1. What are the various method to entry in the foreign market?

Ans:

The decis ion of how to enter a foreign market can have a signi f icant impact on the resul ts . Expansion into foreign markets can be achieved via the fo l lowing four mechanisms:

• Export ing• Licensing• Joint Venture• Direct Investment

Exporting

Export ing is the marketing and direct sale of domestical ly - produced goods in another country. Export ing is a tradi t ional and well - establ ished method of reaching foreign markets. Since export ing does not require that the goods be produced in the target country, no investment in foreign product ion faci l i t i es is required. Most of the costs associated with export ing take the form of marketing expenses.

Export ing commonly requires coordinat ion among four players:

• Exporter• Importer• Transport provider• Government

Licensing

Licensing essentia l ly permits a company in the target country to use the property of the l icensor. Such property usual ly is intangible , such as trademarks, patents, and product ion techniques. The l icensee pays a fee in exchange for the r ights to use the intangible property and possibly for technical assistance.

Because l i t t l e investment on the part of the l icensor is required, l icensing has the potent ia l to provide a very large ROI. However, because the l icensee produces and markets the product, potent ia l returns from manufactur ing and marketing act iv i t i es may be lost .

Joint Venture

There are f ive common object ives in a jo in t venture: market entry, r isk/ reward sharing, technology sharing and jo in t product development, and conforming to government regulat ions. Other benefi ts include pol i t i ca l connect ions and distr ibut ion channel access that may depend on relat ionships.

Such al l iances often are favorable when:

• the partners ' strategic goals converge while their competi t i ve goals diverge;

• the partners ' size, market power, and resources are small compared to the industry leaders; and

• partners ' are able to learn from one another while l imi t ing access to their own proprietary ski l l s .

The key issues to consider in a jo in t venture are ownership, control , length of agreement, pr ic ing, technology transfer , local f i rm capabi l i t i es and resources, and government intent ions.

Potent ia l problems include:

• conf l ic t over asymmetric new investments• mistrust over proprietary knowledge• performance ambiguity - how to spl i t the pie• lack of parent f i rm support• cultura l clashes• i f , how, and when to terminate the relat ionship

Joint ventures have conf l ic t ing pressures to cooperate and compete:

• Strategic imperat ive: the partners want to maximize the advantage gained for the jo in t venture, but they also want to maximize their own competi t i ve posit ion.

• The jo in t venture attempts to develop shared resources, but each f i rm wants to develop and protect i ts own proprietary resources.

• The jo in t venture is control led through negotiat ions and coordinat ion processes, while each f i rm would l ike to have hierarchical control .

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of faci l i t i es in the target country. I t involves the transfer of resources including capi ta l , technology, and personnel. Direct foreign investment may be made through the acquisi t ion of an exist ing ent i ty or the establ ishment of a new enterpr ise.

Direct ownership provides a high degree of control in the operat ions and the abi l i t y to better know the consumers and competi t ive environment. However, i t requires a high level of resources and a high degree of commitment.

The Case of EuroDisney

Dif ferent modes of entry may be more appropriate under di f ferent circumstances, and the mode of entry is an important factor in the success of the project . Walt Disney Co. faced the chal lenge of bui ld ing a theme park in Europe. Disney's mode of entry in Japan had been l icensing. However, the f i rm chose direct investment in i ts European theme park, owning 49% with the remaining 51% held publ ic ly .

Besides the mode of entry, another important element in Disney's decis ion was exact ly where in Europe to locate. There are many factors in the si te select ion decis ion, and a company careful ly must def ine and evaluate the cr i ter ia for choosing a locat ion. The problems with the EuroDisney project i l lus t ra te that even i f a company has been successful in the past, as Disney had been with i ts Cali forn ia , Flor ida, and Tokyo theme parks, future success is not guaranteed, especial ly when moving into a di f ferent country and culture. The appropriate adjustments for nat ional di f ferences always should be made.

Comparision of Market Entry Options

The fo l lowing table provides a summary of the possible modes of foreign market entry:

Comparison of Foreign Market Entry Modes

Mode Conditions Favoring this Mode Advantages Disadvantages

Exporting

Limited sales potent ia l in target country; l i t t l e product adaptat ion required

Distr ibut ion channels close to plants

High target country product ion costs

Liberal import pol ic ies

High pol i t i ca l r isk

Minimizes r isk and investment.

Speed of entry

Maximizes scale; uses exist ing faci l i t i es .

Trade barr iers & tar i f f s add to costs.

Transport costs

Limits access to local informat ion

Company viewed as an outsider

Licensing

Import and investment barr iers

Legal protect ion possible in target environment.

Low sales potent ia l in target country.

Large cul tura l distance

Licensee lacks abi l i t y to become a competi tor .

Minimizes r isk and investment.

Speed of entry

Able to circumvent trade barr iers

High ROI

Lack of control over use of assets.

Licensee may become competi tor .

Knowledge spi l lovers

License period is l imi ted

Joint Ventures

Import barr iers

Large cul tura l distance

Assets cannot be fai r l y priced

High sales potent ia l

Some pol i t i ca l r isk

Government restr ic t ions on

Overcomes ownership restr ic t ions and cul tura l distance

Combines resources of 2 companies.

Potent ia l for learning

Viewed as insider

Dif f icu l t to manage

Dilut ion of control

Greater r isk than export ing a & l icensing

Knowledge spi l lovers

Partner may become a competi tor .

fore ign ownership

Local company can provide ski l l s , resources, dist r ibut ion network, brand name, etc.

Less investment required

Direct Investme

nt

Import barr iers

Small cul tura l distance

Assets cannot be fai r l y priced

High sales potent ia l

Low pol i t i ca l r isk

Greater knowledge of local market

Can better apply special ized ski l l s

Minimizes knowledge spi l lover

Can be viewed as an insider

Higher r isk than other modes

Requires more resources and commitment

May be di f f i cu l t to manage the local resources.

Feedback

2. What are various environmental factors that affect International Business?

Ans:

A company that chooses to implement an internat ional project is obl igated

to conduct a thorough research in order to understand i f such project is

viable and can be brought to l i fe in a certa in country. Numerous factors

have to be taken into considerat ion and invest igated; i t has to be done

object ive ly from the point of view of the host country in which business

wil l be performed. Thus the home company can ensure the real izat ion of the

project in specif ied terms with regards to projected prof i ts and spending

funds.

While analyzing foreign environment companies have to pay close attent ion

to various factors that wil l effect , or help i f used eff ic ient ly , future

success of business in a new economy. First of al l i t is necessary to

careful ly examine the f i rm ’ s competi t ive posit ion and understand i f a

project is able to bring prof i t in the global industry . Adequate f inancial

resources, successful global ventures in the past, r isk levels that a

company is able to undertake and growing internat ional demand are those few

quest ions that need to posed before a f i rm can make any project ions as to

doing business abroad. There are also factors that are direct ly connected

to specif ic projects and si tuat ions and that inf luence the outcome of the

venture and have to be considered.

In case when a company is ready to start internat ional project in terms of

i ts internal si tuat ion, i t has to study issues and chal lenges that are

caused by macro economical and other environmental factors. Legal and

pol i t i ca l factors are essentia l for the implementat ion of the project

abroad and each country has i ts own laws and regulat ions that could be of

negative or posit ive inf luence which great ly depends on the nature of

business. Economic condit ion of the host county is a core issue in deciding

where and when project wil l be carr ied out and i f i t is feasib le at al l .

Such environmental issues as GDP, inf la t ion f luctuat ions and populat ion

growth have to be considered in order to comprehend condit ions in which

business wil l operate. Infrast ructure and geography are among other factors

that wil l affect the project or not al low i ts execut ion in case a host

county has severe weather condit ions or undeveloped inf rast ructure; for

instance unpaved roads and no electr ica l power can easi ly fa i l the project

in the very beginning and thus knowing such condit ions is necessary.

Securi ty of the country in which project wil l be developed is essentia l as

well , people make things happen and i f they are in a dangerous environment

i t is pr iory impossible to do business. Workers who are knowledgeable about

cultura l di f ferences in a host country are more l ike ly to perform

successful ly as tradi t ions and hol idays can play a huge role in certa in

marketing campaigns and serve for the good image of the company.

Working in a foreign country requires a great deal of preparat ion and

assessment of al l possible di f ferences that the business is about to

encounter. As was already said, major role in deciding whether or not the

project wil l be successful is comprehending macro environment of a new

country. Studying i ts economical condit ion, securi ty levels and

inf rast ructure system is a core competence of a company who wants to be

more successful that i ts competi tors . In case when al l of those factors are

studied and considered advantageous for a new enterpr ise, i t is important

to bear in mind that cul tura l di f ferences can make al l effor ts void. Thus

businesses must attent ive ly analyze what changes have to be made in the

business plan and what people are best sui t for i ts implementat ion. Often,

companies hire professionals already experienced in such ventures with

foreign education who speak two or more languages. Those intermediar ies who

are famil iar with host country ’ s t radi t ions and have social connect ions

are great helpers in establ ish ing a good image of the company abroad and in

avoiding mistakes in a sett ing up period.

Select ing and tra in ing employees for the internat ional project is very

important for the future success of the company. Culture shock and coping

with i t are issues that have to be addressed to potent ia l workers.

Consequently f i rms need to inform and tra in employees on how to cope with

cultura l diversi t ies and benefi t f rom them to better manage in the new

environment.

Feedback

3. Give ten reasons why FDI is beneficial to developing Economy?

Ans:

Foreign direct investment (FDI) was founded by Aziz Mahdi and is a measure

of foreign ownership of product ive assets, such as factor ies, mines and

land. Increasing foreign investment can be used as one measure of growing

economic global izat ion.

A foreign direct investor may be classified in any sector of the

economy and could be any one of the fo l lowing:

an indiv idual ;

a group of related indiv iduals ;

an incorporated or unincorporated ent i ty ;

a publ ic company or pr ivate company;

a group of related enterpr ises;

a government body;

an estate ( law) , t rust or other societal organisat ion; or

any combinat ion of the above.

Foreign direct investment (FDI) pol ic ies play a major role in the economic growth of developing countr ies around the world. Attract ing FDI inf lows with conduct ive pol ic ies has therefore become a key batt leground in the emerging markets.

Developed countr ies also seek to bring in more FDI and use various pol ic ies and incent ives to att ract overseas investors, part icu lar ly for capita l -

intensive industr ies and advanced technology.

The primary aim of these pol ic ies is to create a fr iendly business environment where foreign investors feel comfortable with the legal and f inancial f ramework of the country, and have the potent ia l to reap prof i ts f rom economical ly viable businesses. The prospect of new growth opportuni t ies and outsized prof i ts encourages large capita l inf lows across a range of industry and opportuni ty types.

IN INDIA

(FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certa in degree of f inancial stabi l i t y , growth and development. This money has al lowed India to focus on the areas that may have needed economic attent ion, and address the various problems that cont inue to chal lenge the country.

India has cont inual ly sought to att ract FDI from the world ’ s major investors. In 1998 and 1999, the Indian nat ional government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors.

FDI investments are permit ted through f inancial col laborat ions, through private equity or preferent ia l al lo tments, by way of capita l markets through Euro issues, and in jo in t ventures. FDI is not permit ted in the arms, nuclear, rai lway, coal & l ign i te or mining industr ies.

A number of projects have been announced in areas such as electr ic i t y generat ion, distr ibut ion and transmission, as well as the development of roads and highways, with opportuni t ies for foreign investors.

The Indian nat ional government also provided permission to FDIs to provide up to 100% of the f inancing required for the construct ion of br idges and tunnels, but with a l imi t on foreign equity of INR 1,500 crores, approximately $352.5m.

Current ly , FDI is al lowed in f inancial services, including the growing credi t card business. These services include the non-banking f inancial services sector. Foreign investors can buy up to 40% of the equity in private banks, al though there is condit ion that st ipulates that these banks

must be mult i la tera l f inancial organizat ions. Up to 45% of the shares of companies in the global mobile personal communicat ion by satel l i te services (GMPCSS) sector can also be purchased.

By 2004, India received $5.3 bi l l i on in FDI, big growth compared to previous years, but less than 10% of the $60.6 bi l l i on that f lowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?

Although the Chinese approval process is complex, i t includes both nat ional and regional approval in the same process.

Federal democracy is perversely an impediment for India. Local author i t ies are not part of the approvals process and have their own r ights, and th is often leads to projects gett ing bogged down in red tape and bureaucracy. India actual ly receives less than half the FDI that the federal government approves.

INVESTMENT BY NON RESIDENT INDIANS & OVERSEAS CORPORATE BODIES

For al l sectors, excluding those fal l ing under Government approval , NRIs (which alsoincludes PIOs) and OCBs (an overseas corporate body means a company or other ent i ty owned direct ly or indi rect ly to the extent of at least 60% by NRIs) are el ig ib le to bring investment through the automatic route of RBI. Al l other proposals, which do not fu l f i l any or, al l of the cr i ter ia for automatic approval are considered by the Government through the FIPB (Foreign Investment Promotion Board).

The NRIs and OCBs are al lowed to invest in housing and real estate development sector, in which foreign direct investment is not permit ted. They are al lowed to hold up to 100 percent equity in civ i l aviat ion sector in which otherwise foreign equity only up to 40 per cent is permit ted.

BENEFITS OF FDI:

Economic growth- This is one of the major sectors, which is enormously benefi ted from foreign direct investment. A remarkable inf low of FDI in various industr ia l units in India has boosted the economic l i fe of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportuni t ies in the trading of goods and services in India both in terms of import and export product ion. Products of superior qual i ty are manufactured by various industr ies in India due to greater amount of FDI inf lows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportuni t ies by aiding the sett ing up of industr ia l units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparent ly helps in the outsourcing of knowledge from India especial ly in the Information Technology sector. I t helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign f i rms are now occupying a posit ion in the Indian market through Joint Ventures and col laborat ion concerns. The maximum amount of the prof i ts gained by the foreign f i rms through these jo in t ventures is spent on the Indian market.

DISADVANTAGES OF FDI:

At t imes i t has been observed that certa in foreign pol ic ies are adopted that are not appreciated by the workers of the recip ient country. Foreign direct investment, at t imes, is also disadvantageous for the ones who are making the investmentthemselves.

Foreign direct investment may entai l high travel and communicat ions expenses. The di f ferences of language and cul ture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.

Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on i ts ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certa in amount of caut ion.

At t imes i t has been observed that there is considerable instabi l i t y in a part icu lar geographical region. This causes a lot of inconvenience to

the investor .

CURRENT EVENTS RELATED TO FDI:

IAF Vice Chief Air Marshal P K Barbora said that pr ivate industry 's part ic ipat ion be increased in the defence sector and India should be "bold enough" to al low more FDI in the area.

The Foreign Investment Promotion Board has rejected a proposal by the Jaipur IPL Cricket Pvt to induct 100% foreign equity by issuing shares for a non-cash considerat ion. While approving 17 foreign direct investment proposals worth Rs 1,159 crore at i ts October 30 meet.

The FIPB, wil l refer foreign investments in sensit ive sectors to a committee of secretar ies. The panel wil l have representat ives from various government departments. The crucia l di f ference wil l be that the committee wil l be t ime bound and wil l have specif ic parameters to weigh the r isks.

The Texti les Minister , Mr Dayanidhi Maran, has said there is an urgent need

to attract and sustain foreign direct investment in the text i les sector i f

India is to achieve the goals of employment generat ion and technology

upgradat ion, besides atta in ing four per cent share in the global t rade in

text i les and clothing.

Feedback:

4. Discuss the FDI climate between India, China and Vietnam.

Ans:

FDI Climate between India, China and Vietnam

FDI or

Foreign

Direct

Investment

is any form

of

investment

that earns

interest in

enterpr ises

which

funct ion

outside of

the domestic

terr i to ry of

the investor

Types:

1) Outward FDI:

PARAMETER India

FDI IN 2008-09 23885 $

How to enter • Through f inancial al l iance • Through jo in t schemes and technical al l iance • Through capita l markets, via Euro issues

• Through private placements or preferent ia l al lo tments

Sectors in which

100% equity is

al lowed

• Hotel & tour ism• Trading companies• Power generat ion/

t ransmission/dis t r ibut ion

• Drugs & Pharma• Shipping • Deep Sea Fishing • Oil Explorat ion • Housing and Real

Estate Development • Highways, Bridges

and Ports • Sick Industr ia l

Units • Industr ies Requir ing

Compulsory Licensing • Industr ies Reserved

for Small Scale Sector

100% is not

al lowed

• Private banking (49%)

• Insurance (26%)• Telecommunicat ion

(49% / 74 %)• Retai l (51% in

single brand)FDI not at al l

al lowed

• Arms and ammunit ion • Atomic Energy • Coal and l igni te • Rail Transport • Mining of metals l ike i ron, manganese, chrome, gypsum, sul fur , gold, diamonds, copper,

An outward-bound FDI is backed by the government against al l types

of associated r isks. This form of FDI is subject to tax incent ives

as well as dis incent ives of various forms

2) Inward FD I : Here, investment of foreign capita l occurs in local

resources.

3) Vertical FDI: I t takes place when a mult inat ional corporat ion owns

some shares of a foreign enterpr ise, which suppl ies input for i t or

uses the output produced by the MNC.

4) Horizontal FDI : I t happens when a mult inat ional company carr ies

out a simi lar business operat ion in di f ferent nat ions.

I] CLIMATE IN INDIA : Several factors being att r ibuted to the revival in

foreign direct investments (FDI) in the country include l iberal investment

pol ic ies and reforms, innovat ive and technological ly advanced products

being manufactured in India and low cost and effect ive solut ions. FDI

equity inf lows amounting to US$ 10.532 bi l l i on were received during Apri l -

July 2009. The largest FDI of US$ 153.31 mil l ion wil l be brought in by

Essel Group-promoted DTH service provider. India is target ing annual

foreign direct investments worth $50 bi l l i on by 2012. I t would double the

inf lows by 2017. The government has approved 17 (FDI) proposals amounting

to US$ 250.56 mil l ion. Among those projects approved were FDI appl icat ions

for steel maker ArcelorMit ta l and i ron pipe maker Electrosteel Castings.

With the government planning more l iberal isat ion measures across a broad

range of sectors and cont inued investor interest , the inf low of FDI into

India is l ike ly to fur ther accelerate.

II]CLIMATE IN CHINA: The top sources of FDI in China in 2008 were: Hong

Kong, the Bri t ish Virgin Is lands, Singapore, Japan, the Cayman Is lands,

South Korea, the United States, Western Samoa, and Taiwan.

The growth rate of foreign direct investment (FDI) into China accelerated

to 23% in 2008 to $92.3 bi l l i on , according to Minist ry of Commerce

stat is t i cs . According to the United Nations Conference on Trade and

Development (UNCTAD), in 2007, mainland China was the world ’ s sixth

largest FDI recip ient , after the United States, the United Kingdom, France,

Canada, and the Netherlands. China also received the most votes in a 2007

UNCTAD pol l of att ract ive investment dest inat ions, fo l lowed by India, the

United States, Russia, Brazi l , and Vietnam.

While FDI in China shot higher, investors cont inued to face a range of

potent ia l problems that could expose them to r isks in the future. Problems

foreign investors face in China include lack of t ransparency,

inconsistent ly enforced laws and regulat ions, weak IPR protect ion,

corrupt ion, industr ia l pol ic ies that protect and promote local f i rms, and

an unrel iable legal system. In 2008, China cont inued to lay out a legal and

regulatory framework grant ing i t the author i ty to restr ic t foreign

investment that i t deems not to be in China ’ s nat ional interest . In many

ways, the new rules, codify standards and pract ices that China was already

employing in i ts exist ing, mandatory foreign investment approval process.

Key terms and standards in the new regulat ions are undefined. At the

moment, China appears to be using the rules to restr ic t foreign investments

that are:

• intended to prof i t f rom currency speculat ion;

• in sectors where the government is t ry ing to tamp down aggregate

capi ta l inf lows and inf la t ion;

• in sectors where China is seeking to cult ivate “ na t ional

champions; ”

• in sectors that have benefi ted histor ica l ly f rom state- author ized

monopolies or f rom a legacy of state investment;

• in sectors deemed key to social stabi l i t y , l ike foodstuf fs and

heavi ly pol lut ing industr ies; and

• nominal ly “ f o re ign ” investment that is actual ly Chinese capi ta l

that has been exported and re- imported to take advantage of

preferent ia l t reatment accorded to foreigners.

Although i t remains to be seen how many of these rules wil l be appl ied,

they present several concerns to foreign investors. First , they appear to

give regulators signi f i cant discret ion to shield inef f ic ient or

monopolist ic enterpr ises from foreign competi t ion. They are also often

appl ied in a manner that is not t ransparent. Final ly , overal l

predictabi l i t y for foreign investors has suffered because investors are

less certa in that China wil l approve proposed investment projects. Some

areas where investment is restr ic ted are news agencies radio and TV

t ransmission networks, f i lm product ion, publ icat ion and importat ion of

press and audio- visual products, compulsory basic educat ion, mining and

processing of certa in minerals, processing of green and “ specia l ” tea

using Chinese tradi t ional craf ts and preparat ion of Chinese tradi t ional

medicine

At the end of 2008, in response to the weakening economy, China announced a

st imulus package that includes f iscal st imulus, business tax cuts, and

support for pr ior i ty sectors that may present foreign investors with new

opportuni t ies. China offers preferences for investments in sectors i t seeks

to develop, including transportat ion, communicat ions, energy, metal lurgy,

construct ion materia ls , machinery, chemicals, pharmaceuticals , medical

equipment, environmental protect ion, energy conservat ion, and electronics.

Final ly , China boasts numerous nat ional science parks, many focused on

commercial iz ing research developed in Chinese universi t ies . The parks

provide inf rast ructure, management and funding support for start - ups across

a variety of industr ies, and welcome foreign f i rms.

Investment Guidelines

While insis t ing i t remains open to inward investment, China ’ s leadership

has also stated that China is act ively seeking to target investment in

higher value- added sectors, including high technology research and

development, advanced manufactur ing, energy eff ic iency, and modern

agricul ture and services, rather than basic manufactur ing. China would also

seek to spread the benefi ts of foreign investment beyond China ’ s more

wealthy coastal areas by encouraging mult inat ionals to establ ish regional

headquarters and operat ions in Central , Western, and Northeastern China.

Distribution of Foreign Investment

The vast majori ty of foreign investment is concentrated in China's more

prosperous coastal areas, including Guangdong, Jiangsu, Fuj ian, and

Shandong provinces, and Shanghai. Foreign investment in most service

sectors lags manufactur ing, mainly due to government- imposed restr ic t ions.

China is committed to gradual ly phasing out barr iers in many service

industr ies, but progress has been slow

Dispute Settlement

Foreign f i rms report inconsistent resul ts with al l of China ’ s dispute

sett lement mechanisms, none of which are independent of the government. The

government often intervenes in disputes. Corrupt ion may also inf luence

local court decis ions and local off ic ia ls may disregard the judgments of

domestic courts. Well- connected local business people are often in a better

posit ion to win court cases than are foreign investors and i t is possible

that they may use their connect ions to avoid prosecut ion for taking i l l egal

act ions against their former foreign partners. China ’ s legal system rarely

enforces foreign court judgments

As the economy has slowed, there have been anecdotal reports of local

governments singl ing out foreign investors, cl ients , and partners of

Chinese businesses to repay debts incurred by local businesses

III] CLIMATE IN VIETNAM

Vietnam has seen a vert ica l surge in i ts FDI inf lows in the recent

years, thus becoming the th i rd most popular investment dest inat ion after

China and India. The Vietnamese government is also try ing i ts best to mould

the exist ing pol ic ies and laws, so as to keep the capita l f low coming.

Stat is t i ca l l y speaking, the FDI pledges in Vietnam have gal loped from a

meager $ 11.3 bi l l i on in 2005 to $ 50 mil l ion in 2008. This year though the

FDI f lows have taken a drubbing because of the volat i le economic prevalence

and thus the reluctance of the foreign majors to part with the cash, but

the experts feel that Vietnam ’s ident i ty as an investor ’ s heaven is here

to stay. The major factors in the country which have led, mult inat ionals

park huge investments in the country can be tabulated as fo l lows-

Avai labi l i t y of a young, l i te rate and cheap workforce.

A stable socio- pol i t i ca l si tuat ion

Vietnam ’s professional ized investment promotion act iv i t ies , pol icy

formulat ion and implementat ion

Cost of land, cost of consumables, very low as compared to other locales

On account o the above stated reasons, the FDI in Vietnam surged to a level

of $64 bi l l i on in 2008. The investments were primari ly in sectors l ike

Construct ion

High-tech areas

Product ion of electronics

Telecommunicat ions

thus turning Vietnam into a manufactur ing hub in Asia.

In 2009, the expected inf lows in the country in the form of FDI pledges are

reported to plunge drast ical ly on account of the skept ic ism, on the part of

the global investors, due to the ongoing slowdown. Experts have forecasted

a f igure of $ 20-25 bi l l i on for this f inancial year in terms of the FDI

pledges, which is a fa l l of above 60%. Apart f rom the slowdown, the various

reasons that can be att r ibuted to the same are doubts of Vietnam ’s

capabi l i t y to digest such huge investment sums. The various factors that

play a role here are

inadequate inf rastructure

Management problems

Shortage of adequately tra ined human resource

This lack of absorpt ion capabi l i t y has become a huge spoi lsport as i t is

bel ieved that in 2006, out of the tota l investment funds inf low, 60 %

remained unuti l i zed. These trends could fur ther intensi fy the dol lar

shortage faced by the country, on account of hoarding by companies

expect ing the dong to depreciate. Thus the need of the hour for the

government is to plan and implement pol ic ies and inf rast ructure

development, which wil l restore investor conf idence in Vietnam ’s

capabi l i t y to absorb the incoming funds.

Feedback

5. Discuss various international trade theories.

Ans:

1. Theory of Mercantilism

1) The f i rs t theory of internat ional t rade emerged in England in the

mid-16th century. Referred to as mercanti l i sm, i ts pr incip le

assert ion was gold and si lver were the mainstays of nat ional wealth

and essentia l to vigorous commerce. At that t ime, gold and si lver

were the currency of t rade between countr ies; a country could earn

gold and si lver by export ing goods.

2) The main tenet of mercant i l i sm was that i t was in a country ’ s hand

to maintain a trade surplus, to export more than i t imported. By

doing so, a country would accumulate gold and si lver and,

consequently, increase i ts nat ional wealth and prest ige.

3) As the Engl ish mercant i l i s t wri ter Thomas Mun put i t in 1630, The

ordinary means therefore to increase our wealth and treasure is by

foreign tread, where we must ever observe th is rule: to sel l more to

strangers yearly than we consume of thei rs in value.

4) Consistent with th is bel ief , the mercant i l i s t doctr ine advocated

government intervent ion to achieve a surplus in the balance of t rade.

The mercant i l i s ts saw no vir tue in a large volume of t rade per se.

Rather, they recommended pol ic ies to maximize exports and minimize

imports. To achieve this , imports were l imi ted by tar i f f s and quotas,

while exports were subsidized.

5) The classical economist David Hume pointed out an inherent

inconsistency in the mercanti l i s t doctr ine in 1752. According to

Hume, i f England had a balance-of- trade surplus with France ( i t

exported more than i t imported) the resul t ing inf low of gold and

si lver would swel l the domestic money supply and generated inf la t ion

in England. In France, however the outf low of gold and si lver would

have the opposite effect . France ’ s money supply would contract , and

i ts pr ices would fa l l . This change in relat ive prices between France

and England would encourage the France to buy fewer English goods

(because they were becoming more expensive) and the Engl ish to buy

more Franch goods. The resul t would be deter iorat ion in the English

balance of t rade and an improvement in France ’ s trade balance, unt i l

the Engl ish surplus was el iminated.

6) Hence, according to Hume, in the long run no country could sustain a

surplus OD the balance of t rade and so accumulate gold and si lver as

the mercant i l i s ts had envisaged.

7) The f law with mercant i l i sm was that i t viewed trade as a zero game.

(A zero- sum game is one in which a gain by one country resul ts in a

loss by another. )

2. Absolute Advantage Theory

1) In his 1776 landmark book The Wealth of Nations, Adam Smith attacked

the mercant i l i s t assumption that t rade is a zerosum game.

2) Smith argued that countr ies di f fer in thei r abi l i t y to produce goods

eff ic ient ly .

3) In his t ime, the Engl ish, by vir tue of their superior manufactur ing

processes, were the world ’ s most eff ic ient text i le manufacturers.

4) Due to the combinat ion of favorable cl imate, good soi ls , and

accumulated expert ise, the French had the world ’ s most eff ic ient

wine industry .

5) The Engl ish had an absolute advantage in the product ion of text i les ,

while the French had an absolute advantage in the product ion of wine.

Thus, a country has an absolute advantage in the product ion of a

product when i t is more eff ic ient than any other country in producing

i t .

6) According to Smith, countr ies should special ize in the product ion of

goods for which they have an absolute advantage and then trade these

for goods produced by other countr ies.

7) In Smith ’ s t ime, th is suggested that the English should special ize

in the product ion of text i les while the French should special ize in

the product ion of wine. England could get al l the wine i t needed by

sel l ing i ts text i les to France and buying wine in exchange.

8) Similar ly , France could get al l the text i les i t needed by sel l ing

wine to England and buying text i les in exchange. Smith ’ s basic

argument, therefore, is that you should never produce goods at home

that you can buy at a lower cost f rom other countr ies.

9) Smith demonstrates that by special iz ing in the product ion of goods in

which each has an absolute advantage, both countr ies benefi t by

engaging in trade.

10) Consider the effects of t rade between Ghana and South Korea.

The product ion of any good (output) requires resources ( inputs) such

as land, labor, and capita l . Assume that Ghana and South Korea both

have the same amount of resources and that these resources can be

used to produce ei ther r ice or cocoa.

11) Assume fur ther that 200 units of resources are avai lable in

each country. Imagine that in Ghana i t takes 10 resources to produce

one ton of cocoa and 20 resources to produce one ton of r ice. Thus,

Ghana could produce 20 tons of cocoa and no r ice, 10 tons of r ice and

no cocoa, or some combinat ion of r ice and cocoa between these two

extremes.

12) The di f ferent combinat ions that Ghana could produce are

represented by the l ine GG’ in Figure 2.1. This is referred to as

Ghana ’s product ion possibi l i t y f ront ier (PPF). Similar ly , imagine

that in South Korea i t takes 40 resources to produce one ton of cocoa

and 10 resources to produce one ton of r ice.

13) Thus, South Korea could produce 5 tons of cocoa and no r ice, 20

tons of r ice and no cocoa, or some combinat ion between these two

extremes. The di f ferent combinat ions avai lable to South Korea are

represented by the l ine KK ’ in Figure 2.1, which is South Korea ’ s

PPF.

14) Clearly , Ghana has an absolute advantage in the product ion of

cocoa. (More resources are needed to produce a ton of cocoa in South

Korea than in Ghana.) By the same token, South Korea has an absolute

advantage in the product ion of r ice.

3. Ricardian Model (Comparative Advantage Theory)

1) David Ricardo took Adam Smith ’ s theory one step fur ther by explor ing

what might happen when one country has an absolute advantage in the

product ion of al l goods.

2) Smith ’ s theory of absolute advantage suggests that such a country

might derive no benefi ts f rom internat ional t rade.

3) In his 1817 book Princip les of Pol i t i ca l Economy, Ricardo showed that

th is was not the case.

4) According to Ricardo ’ s theory of comparat ive advantage, i t makes

sense for a country to special ize in the product ion of those goods

that i t produces most eff ic ient ly and to buy the goods that i t

produces less eff ic ient ly f rom other countr ies, even i f this means

buying goods from other countr ies that i t could produce more

eff ic ient ly i tse l f .

5) While this may seem counter intu i t i ve , the logic can be explained with

a simple example. Assume that Ghana is more eff ic ient in the

product ion of both cocoa and r ice; that is Ghana has an absolute

advantage in the product ion of both products. In Ghana i t takes 10

resources to produce one ton one ton of cocoa and, 13 1/3 resources

to produce one ton of r ice. Thus, given i ts 200 units of resources,

Ghana can produce 20 tons of cocoa and no r ice, 15 tons of r ice and

no cocoa, or any combinat ion in between on i ts PPF ( the l ing GG’ in

f igure 2.2). In South Korea i t takes 40 resources to produce one ton

of cocoa and 20 resources to produce one ton of r ice. Thus South

Korea can produce 5 tons of cocoa and no r ice, 10 tons of r ice and no

cocoa, or any combinat ion on i ts PPF ( the l ink KK ’ in f igure 2.2).

6) Again assume that without t rade, each country uses half of i ts

resources to produce r ice and

7) half to produce cocoa. Thus, without “ t r ade, Ghana wil l produce 10

tons of cocoa, and 7.5 tons of r ice (point A in

8) Figure 2.2), while South Korea wil l produce 2.5 tons of cocoa and 5

tons of r ice (point B in Figure2.2).

9) In l ight of Ghana ’s absolute advantage in the product ion of both

goods, why should i t t rade with South Korea? Although Ghana has an

absolute advantage in the product ion of both cocoa and r ice, i t has a

comparat ive advantage only in the product ion of cocoa: Ghana can

produce 4 t imes as much cocoa as South Korea, but only 1.5 t imes as

much r ice. Ghana is comparat ively more eff ic ient at producing cocoa

than i t is at producing r ice. Without t rade the combined product ion

of cocoa wil l be 12.5 tons (10 tons in Ghana and 2.5 in South Korea),

and the combined product ion of r ice wil l also be 12.5 tons (7.5tons

in Ghana and 5 tons in South Korea). Without t rade each country must

consume what i t produces. By engaging in trade, the two countr ies can

increase their combined product ion of r ice and cocoa, and consumers

in both nat ions can consume more of both goods.

10) The Gains from Trade

a) Imagine that Ghana exploi ts i ts comparat ive advantage in the

product ion of cocoa to increase i ts output f rom 10 tons to 15 tons.

This uses up 150 units of resources, leaving the remaining50 units of

resources to use in producing 3.75 tons of r ice (point C in f ig- ure

1.2).

b) Meanwhile, South Korea special izes in the product ion of r ice,

producing l0 tons. The combined output of both cocoa and r ice has now

increased.

c) Before special izat ion, the combined output was 12.5 tons of cocoa and

12.5 tons of r ice. Now i t is 15 tons of cocoa and 13.75 tons of r ice

(3.75 tons in Ghana and 10 tons in South Korea). The source of the

increase in product ion is summarized in Table 2.2.

d) Not only is output higher, but also both countr ies can now benefi t

f rom trade. I f Ghana and South Korea swap cocoa and r ice on a one-to-

one basis, with both countr ies choosing to exchange 4 tons of their

export for 4 tons of the import , both countr ies are able to consume

more cocoa and r ice than they could before special izat ion and trade

(see Table 2.2).

e) Thus, i f Ghana exchanges 4 tons of cocoa with South Korea for 4 tons

of r ice, i t is st i l l lef t with 11 tons of r ice, which is 1 ton more

than i t had before trade. The 4 tons of r ice i t gets from South Korea

in exchange for i ts 4 tons of cocoa, when added to the 3.75 tons i t

now produces domestical ly , leaves i t with a tota l of 7.75 tons of

r ice, which is 25 of a ton more than i t had before special izat ion.

Similar ly , after swapping 4 tons of r ice with Ghana, South Korea

st i l l ends up with 6 tons off ice, which is more than i t had before

special izat ion.

f ) In addit ion, the 4 tons of cocoa i t receives in exchange is 1.5 tons

more than i t produced before trade. Thus, consumption of cocoa and

r ice can increase in both countr ies as a resul t of special izat ion and

trade.

11) The basic message of the theory of comparat ive advantage is that

potent ia l ’ world product ion is greater with unrestr ic ted free trade

than i t is with restr ic ted trade.

12) Ricardo ’ s theory suggests that consumers in al l nat ions can

consume more i f there are no restr ic t ions on trade. This occurs even

in countr ies that lack an absolute advantage in the product ion of any

good.

13) In other words, to an even greater degree than the theory of

absolute advantage, the theory of comparat ive advantage suggests that

t rade is a posit ive- sum game in which al l countr ies that part ic ipate

real ize economic gains.

14) As such, th is theory provides a strong rat ionale for

encouraging free trade. So powerful is Ricardo ’ s theory that i t

remains a major inte l lectual weapon for those who argue for f ree

trade.

4. Heckscher- Ohlin Theory

Swedish economists El i Heckscher ( in 1919) and Bert i l Ohlin ( in 1933)

argued that comparat ive advantage ar ises from di f ferences in nat ional

factor endowments. By factor endowments they meant the extent to which a

country is endowed with such resources as land, labor, and capita l Nations

have varying factor endowments, and di f ferent factor endowments explain

di f ferences in factor costs. The more abundant a factor , the lower i ts

cost. The Heckscher- Ohlin theory predicts that countr ies wil l export those

goods that make intensive use of factors that are local ly abundant, while

import ing goods that make intensive use of factors that are local ly

scarce. Thus, the Heckscher- Ohlin theory attempts to explain the pattern

of internat ional t rade that we observe in the world economy. Like

Ricardo ’ s theory the Heckscher- Ohlin theory argues that f ree trade is

benefic ia l . Unlike Ricardo ’ s theory, however, the Heckscher- Ohlin theory

argues that the pattern of internat ional t rade is determined by

di f ferences in factor endowments, rather than di f ferences in product iv i t y .

The Heckscher- Ohlin theory also has commonsense appeal. For example,

‘ Un i ted States has long been a substant ia l exporter of agricul tura l

goods, ref lect ing in part i ts unusual abundance of arable land. In

contrast , China excels in the export of goods produced in labor- intensive

manufactur ing industr ies, such as text i les and footwear. This ref lects

China ’ s relat ive abundance of low-cost labor. The United States, which

lacks abundant low-cost labor, has been a primary importer of these goods.

Note that i t is relat ive, not absolute, endowments that are important ; a

country may have larger absolute amounts of land and labor than another

country, but be relat ive ly abundant in one of them.

The Leontief Paradox

Using the Heckscher Ohlin theory, Wassily Leontief postulated that since

the United States was relat ive ly abundant in capita l compared to other

nat ions, the United States would be an exporter of capita l - intensive goods

and an importer of labor- intensive goods. To his surpr ise, however, ‘ he

found that U.S. exports were less capita l intensive than U.S. imports.

Since th is resul t was at var iance with the predict ions of the theory, i t

has become known as the Leont ief paradox. No one is quite sure why we

observe the Leont ief paradox. One possible explanat ion is that the United

States has a special advantage in producing new products or goods made

with innovat ive technologies. Such products may be less capita l intensive

than products whose technology has had t ime to mature and become sui table

for mass product ion. Thus, the United States may be export ing goods that

heavi ly use ski l led labor and innovat ive entrepreneurship, such as

computer software, while import ing heavy manufactur ing products that use

large amounts of capita l .

What is Leontief Paradox?

Wassily Leontief (winner of the Nobel Prize in economics in 1973), many of

these tests have raised quest ions about the val id i ty of the Heckscher-

Ohlin theory.

As per Heckscher- Ohlin theory Leont ief postulated that since the uni ted

States was relat ive ly abundant in capi ta l compared to other nat ions, the

uni ted States would be an exporter of capita l - intensive goods and an

importer of labor- intensive goods. To his surpr ise, however, ‘ he found

that U.S. exports were less capita l intensive than U.S. imports. Since

th is resul t was at variance with the predict ions of the theory, i t has

become known as the Leontief paradox.

No one is quite sure why we observe the Leont ief paradox. One possible

explanat ion is that the United States has a special advantage in producing

new products or goods made with innovat ive technologies. Such products may

be less capi ta l intensive than products whose technology has had t ime to

mature and become sui table for mass product ion. Thus, United States may be

export ing goods that heavi ly use ski l led labor and innovat ive

entrepreneurship, such as computer software, while import ing heavy

manufactur ing products that use large amounts of capita l .

Example : As per the theory, United States exports commercial aircraf t and

imports automobiles not because i ts factor endowments are especial ly

sui ted to aircraf t manufacture and not sui ted to automobile manufacture,

but because the United States is more eff ic ient at producing aircraf t than

automobi les. A key assumption in the Heckscher- Ohlin theory is that

technologies are . the same across countr ies. This may not to be the case,

and di f ferences in technology may lead to di f ferences in product iv i t y ,

which in turn, dr ives internat ional t rade patterns .

5. The Product Life Cycle Theory

Raymond Vernon in i t ia l l y proposed the product l i fe - cycle theory in the

mid-1960s. Vernon ’ s theory was based on the observat ion that for most of

the 20th century a very large proport ion of the world ’ s new products had

been developed by U.S. f i rms and sold f i rs t in the U.S. market (e.g.mass-

produced automobiles, te lev is ions, instant cameras, photocopiers, personal

computers, and semiconductor chips) . To explain th is , Vernon argued that

the wealth and size of the U.S market gave U.S. f i rms a strong incent ive

to develop new consumer products. Inaddi t ion, the high cost of U.S. labor

gave U.S. f i rms an incent iveto develop cost- saving process innovat ions.

- Just because a new product is developed by a U.S. f i rm and f i rs t sold in

the U.S. market, i t does not fo l low that the product must be produced in

the United States. I t could be produced abroad at some low-cost locat ion

and then exported back into the United States. However, Vernon argued that

most new products were in i t ia l l y products were in i t ia l l y produced- in

America. Apparent ly , the pioneering f i rms bel ieved i t was better to keep

product ion faci l i t i es close the market and to the f i rm ’ s center of

decis ion making, given the uncerta inty and r isks inherent in int roducing

new products. Also, the demand for most new products tends to be based on

nonprice factors.

Consequently , f i rms can charge relat ive ly high prices for new products,

which obviate the need to look for low cost product ion si tes in other

countr ies. Vernon went on to argue that early in the l i fe cycle of a

typical new product, demand is star t ing to grow rapidly in the United

States, demand in other advance countr ies is l imi ted to highincome groups.

The l imi ted in i t ia l demand in other advanced countr ies does not make i t

worthwhi le for f i rms in those countr ies to star t producing the new

product, but i t does necessi tate some exports f rom the United States to

those countr ies.

Over t ime, demand for the new product starts to grow in other advanced

countr ies (e.g. , Great Bri ta in , France, Germany, and Japan). As i t does,

i t becomes worthwhi le for foreign producers to begin producing for thei r

home markets. In addit ion, U.S.f i rms might set up product ion faci l i t i es in

those advanced countr ies where demand is growing. Consequently , product ion

within other advanced countr ies begins to l imi t the potent ia l for exports

from the United States. As the market in the United States and other

advanced nat ions matures, the product becomes more standardized, and price

becomes the main competi t ive weapon. As th is occurs, cost considerat ions

star t to play a greater role in the competi t i ve process. Producers based

in advanced countr ies where labor costs are lower than in the United

States (e.g. , I ta ly , Spain) might now be able to export to the United

States. I f cost pressures become intense, the process might, not stop

there. The cycle by which the United States lost i ts advantage to other

advanced countr ies might be repeated once more, as developing countr ies

(e.g. , Thai land) begin to acquire a product ion advantage over advanced

countr ies. Thus, the locus of global product ion in i t ia l l y switches from

the United States to other advanced nat ions and then from those nat ions to

developing countr ies.

The consequence of these trends for the pattern of world trade is that is

over t ime the United States switches, f rom being an exporter of the

Product to an importer of product as product ion becomes concentrated in

lower- cost foreign locat ions.

Figure 2.5 shows the growth of product ion and consumption over t ime in the

United States, other advanced countr ies, and developing countr ies.

6. New Trade Theory

New Trade Theory (NTT) is the economic cr i t ique of internat ional f ree

trade f rom the perspect ive of increasing returns to scale and the network

effect

1. New Trade theor is ts chal lenge the assumption of diminishing returns

to special izat ion used in internat ional t rade theory. I t argues that

increasing returns to special izat ion might exist in some industr ies.

2. New trade theory also argues that i f the output required to real ize

signi f i cant scale economies represents a substant ia l proport ion of

tota l world demand for that product the world market may be able to

support only a l imi ted number of f i rms based in a l imi ted number of

countr ies producing that product

Example: The commercial aerospace industry , which is current ly dominated

by just two f i rms, Boeing and Airbus, is a good example of th is theory.

Economies of scale in th is industry come from the abi l i t y to spread f ixed

costs over a large output.

Impl icat ion:

• "NTD" was the r igor of the mathematical economics used to model the

increasing returns to scale, and especial ly the use of the network

effect to argue that the formation of important industr ies was path

dependent in a way which industr ia l planning and judic ious tar i f f s

might control .

• The model they developed was highly technical , and predicted the

possibi l i t i es of nat ional special izat ion- by- industry observed in the

industr ia l world. The story of path- dependent industr ia l

concentrat ions sometimes leads to monopolis t i c competi t ion.

Econometric evidence:

• The econometr ic evidence for NTT was mixed, and again, highly

technical . Due to the t ime-scales required and the part icu lar nature

of product ion in each 'monopol izable ' sector , stat is t i ca l judgements

have been hard to make. In many ways, there is too l imi ted a dataset

to produce a rel iab le test of the hypothesis which doesn' t require

arbi t rary judgements from the researchers.

Japan is ci ted as evidence of the benef i ts of " inte l l i gent" protect ion ism,

but cr i t i cs of NTT have argued that the empir ica l support post- war Japan

offers for benefic ia l protect ion ism is unusual, and that the NTT argument

is based on a select ive sample of histor ica l cases. Although many examples

( l i ke Japanese cars) can be ci ted where a 'protected' industry

subsequently grew to world status, regressions on the outcomes of such

" industr ia l pol ic ies" ( inc luding the fa i lu res) have been less conclusive

Feedback

6.Discuss the impact of WTO on India’s trade policy.

Ans:

Agreement Provisions Impact Policy issue

GeneralAgreement onTrade'" Tari f f .(GATT)

Prohibi ts :- Actions of Government I Organisat ions that distor t normal- Discr iminat ion betweenMember nat ions- Discr iminat ion between domesticand lawful ly imported foreigngoods

Binding of tar i f f l ines. ( India is committed to a bind tar i f f l ines at 40 per cent on f in ished goods and 2S per cent on intermediate goods. machinery and equipment; phased reduct ion by 2005).- Quanti ta t ive restr ic t ions of imports to be phased out by 1.4.2000 (or ig inal deadl ine set was 2003. but India has lost in theDisputes Sett lement Case). - Create freer trade regime.

- Competi t ion from foreign goods.- This affects eff icacy of Reservat ion Policy.Need for Reservat ion Policy to move in tandem with OGL l is t , with greater emphasis on competi t iveness.- Need to strengthen competi t iveness among domestic SSI through modernisat ion and technology development.

Agreement onvaluat ion ofGoods

Countr ies to fo l low uniform procedures in respect of customs formal i t ies .

- Greater transparency- Benefic ia l to both importers and exporters

India bas amended the Customs Act in conformity with the Agreement.

Agreement onPre-shipmentinspect ion (PSI)

To check arbi t rary ways of PSI companies in valuat ion of goods.

Indian companies export ing to countr ies usingPSI companies to benefi t

India does not use services of PSI companies.

Agreement onTechnical ;Barr iers to Trade(TBT)

- Conformity with internat ionalstandards- Checks on misuse of mandatoryproducts standards- Establ ishment of enquiry points

- Indian exporters to benefi t . As import by other countr ies are subject to mandatory product standards.- Enquiry points help faci l i ta t ion .- Process and product ion methods can be used to discr iminate against Indian exports.

- Bureau of Indian Standards (SIS) conforms to Agreement.- SIS in conformity with Internat ional standards.- BIS to serve as enquiry point .

Agreement onSanitary andPhytosanitary Measure. (SPM)

Same as above except that countr iescan deny import f rom certa inregion/country on the ground ofpest I disease

Internat ional standards to be adopted

Most of Indian standards in conformity with Internat ional standards.

Agreement onimport l icensing

Transparency and t ime bound

Benefic ia l to small businesses, as they are usual ly at the receiv ing end of restr ic ted pract ices.

Delays, discret ion and misuse of l icensing procedures to be cut.

Rules Applicableon Exports

- Allows export ( to be rel ieved of indirect taxes (e.g. Excise Duty).- Prohibi ts direct tax benefi ts (e.g.Income Tax waiver on export earnings).- Allows levy of dut ies on exports

- Neutral isat ion of indi rect taxes good.- Present schemes providing waiver ofIncome Tax on export earnings to be scrapped. Would affect pricecompeti t iveness

- EXIM pol icy provides scheme for neutral isat ion of incidence of indi rect taxes (e.g. Duty drawback, advance l icenses etc.)- Review of direct tax benefi ts .

Agreement onSubsidies andCountervai l ingMeasures (SCM)

- Prohibi ts export subsidies- Phasing out by 2003.- Permits permissible subsidies.

- Subsidies given to small businesses are usual ly permissible and non-act ionable.- Import ing countr ies can countervai l subsidies that are act ionable. Wil l makeIndian exports more expensive.- Small businesses have to become more competi t ive.

EXIM Policy to be made WTO compatible.

Agreement onSafeguardMeasures

Allows countr ies to take act ion against undue import surge in jur ious to domestic industry during transi t ion period. Measures can include Quanti ta t ive Restr ic t ions (QRs), duty enhancement beyond bound rates etc. period extendable

Helpful provis ion Minist ry of Commerce & Industry is putt ing required system in place.

Agreement onAnti- DumpingMeasures (ADP)

Allows counter ing unfair t rade pract ices.

Helpful provis ion Directorate of Anti- Dumping establ ished in Minist ry of Commerce & Industry.

Trade RelatedInvestment Measures(TRIMS)

Prohibi ts countr ies from imposing condit ions such as local isat ion, export obl igat ion on investors.

- Affects FOREX posi t ion.- Affects Government foreign InvestmentPolicy- Enhances competi t ion to domestic industry

Measures underway to terminate not i f iedTRIMs such as Dividend Balancing

Market AccessNegotiat ions

Binding of tar i f f l ines

- Increased competi t ion from foreign goods.- Does not help

India fo l lowed the WTO t ime- table in terms of reduct ion and binding of

Most Favoured Nation Treatment (MFN): No discr iminat ion between

member nat ions.

National Treatment : No discr iminat ion between domestic products and

lawful ly imported products.

Subsidies: Permissib le - Actionable and non-act ionable; non-permissib le.

Feedback

7. Discuss the various organisational structure in International Business.

Ans:

There are f ive types of organizat ional structures: Internat ional Divis ion

Structure, Internat ional Area Structure, Global Product Structure, Global

Matr ix Structure, and Global Functional Design Structure.

INTERNATIONAL AREA STRUCTURE

The one that would be opt imal for a company that is just expanding is the

Internat ional Area Structure. The reason this would be opt imal is because a

company is new to sel l ing internat ional ly . " In th is organizat ional

structure, the company is organized into countr ies or geographic regions."

This would be a benefi t to have the organizat ional in th is manner because

i t would al low a company to focus on the region of the world we are sel l ing

to and ta i lor the needs of mobil i ty products to that area. As a company

grows internat ional ly we can expect to see a companies organizat ion grow as

well .

Using the Internat ional Area Structure wil l al low a company to hire

managers who special ize in understanding the cul tura l , commercial , social

and economic condit ions we wish to expand to.

By using the Internat ional Area Structure, this is going to al low the

company to adapt addit ional marketing strategies, without disrupt ing the

ones company managers have worked so hard for . In addit ion, "an

internat ional f i rm must address i ts coordinat ion needs" Meaning, a company

must l ink and integrate funct ions and act iv i t i es of di f ferent div is ions of

the company.

• Worldwide area structure• Favored by f i rms with low degree of diversi f i ca t ion & domestic

structure based of funct ion• World is div ided into autonomous geographic areas• Operat ional author i ty decentral ized• Faci l i ta tes local responsiveness• Fragmentat ion of organizat ion can occur• Consistent with mult i - domestic strategy

INTERNATIONAL DIVISION STRUCTURE

When a company has a branch that is located abroad and that abroad company

is said to be attached with the orig inal company, then this is an

internat ional div is ion structure.

The abroad unit is required to control al l the act iv i t i es which are to be

performed internat ional ly . I t is usual ly based on the character is t i cs l ike

a funct ion, product or on geography. This structure is designed do that the

mult inat ional wil l have a free access to explore the resources that are

present internat ional ly .

• Adopted in early stages of internat ional• business operat ions• Coordinate al l IB act iv i t i es• Develop internat ional expert ise & ski l l s• Develop a global/ in ternat ional mindset• Champion of foreign business

• Favored by f i rms with low degree of diversi f i ca t ion.

• Area is usual ly a country.• Largely autonomous.• Faci l i ta tes local responsiveness

GLOBAL PRODUCT STRUCTURE

The product div is ion structure is popular with large conglomerates with

mult ip le , unrelated business. Under th is structure di f ferent subsidiar ies

pertain ing to di f ferent products with in the same foreign country report to

the head of di f ferent product groups at the head quarters.

The product div is ion structure enhances coordinat ion between di f ferent

areas for any one product l ine but i t reduces coordinat ion of al l product

l ines within each zone.

• Adopted by f i rms that are reasonably diversi f ied• Original domestic f i rm structure based on product div is ion

• Value creat ion act iv i t i es of each product div is ion coordinated by that div is ion worldwide

• Help real ize locat ion and experience curve economies• Faci l i ta te transfer of core competencies• Problem: area managers have l imi ted control ,• subservient to product div is ion managers, leading to lack of local

responsiveness

GLOBAL MATRIX STRUCTURE

Over t ime, we can expect to see a company grow into a Global Matr ix

Structure. " In th is organizat ional structure, the chain of command is spl i t

between product managers and area managers." As we develop the sales in

areas of the world, we can expect to see the chain of command spl i t between

product managers and area managers.

• Helps to cope with conf l ic t ing demands of earl ier strategies

• Two dimensions: product div is ion and geographic area• Product div is ion and geographic areas given equal responsibi l i t y for

operat ing decis ions• Problems: Bureaucrat ic structure slows decis ion making• Confl ic t between areas and product div is ions• Dif f icu l t to make one party accountable due to dual responsibi l i t y

GLOBAL FUNCTIONAL DESIGN STRUCTURE

Under the funct ional structure, the head of funct ional areas, such as product ion, marketing, f inance and personnel, are responsible for the worldwide operat ions of their own funct ional areas.

In certa in industr ies l ike energy and mining, a variat ion of the

funct ional structure known as the process structure, which uses processes

as the basis for the structure, is common.

Feedback