MS-97

MANAGEMENT PROGRAMME

Term-End Examination

December, 2009

MS-97 : INTERNATIONAL BUSINESS

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Time : 3 hours Maximum Marks : 100

(Weightage 70%)

Note :

There are two sections : A and B.

Attempt any three questions from Section A, which carry

20 marks each.

(iii) Section B is compulsory and carries 40 marks.

SECTION - A

Considering the reasons for the growth anddevelopment of Multinational Enterprises, discussvarious theories of Foreign Direct Investment.How are they different from International Tradetheories ?

"MNEs need managers with a global outlook."To enable the managers to work overseas whatManagement Development and trainingprogrammes can be used for training such MNEsManagers ?

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Explain the Control System followed by largeMultinational Enterprises and the AccountingAspects of such a control system.

(a) What are the important decisions involvedin managing the production function ininternational business ? Is managing theproduction function the same as logisticsmanagement ?

(b) How can an Indian company, which hasrecently gone international, manage itsnegotiations in the international fieldeffectively ?

5. Write notes on any four of the following :

ASEAN and India

World Trade Organization (WTO) and itsrole

(c) Flexible Manufacturing System (FMS)

Ownership strategy in internationalbusiness

Labour intensity vs. labour productivity

(f) Reporting and Information system.

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SECTION - B

6. After reading and analysing the following Casecarefully, answer the questions given at the end.

t-C\

Russell Corporation : The Dilemma of

O Regional Free Trade

Russell Corporation is a leadingmanufacturer of sports-wear, includingsweatshirts, sweatpants, and T-shirts. Owned byBerkshire Hathaway, Russell is based in Atlanta,Georgia, in the United States, and has annualrevenues of around $2 billion. Its maincompetitors include Adidas, Nike, Benetton, andZara. Russell runs every step of the manufacturingprocess : from weaving raw yarn into fabric, todyeing, cutting, and sewing, to selling garmentsthrough retailers. Russell's brands includeJERZEES, American Athletic, Brooks, CrossCreek, Huffy Sports, Russell Athletic, andSpalding. The firm sells through massmerchandisers, department stores such as Wal-Mart, and golf pro shops. Russell sells its apparelin about 100 countries and recently restructuredproduction. The firm closed plants, moved somemanufacturing abroad, and eliminated 1,700 U.S.jobs.

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Management at Russell was pleased withthe passage of the Dominican Republic-CentralAmerican Free Trade Agreement (DR-CAFTA) in2005. The pact eliminated trade barriers betweenthe United States and six Latin Americancountries : Guatemala, Honduras, EL Salvador,Nicaragua, Costa Rica, and the Dominican

Republic. Following DR-CAFTA'S passage,Central American countries experienced asignificant rise in foreign direct investment (FDI)from abroad. The apparel and clothingsector - consisting of firms like Russell-were amongthe biggest beneficiaries.

Prior to DR-CAFTA, many North Americanapparel companies sourced from China and otherAsian nations where production costs are low.DR-CAFTA virtually eliminated tariffs on tradebetween the United States, Central America, andthe Dominican Republic. Now Russell can cost-effectively source raw materials in CentralAmerica, manufacture fabric in the United States,then send the fabric to its factories in Hondurasfor assembly. Once the garments are completedthey are re-exported to the U.S. for distribution.Without DR - CAFTA it would not have been costeffective to make fabric in the United States,export it to Asia, have the products manufacturedthere and then reexported back. Under that

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scenario, Russell would have shifted all itsmanufacturing to China.

Background on DR-CAFTA

In the past, Central America and theCaribbean were parties to various protectionisttrade arrangements, including the worldwideMulti-Fibre Agreement (MFA) of 1974. Amongits provisions, the MFA shielded the North andCentral American apparel industries from foreigncompetition by imposing strict import quotas.When the MFA expired in 2005, many countriesbecame exposed to the full force cheap importsfrom low - cost producers in Asia. Chinadramatically increased its apparel exports to theUnited States, to the detriment of U.S. and CentralAmerican producers that long had suppliedWestern markets. For example, Alabama wasonce the world center of sock manufacturing.When the MFA expired, the sock capital shiftedto Datang, China. Alabama sock workers receivean average of $10 an hour, compared to 70 centsan hour in Datang.

Since the expiration of the MFA, China hasbeen flooding the United States with apparel. Inrecent years, China's share of finished clothingexports to the United States, once less than 20percent, has leaped past 50 percent in somesegments. To protect its home-grown apparel

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industry, the United States reimposed some tradebarriers against Chinese imports. The U.S.government justified this action in part becauseChina's currency, the yuan, is consideredundervalued, which makes Chinese exportsartificially cheap. However, such protection ofthe U.S. apparel industry is only temporary. WorldTrade Organization rules require the U.S.government to remove the trade barriers, at whichtime Chinese exports to the United States willincrease.

Many in the U.S. apparel industry see DR-CAFTA as perhaps the only way to compete withChina. DR-CAFTA helps maintain much apparelproduction in the Western Hemisphere by creatinga bigger apparel market in the region and grantingfavorable trade status to apparel producers whomanufacture their products using raw materialfrom the DR-CAFTA region.

The United States is the biggest apparelmarket, importing more than $9 billion worth ofapparel from the DR-CAFTA countries in eachof 2004, 2005, and 2006. Honduras was thebiggest shipper in dollar value, and exportedproducts such as cotton blouses, shirts, andunderwear. Meanwhile, DR-CAFTA gave U.S.producers an equal footing to sell their productsto Central America. For example, the region is

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the second largest market for U.S. textiles andyarn, which Central American manufacturers useto produce finished apparel.

The DR-CAFTA countries are part of a largeand growing trade region, and the free tradeagreement is helping to improve economicconditions there. Perhaps the most importantlong-term benefit will be foreign investment innew technologies and a better-educated regionallabor force. Some see DR-CAFTA as a furtherstep towards development of the Free Trade Areaof the Americas (FTAA), a proposed agreementthat would bring free trade to all or most of North,Central, and South America.

The Situation in Honduras

Russell manufactures much of its garments inHonduras, a poor Central American country with7 million people, one quarter of whom areilliterate. Honduras has an annual per-capitaGDP of about $3,000. In 2006, the country'sunemployment rate was 28 percent. TheHonduras currency, the lempira, has beenweakening against the U.S. dollar over time.Growth remains dependent on the U.S. economy,its largest trading partner, and on reduction ofthe high local crime rate. Honduras sends over73 percent of its exported goods to the UnitedStates and receives about 53 percent of its imports

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from that country. The Honduran government iscounting on the DR-CAFTA agreement toincrease trade with the United States and theCentral American region.

Few countries rely on their apparel industrymore than Honduras. The Honduran governmentused incentives to create a large cluster of apparelfirms. In addition to low-cost labor, Hondurasoffers a generous tax package: firms pay noincome tax, value-added tax, or duties. Honduranapparel manufactures can truck theirmerchandise to Puerto Cortes, Central America's

biggest port, in just 30 minutes. From there, ittakes only 22 hours to ship the goods to Miami bycontainer ship. Honduras' apparel sector employsover 110,000 people, or 30 percent of the country'stotal industrial employment. The government isinvesting to improve Puerto Cortes and create aTextiles and Apparel University to train futuremanagers and supervisors. To counter Chinesecompetition, the apparel industry in Hondurashas begun to offer the "total package"-buyingfabric, and sometimes even designing thegarments, as well as final assembly.

Some Honduran apparel plants employ,sophisticated technologies to increase productivityand output. For example, one supplier uses

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computer-aided design to cut cloth before sendingit to be stitched into shirts for brands such asJockey, Ralph Lauren, and Nautica. In 2003, thestock of U.S. FDI in Honduras was $262 millionand rose to $339 million the following year.However, Honduras' legal system remains weakand corruption is a problem.

Honduran apparel producers are takingsteps to survive in the evolving free tradeenvironment. Geographic proximity to the UnitedStates is a big advantage that gives producersgreater flexibility to respond quickly to rapidlyevolving tastes. Honduran producers can shipfinished merchandise to the United States in lessthan 24 hours, while similar shipments from Chinatake up to a month.

Russell's Dilemmas

Many consumers shop for athletic clothingbased on price, so even slight price increases canaffect sales. Unlike Nike and Adidas, Russell doesnot enjoy much brand loyalty. Russell must decidewhether to retain its manufacturing in Hondurasor move everything to China. An additionalpossibility is to establish production in EasternEurope to gain access to the huge EU market.Meanwhile, Adidas and Nike are pursuingmarkets in China and other Asian countries.

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Labor costs for manufacturing apparel are similarin Central America and China. In both locations,workers earn around a dollar per hour and canproduce over a hundred garments per day, fromprecut cloth. Labor costs are roughly $2 an hourin Eastern Europe, but producers are advantagedby being so close to the nearly 500 millionconsumers in the EU.

Management at Russell is keeping an eyeon the proposed FTAA, which would widenaccess to the Latin American marketplace withits 500 million consumers. Maintaining a presencein Latin America would give Russell a favorableposition for targeting new markets there. Butprogress on the FTAA has been slowed due tohostile public and governmental opposition fromsome South American countries. Governmentsin countries such as Bolivia and Venezuela arguethat the FTAA will increase U.S. dominance inthe region and harm local workers, subjectingthem to sweatshop working conditions.

Meanwhile, regional integration is creatinga larger market in the Western Hemisphere andnew opportunities to source low-cost inputs fromregional suppliers. While increased competitionfrom China poses new challenges, the DR-CAFTAaccord is helping to level the playing field. Russellmanagement is concerned about manufacturing

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costs that are higher than competitors and ispoised to consolidate much of its production intosuppliers located close to its home market. At thesame time, Russell is also contemplating newmarkets in the Americas and beyond.

Case Questions :

Worldwide, China has the most absoluteand comparative advantages in producingapparel. Free trade theory implies thatretailers should import clothing from themost efficient country. Nevertheless, DR-CAFTA aims to promote Central Americantrade with the United States, and the UnitedStates has imposed quotas on imports fromChina. Given this, and the potentialdrawbacks of regional integration, wouldit be better to allow free trade to take itsnatural course ? That is, would it be betterto rescind DR-CAFTA and allow apparelretailers to import from the most cost-effective suppliers, wherever they arelocated worldwide ?

What are the advantages and disadvantagesof DR-CAFTA to Honduran firms ? ToHonduras as a nation ? Should free tradebe extended throughout Latin Americathrough the proposed FTAA ?

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Honduras is a poor country that faces theloss of jobs in its apparel sector fromgrowing foreign competition. What can theHonditran government do to help keep jobsin Honduras ? The government can addresssome problems by attracting more foreigninvestment into Honduras. In what wayscould foreign investment help ? What stepscould the government take to attractmore FDI ?

Russell Corporation is a smaller player thanits formidable rivals. Adidas and Nike.What should Russell do to counter thesefirms ? What should Russell do to counterthe flood of low- cost athletic apparel nowentering the United States from China ?What strategic approaches should Russellfollow to ensure its future survival andsuccess ?

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