need for reducing disparities between the rich and the poor was keenly felt at the global
level. Particularly developing countries in Asia, Africa and Latin America realized the
importance of global efforts to be undertaken in this direction. In order to fulfill the above, the
United Nations Conference on Trade and Development (UNCTAD) came to be established on
30th December, 1964.

The UN session aimed at attaining a minimum of 5 percent annual growth rate for the developing
countries by the end of 1970. It sought the help of developed countries to attain the above
objective. In 1960s, most of the developed countries became independent of their formal
imperial masters. These nations launched programmes of rapid industrialization of their
backward economies.

As developing countries required enormous amount of investments for their rapid

industrialization, this has necessitated large imports of capital goods. But their export earnings
were not sufficient for the purpose of import of capital goods and technical know-how.
Resultantly, huge balance of payments deficits prevailed in most developing countries. During
1950s, these deficits were made good with foreign loans. But the conditions attached to foreign
 loans were difficult to comply-with. It was also realized that the protection available
from GATT was inadequate to their needs. In this context, UNCTAD came into existence in
1964 as a permanent organization of UNO with its own permanent secretariat. UNCTAD has
its headquarters in Geneva.

Organization of UNCTAD

The UNCTAD was set up as the permanent organ of the UN General Assembly. It has its own
structure of subsidiary bodies and a full time secretariat. It has established a Trade and
Development Board to take policy decisions when the conference is not in session. It has 155
members, elected from among its members in proportion to geographical distribution. The Board
meets twice a year.

There are four subsidiary committees to assist the Trade and Development Board. These include

i. the committee on commodities

ii. the committee on manufacture
iii. the committee on shipping and
iv. the committee on invisible items and financing related to trade.

Generally, these committees meet once a year. However, special sessions of committees can be
convened to transact matters of urgent nature. All the members of the United Nations are entitled
to become the member of the UNCTAD.

A special committee on preferences furnishes reports from time to time for the conference to be
held.

Basic Principles of UNCTAD

The first conference held in 1964 laid down UNCTAD’s action programme and priorities. The
various recommendations are based on the following principles:

1. Every country has the supreme right to freely dispose of its natural resources for the sake of its
economic development. It can freely trade with other countries.

2. Principles of sovereign equality of states, self determination of people and non-interference in

the internal affairs are the principles which guide trade and economic relations between
countries; and
3. There shall be no discrimination on the basis of differences in socioeconomic systems. The
adoption of various trading methods and policies shall be consistent with this principle.

Functions of UNCTAD

UN General Assembly has laid down certain essential functions of UNCTAD. Accordingly, it
shall promote accelerated development of the less developed regions of the world by dealing
properly with the problem of slow expansion of exports confronting the less developed countries.
The other important functions of UNCTAD are as follows:

1. To promote international trade between the developed and underdeveloped countries with a
view to accelerating economic development, special emphasis should be laid upon the
accelerated development of the underdeveloped countries.

2. To formulate the principles and policies on International trade.

3. To negotiate multinational trade agreements.

4. To make proposals for implementing its principles and policies.

5. To promote research and support negotiations for commodity agreements, technical

elaboration of new trade activities designed to assist in the areas of trade and capital for
developing countries.

6. To generally review and coordinate the activities of other institutions within the fold of United
Nations relating to international trade and economic development.

7. To act as a centre for harmonious trade related policies of governments and regional economic
groupings in pursuance of Article 7 of the Charter of the United Nations.

Achievements of UNCTAD
The achievements of UNCTAD may be discussed under the headings:
 i. tariff reclassification
ii. integrated programme on commodities
iii. reducing debt burden
iv. commodity development facility.
v. 1. Tariff reclassification: UNCTAD worked for the development of trade by
reclassifying the tariff structure. In consultation with the customs cooperation council, it
conducted several technical studies for the purpose of developing nations. Products of
developing countries were grouped to attract favorable tariff rates. It has also instructed
the Embassies to classify the products correctly so that the developing nations would
enjoy concession in the matter of tariff.
vi. 2. Integrated Programme on Commodities: Wide fluctuations in the prices of primary
products being exported by developing countries cause hardship to them. Foreign
exchange earnings from the export of primary products become uncertain. To stabilize
the prices of primary products, UNCTAD suggested creation of buffer stock. A common
fund to stabilize the prices of primary products was created under a programme called
integrated programme on commodities. The initial contribution to the fund is 750 million
dollars.
vii. 3. Reducing debt burden: UNCTAD reduced the debt burden of developing countries.
Large amount of loans are obtained by underdeveloped countries from bilateral and
multilateral sources. As a result, the debt servicing burden (repayment of loan
installments and interest thereon) increased for the underdeveloped countries. The debt
servicing burden accounted for a considerable proportion of foreign exchange earnings.
In some cases, the whole amount of earnings earned from exports had to be spent on debt
servicing. UNCTAD persuaded the creditors in the developed countries to write-off a part
of the debts accumulated. Some of the developed countries agreed to the proposal and
reduced the debt burden of underdeveloped countries.

4. Commodity development facility: Commodity development facility is popularly is known as

second window of the integrated programme on commodities. UNCTAD conference held in May
1979 at Manila strengthened this scheme. Several developing countries contributed to the
creation of commodity development facility. The developing countries benefited very much in
terms of processing, marketing skills, product adaptation and infrastructure facilities.

International Monetary Fund (IMF)

The formation of the IMF was initiated in 1944 at the Bretton Woods Conference. IMF came
into operation on 27th December 1945 and is today an international organization that consists of
189 member countries. Headquartered in Washington, D.C., IMF focuses on fostering global
monetary cooperation, securing financial stability, facilitating and promoting international trade,
employment, and economic growth around the world. The IMF is a specialized agency of
the United Nations.

Formation of IMF

The breakdown of international monetary cooperation during the Great Depression led to the
development of the IMF, which aimed at improving economic growth and reducing poverty
around the world. The International Monetary Fund (IMF) was initially formed at the Bretton
Woods Conference in 1944. 45 government representatives were present at the Conference to
discuss a framework for postwar international economic cooperation.

The IMF became operational on 27th December 1945 with 29 member countries that agreed to
bound to this treaty. It began its financial operations on 1st March 1947. Currently, the IMF
consists of 189 member countries.

The IMF is regarded as a key organisation in the international economic system which focuses
on rebuilding the international capital along with maximizing the national economic sovereignty
and human welfare.

Organizational Structure of International Monetary Fund (IMF)

The United Nations is the parent organization that handles the proper functioning and
administration of the IMF. The IMF is headed by a Managing Director who is elected by the
Executive Board for a 5-year term of office. The International Monetary Fund (IMF) consists of
the Board of Governors, Ministerial Committees, and the Executive Board.

To know more about the organizational structure of IMF, refer to the table below:

Structure of the International Monetary Fund (IMF)

Governing Bodies of IMF Roles and Responsibilities

Board of Governors  Each governor of the Board of Governors is appointed by

 his/her respective member country.
 Elects or appoints executive directors to the Executive
Board.
 Board of Governors is advised by the International
Monetary and Financial Committee (IMFC) and the
Development Committee.
 An annual meet up between the Board of Governors and the
World Bank Group is conducted during the IMF–World
Bank Annual Meetings to discuss the work of their
respective institutions.

Ministerial Committees  It manages the international monetary and financial system.

 Amendment of the Articles of Agreement.
1. International Monetary and
 To solve the issues in the developing countries that are
Financial Committee
related to economic development.
(IMFC)
2. Development Committee

Executive Board  It is a 24-member board that discusses all the aspects of the
Funds.
 The Board normally makes decisions based on consensus,
but sometimes formal votes are taken.

Objectives of the IMF

IMF was developed as an initiative to promote international monetary cooperation, enable

international trade, achieve financial stability, stimulate high employment, diminish poverty in
the world, and sustain economic growth. Initially, there were 29 countries with a goal of redoing
the global payment system. Today, the organization has 189 members. The main objectives of
the International Monetary Fund (IMF) are mentioned below:

1. To improve and promote global monetary cooperation of the world.

2. To secure financial stability by eliminating or minimizing the exchange rate stability.
3. To facilitate a balanced international trade.
4. To promote high employment through economic assistance and sustainable economic
growth.
5. To reduce poverty around the world.
What are the functions of the IMF?

IMF mainly focuses on supervising the international monetary system along with providing
credits to the member countries. The functions of the International Monetary Fund can be
categorized into three types:

1. Regulatory functions: IMF functions as a regulatory body and as per the rules of the
Articles of Agreement, it also focuses on administering a code of conduct for exchange
rate policies and restrictions on payments for current account transactions.
2. Financial functions: IMF provides financial support and resources to the member
countries to meet short term and medium term Balance of Payments (BOP)
disequilibrium.
3. Consultative functions: IMF is a centre for international cooperation for the member
countries. It also acts as a source of counsel and technical assistance.

Role of IMF
The International Monetary Fund is a global organisation founded in 1944 in the post-war
economic settlement which included the Bretton-Woods system of managed exchange rates.
J.M.Keynes and Harry Dexter White both played an important role in its development.

Its primary aim is to help stabilise exchange rates and provide loans to countries in need. Nearly
all members of the United Nations are members of the IMF with a few exceptions such as Cuba,
Lichtenstein and Andorra.

 The IMF is independent of the World Bank although both are United Nations agencies
and both are aiming to increase living standards. The World Bank concentrates on long-
term loans to developing countries.
Functions of IMF

1. International monetary cooperation.

2. Promote exchange rate stability.
3. To help deal with balance of payments adjustment
4. Help deal with economic crisis by providing international coordination – loans, plus
advice.
What the IMF does in practice

1. Economic surveillance and monitoring. IMF produces reports on member countries

economies and suggests areas of weakness / possible danger (e.g. unbalanced economies with
large current account deficit/excess debt levels.. The idea is to work on crisis prevention by
highlighting areas of economic imbalance. A list of IMF reports on member countries are
available at IMF Countries
2. Loans to countries with a financial crisis. The IMF has $300 billion of loanable funds. This
comes from member countries who deposit a certain amount on joining. In times of
financial/economic crisis, the IMF may be willing to make available loans as part of a financial
readjustment.
 The IMF has arranged more than $180 billion in bailout packages since 1997.
 In 1976, the IMF gave a loan to the UK as the Pound Sterling was coming under
pressure. The loan came with conditions to reduce the budget deficit and raise interest
rates to defend the value of the Pound. See: IMF Loan to UK 1976.
 In 2010/11 the IMF played a major role in the bailout to the Greek economy, which
involved a total loan of up to $110 billion.
3. Conditional loans/structural adjustment. When giving loans, the IMF usually insist on
certain criteria being met. These can include policies to reduce inflation (tightening of monetary
policy)
 Reduce inflation (tightening of monetary policy)
 Deficit-reducing policies (higher tax)
 Supply-side policies, such as privatisation, deregulation and improved tax collection.
 Removing price controls
 Free trade – removing tariff barriers
 Devaluation of currency to reduce current account deficit.
 See also: Washington Consensus
4. Technical assistance and economic training. The IMF produce many reports and
publications. They can also offer support for local economies. More on technical assistance of
IM
How is the IMF Financed?

The IMF is financed by member countries who contribute funds on joining. They can also
increase this throughout their membership. The IMF can also ask its member countries for more
money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion
last year, sourced from contributions from its 183 members.This initial amount depends on the
size of the countries economy. E.g. the US deposited the largest amount with the IMF. The US
currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The
UK has 4% of IMF Voting rights. Loans at a discounted rate are also available to developing
countries to ‘deal with poverty reduction.’

Special Drawing Rights SDR

The IMF uses Special drawing rights to provide a unit for the amount of foreign currency
member states can draw on. SDRs are defined in terms of a basket of major currencies including
Euro, Pound Sterling, Japanese yen and US Dollar.
 IBRD stands for International Bank for Reconstruction and Development and it is a multilateral
financial agency that provides lending to emerging economies with middle incomes. The IBRD
is the first of the World Bank Group’s five-member organisations, with headquarters in
Washington, D.C., USA.

 It was founded in 1944 with the purpose of supporting the rebuilding of Europe’s ravaged
countries following World War II
 Since the IBRD and its subsidised lending hand, the IDA, share the same management and
personnel, they are collectively referred to as the World Bank
 After Europe’s reconstruction, the Bank’s mission was enlarged to include furthering global
economic growth and alleviating poverty
 The IBRD offers sovereign governments commercial-grade or subsidised finance for
programmes aimed at improving transit and construction, education, social policy, environmental
protection, power expenditures, health, access to food and potable water, and good sanitation
 Participants at the Bretton Woods Conference founded the International Bank for Reconstruction
and Development (IBRD) and the International Monetary Fund (IMF) in 1944, and they began
functioning in 1946

Purpose of IBRD

Even though one of the Bank’s initial missions was to aid in the smooth transition from wartime
to peacetime countries, economic growth quickly had become the Bank’s primary goal.

The World Bank’s current mission is to support economic and social development that favours
the disadvantaged in emerging countries. Loans are granted to developing countries to aid in
alleviating poverty and to fund activities that promote economic progress.

Roads, power plants, schools, and irrigation networks, as well as agricultural extension, training
of teachers, and health improvement for children and pregnant women, are among the
expenditures. Some credit facilities are used to help countries restructure their economic
structures in an effort to assist them to be more sustainable and productive.

Primary Functions of IBRD

 Human and social development over a long period of time
 Reform programmes in developing different countries’ policies and institutions
 For these low- and middle-income countries, it establishes an industry ecosystem and improves
financial access to markets

Other Functions of IBRD

 Assists long-term individual and social growth that is not funded by private lenders
 Maintains debtors’ economic resilience by giving assistance during times of crisis, when the poor
are most vulnerable
 Encourages policy and institutional changes (such as safety net or anti-corruption reforms)
 Provides a positive investment atmosphere to encourage private capital investment
 Accessibility to capital markets is facilitated, frequently at more reasonable terms than
stakeholders can obtain on their own
 Accessibility to capital markets is facilitated, frequently at more reasonable terms than
stakeholders can obtain on their own
 The capital reserves and receivables form the resources of IBRD

Finance of IBRD

 Just like other banks function, floating bonds in global financial markets
 To be precise, in these economies, the IBRD is generally recognized as a World Bank. Member
states of IBRD contribute roughly $14 billion in total in ratio to respective IMF allocation
 Since 1959, the bank has retained a triple-A rating
 Its excellent credit rating lets it acquire funds at cheap interest rates and provide funding to
developing countries with middle income on more favourable conditions also with long-term
bonds
 The International Bank for Reconstruction and Development (IBRD) earns money each year
from the receivables on its capital and the little margins it earns on loans
 The funds so earned are spent in the IBRD’s operations, flows into resources to bolster the
financial statement, and makes a yearly transmission of assets to IDA, the International
Development Association’s development fund for the still to prosper states of the world

The Journey of IBRD so far

Post-World War II, the International Bank for Reconstruction and Development expanded its
mission to also include promoting economic expansion and social equity. The IBRD now
 concentrates its activities on intermediate-income nations. Middle-income countries are defined
as those with annual per capita incomes ranging from $1,026 to $12,375. This and many other
data are adjusted by the IBRD every year to factor in inflation, financial shifts inside
intermediate-income states, and other variables.

Quickly developing economies, such as those in Indonesia, Thailand, and India, attract a bunch
of international investment and huge infrastructure construction projects. Around the same time,
intermediate-income countries are host to 70 percent of the world’s deprived, owing to the
disproportionate distribution of the benefits of industrial growth.

The International Bank for Reconstruction and Development’s mission is to assist such
countries’ governments in navigating the road to economic wealth by providing funding and
fiscal policy guidance. This will frequently assist governments in financing public works projects
that increase a nation’s economic viability while also assisting administrations in managing state
finances and cultivating investor sentiment.

History of IBRD

In the course of the Bretton Woods Conference in 1944, a meeting of the 44 Allied Countries of
World War II aimed at establishing the post-war world’s economic order, the IBRD was
established in preparation for World War II’s end. The Bretton Woods Agreement was also the
birthplace of the International Monetary Fund and the International Bank for Reconstruction and
Development.

IBRD’s first credit was granted to the French state to facilitate financing the renovation of
essential infrastructure. The IBRD moved its priority after the rebuilding of Europe to encourage
economic growth in other regions of the globe.

IBRD and India

 India remains the World Bank’s largest borrower, which constitutes IBRD and IDA
 India is a founding partner of the IBRD. World Bank aid to India began in 1948 with the
approval of money for the Agriculture Equipment Project
 The Board of Directors of IBRD each has an Executive Director from India. India’s Executive
Director leads a group that includes India, Bangladesh, Bhutan, and Sri Lanka
 Expressways, electricity, urban infrastructure (including water supply and sanitation), emergency
management, banking sectors, and rural financial projects have been the main areas of IBRD aid
 The International Bank for Reconstruction and Development (IBRD), commonly referred

to as the World Bank, is an international financial institution whose purposes include

assisting the development of its member nation’s territories, promoting and

supplementing private foreign investment and promoting long-range balance growth in

international trade.

 ADVERTISEMENTS:

 The World Bank was established in December 1945 at the United Nations Monetary and

Financial Conference in Bretton Woods, New Hampshire. It opened for business in June

1946 and helped in the reconstruction of nations devastated by World War II. Since

1960s the World Bank has shifted its focus from the advanced industrialized nations to

developing third-world countries.

 Organization and Structure:

 The organization of the bank consists of the Board of Governors, the Board of Executive

Directors and the Advisory Committee, the Loan Committee and the president and other

staff members. All the powers of the bank are vested in the Board of Governors which is

the supreme policy making body of the bank.

 The board consists of one Governor and one Alternative Governor appointed for five

years by each member country. Each Governor has the voting power which is related to

the financial contribution of the Government which he represents.

 ADVERTISEMENTS:

 The Board of Executive Directors consists of 21 members, 6 of them are appointed by the

six largest shareholders, namely the USA, the UK, West Germany, France, Japan and

India. The rest of the 15 members are elected by the remaining countries.

 Each Executive Director holds voting power in proportion to the shares held by his

Government. The board of Executive Directors meets regularly once a month to carry on

the routine working of the bank.

 The president of the bank is pointed by the Board of Executive Directors. He is the Chief

Executive of the Bank and he is responsible for the conduct of the day-to-day business of

the bank. The Advisory committees appointed by the Board of Directors.

 It consists of 7 members who are expects in different branches of banking. There is also

another body known as the Loan Committee. This committee is consulted by the bank

before any loan is extended to a member country.

 Capital Resources of World Bank:

 The initial authorized capital of the World Bank was $ 10,000 million, which was divided

in 1 lakh shares of $ 1 lakh each. The authorized capital of the Bank has been increased

from time to time with the approval of member countries.

 ADVERTISEMENTS:

 On June 30, 1996, the authorized capital of the Bank was $ 188 billion out of which $

180.6 billion (96% of total authorized capital) was issued to member countries in the

form of shares.

 Member countries repay the share amount to the World Bank in the following

ways:

 1. 2% of allotted share are repaid in gold, US dollar or Special Drawing Rights (SDR).

 ADVERTISEMENTS:

 2. Every member country is free to repay 18% of its capital share in its own currency.

 3. The remaining 80% share deposited by the member country only on demand by the

World Bank.
 Objectives:

 The following objectives are assigned by the World Bank:

 1. To provide long-run capital to member countries for economic reconstruction and

development.

 ADVERTISEMENTS:
 2. To induce long-run capital investment for assuring Balance of Payments (BoP)

equilibrium and balanced development of international trade.

 3. To provide guarantee for loans granted to small and large units and other projects of

member countries.

 4. To ensure the implementation of development projects so as to bring about a smooth

transference from a war-time to peace economy.

 5. To promote capital investment in member countries by the following ways;

 ADVERTISEMENTS:

 (a) To provide guarantee on private loans or capital investment.

 (b) If private capital is not available even after providing guarantee, then IBRD provides

loans for productive activities on considerate conditions.

 Functions:

 World Bank is playing main role of providing loans for development works to member

countries, especially to underdeveloped countries. The World Bank provides long-term

loans for various development projects of 5 to 20 years duration.

 The main functions can be explained with the help of the following points:

 ADVERTISEMENTS:

 1. World Bank provides various technical services to the member countries. For this

purpose, the Bank has established “The Economic Development Institute” and a Staff

College in Washington.

 2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.

 3. The quantities of loans, interest rate and terms and conditions are determined by the

Bank itself.

 4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the

member country.

 5. The debtor nation has to repay either in reserve currencies or in the currency in which

the loan was sanctioned.

  6. Bank also provides loan to private investors belonging to member countries on its own

guarantee, but for this loan private investors have to seek prior permission from those

counties where this amount will be collected.

What is WTO?

The World Trade Organisation or the WTO is the only such global international entity that deals
with the rules and regulations related to international trade between different countries. Such
regulations and obligations only cover countries that hold membership to the World Trade
Organisation. The functioning of the WTO is based on negotiated and signed WTO agreements
between member countries. It has to be kept in mind that the WTO agreements will have to be
ratified by the parliaments of the member countries.

In Which Year Was WTO Established?

The World Trade Organisation was established on January 1, 1995, following the Marrakesh
Agreement which was ratified on April 15, 1994. The General Agreement on Tariff and Trade
was substituted by the Marrakesh Agreement.

Objectives of WTO
The six key objectives of the World Trade Organization have been discussed below.
1. Establishing and Enforcing Rules for International Trade
The international trading rules by the World Trade Organisation are established under
three separate agreements – rules relating to the international trade in goods; the
agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the
General Agreement on Trade in Services (GATS).
The enforcement of rules by the WTO takes place by way of a multilateral system of
disputes settlement in the instances of violation of trade rules by member countries. The
members are obligated under ratified agreements to honor and abide by the procedures
and judgments.
2. Acting As A Global Apex Forum
World Trade organization is the global forum for monitoring and negotiating further trade
liberalization. The premise of trade liberalization measures undertaken by WTO is based
on the benefits of member countries to optimally utilize the position of comparative
advantage due to a free and fair trade regime.
3. Resolution Of Trade Disputes
Trade disputes, before the WTO, usually arise out of deviation from agreements between
member countries. The resolution of such trade disputes does not take place unilaterally
but through a multilateral system involving set rules and procedures before the dispute
settlement body.
 4. Increasing Transparency in The Decision-Making Process
The World Trade Organisation attempts to increase transparency in the decision-making
process by way of more participation in the decision-making and consensus rule, in
particular. The combined effect of such measures helps to develop institutional
transparency.
5. Collaboration Between International Economic Institutions
The global economic institutions include the World Trade Organisation, the International
Monetary Fund, the United Nations Conference on Trade and Development, and the
World Bank.
With the advent of globalization, close cooperation has become necessary between
multilateral institutions. These institutions are functional in the sector of formulation and
implementation of a global economic policy framework. In the absence of regular
consultation and mutual cooperation, policymaking may be disrupted.
6. Safeguarding The Trading Interest of Developing Countries
Stringent regulations are implemented by the WTO to protect the trading interests of
developing countries. It supports such member countries to leverage the capacity for
carrying out the mandates of the organization, managing disputes, and implementing
relevant technical standards.

Features of WTO
The major features of the World Trade Organization are –
 The scope of WTO is far more expensive than the erstwhile General Agreement on Trade
and Tariff. For instance, GATT solely focused on goods while excluding textiles and
agriculture. On the other hand, WTO covers all goods, services, and investment policies
along with intellectual property.
 WTO Secretariat has formalized and bolstered the mechanisms for the review of policies
as well as the settlement of disputes. This aspect has become crucial due to the
proliferation of member countries and more goods and services being covered by the
WTO. Another important consideration in this regard is the substantial increase in open
access to different international markets.
 There are rules implemented for the protection of small and weak countries against the
discriminatory trade practices of developed countries.
 National Treatment articles and Most Favored Nation (MFN) clause permits equal access
to markets for just treatment of both domestic and foreign suppliers.
 Each member country of the WTO carries a single voting right and all members enjoy
privilege on the global scale.
 The WTO agreements encompass all the member states and act as a common forum of
deliberation for the members.

Roles and Functions of WTO

The broad reach of WTO and its functions have been mentioned below.
 Implementation of Rules for Review of Trade Policy
 The international rules of trade provide stability and assurance and lead to a general
consensus among member countries. The policies are reviewed to ensure that even with
the ever-changing trading scenarios, the multilateral trading system thrives. It also helps
in the facilitation of a transparent and stable framework for conducting business.
 Forum for Member Countries Discuss Future Strategies
The WTO, as a forum, allows for trade negotiations in the multilateral trading system. In
the absence of trade negotiations, growth may stunt, and issues related to tariff and
dumping may go unaddressed. Further liberalization of trade is also subject to consistent
trade negotiations.
 Implementing and Administering Bilateral and Multilateral Trade Agreements
The bilateral or multilateral trade agreements have to be necessarily ratified by the
parliaments of respective member countries. Unless such ratification comes through, the
non-discriminatory trading system cannot be put into practice. The executed agreements
will ensure that every member is guaranteed to be treated fairly in other members’
markets.
 Trade Dispute Settlement
The dispute settlement by the WTO is concerned with the resolution of trade disputes.
Independent experts of the tribunal interpret the agreements and give out judgment
mentioning the due commitments of the concerned member states. It is encouraged to
settle the disputes by way of consultation among the members as well.
 Optimal Utilization of the World's Resources
Resources across the world can be further optimally utilized by harnessing the trade
capacities of the developing economies. It requires special provisions in the WTO
agreements for the least-developed economies. Such measures may include providing
greater trading opportunities, longer duration to implement commitments, and also
support to build the sue infrastructure.