International Business for B.Com Hons Semester 6 for Delhi University by Shiv Das (With OCR) 9389574854, 9789389574852

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Delhl Unlversltv Serles

CBCS I I

llonsl INTERNATIONAL BUSINESS Paper. DSE 4(c)

Semester

Examination Papers (Solved)

• Urdverslty Question Papers wttt, Answers • Examrnatton Questions -Toprc-wise

• Strfctty according to Semester Course • Latest Syltabus

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Shiv Das

Delhi Universitv Series

CBCS •

(Hons)

INTERNATIONAL BUSINESS

PAST YEARS Examination Papers {Solved)

Shiv Das & Sons

Educational Publishers

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ANILKUMAR Best Practice book

Reviewed on 8 March 2020

Shiv Das College books are excellent study material for the college students. Question patterns are according to the new CBCS pattern. I also recommend Shiv Das t o every B.Com. students.

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.__. AMAZON CUSTOMER

Good Book Reviewed on 28 November 2019

I am a student of B.Com. (Hons.) Sem V . Many questions were repeated In exam and they are from Shiv Das books. Price is also low than other books.

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Worthy Reviewed on 19 May 2019

Reviewed on 9 Septemeber 2020

Very good books, extensive collection of questions. You can just go through the pages and voila, understand the whole book.

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To: lnfoOshivdas.in Reviewed on August 11, 2019 I've received your books. Thanks a lot for this. Books are good, precise and complete. All updated and based on the latest pattern.

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To: infoOshivdas.in Reviewed on March 02, 2019 Nice books! Really Helpful. Many students have taken it for papers practice.

By Neena Sinha on 17 Dec 2019

By Rajiv Kumar on 12 Dec 2019 Received your books today. l find it very useful for the exam preparation. rm impressed that you have given the latest syllabus in your books. Thank you so much for this.

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To: lnfoOshivdas.in Reviewed on Oct 25, 2019 I appeared for my DU Sol. exam. These books helped me like anything... I practiced the whole books! Every question in my B.Com exam papers was there in these books! Thank you so much!

Syllabus

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Unit I

1 18

1. Introduction to lntemation.al Business

2. International Business Environment Unit IT

...

3. International Trade

(iv)

30

4. International and Econo1nic Organizations

45

5. Regional Economic Integration

55

Uni.t III

6. International Finan.cial Environrn.ent

...

60

...

77

Unit IV

7. Exchange Rate Determination Unit V

8. Foreign Trade Promotion Measures and Organizations ill li.1dia

University Question Papers

89 97 onwards

(iii)

SYLLABUS

B.Com. (Hons.) CBCS INTERNATIONAL BUSINESS Duration: 3 !tours

Maxi.mu:111 1Warks: 100 Lechcres: 75 Objective: The objective of the course is to expose students to the concept, importance and dyna:n,ics of i.nte:rna tional business and India's involvement with global business operations.

UNIT I

1. In.troducH.on. to ln.ternaH.onal Business. Globalization and its growmg importance in world economy; In1.pact of globalization; Intema-tional business conLTasted with domestic business-complexities of international business; Internationalization Stages and Orientations. lvfode.s of enh·y into in:ternatiorui.l business. 2. International Bus-i:ness Environrnent. National and foreign environ1nents and their components-Physical, economic, demoi,'Taphic, cultural and political-legal environments; Global trading environment-recent trends in world trade in goods and services; Trends in India's foreign trade.

UNIT II

3. International Trade. Theories of International Trade, tariff and non-tariff measures; Balance of Payment account and its components. 4. b1ten1atio11al E:1 Econo,nic Organizations. WTO, UNCTAD, World Bank & Ilv1F. 5. .Regional Economic It1t:egr,1ti.on. Forms of regional integration; Integration efforts among countries in Europe, North America and Asia. Cost and benefit of regional econontic Integration.

UNIT III

6. .Cntenu1tio1tal Financial Environment. 1.n:tetnational financiaJ system arid institutior,s; Foreign exchal1ge u1.a,:kets, Spot n1a,:ket, spot rate qtiotation.�, bid­ ask spreads, Trading in spot maTkets, Cross exchange rates; Fmward Market: forward rate, long and short forward positions, .fon,·ard premium and discount. Arbirrage, hedging and speculations. Foreign investn,en.ts-types and flows; Foreign investment in. Indian perspective.

UNIT IV

7. Exdiat1ge Rate Detertnin.ation. Factors affecting exchan ge rate-Relative inflation rates, relative interest rates, relati1•e income levels, government controls, expectations, etc. Government intervention and government influence on exchange rates. Theories of exchange rate -Purchasing Power Parity, Interest Rate Parity and Fisher's effect.

UNITV 8. Foreign Trade promotion measures and organizations ·in India. Special economic zones (SEZs) and 100% export oriented units (EOUs); Measures for promoting foreign investments into and from India; Indian joint ventures and acquisitions abroad. ❖

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(iv)

-zIi�

1.

Introduction to International Business: Globalization and its growing importance in world economy; Impact of globalization; International business contrasted with domestic business­ complexities of international business; Internationalization Stages and Orientations. Modes of entry into international business.

Q. 1. What is globalization? What are the driving forces of Globalization? Ans. Globalization refers to the shift to�1Tard a more integrated and interdependent world economy. Globalization is a process of interaction and integration among the people, companies and governments of different nations. This process has effects on the environment, culture, political system, economic development and prosperity and on human physical ,-vell-being in societies around the �vorld. Globalization has two cornpon.ents: (1) Globalization of Markets. It implies that national 1narkets are merging into one huge marketplace. Fi.tn1S such as Citigroup, Coca-Cola, .tvlcDonalds, Starbucks, Sony sell their products internationally in aln1ost all the countries. Many co1npan.ies need to vary aspects of their product mix and operatio11S from country to country depending on local tastes and preferences. Globalization of markets includes the 1narkets for commodities, for industrial products, n1arket for computer software, markets for financial assets and even markets for commercial jets/ aircrafts. (ii) The Globalization of Produ.ction. It refers to the sourcing of goods and services from locations around the v,rorld to take advantage of regional and national differences in the cost and quality of factors of production. For example, take the case of IBM ThinkPad X31 laptop computer. This product is designed in US. The case, keyboard and bard drive '"ere made in Thailand; display screen and memory were made in South Korea; built-in v.rireless card in Malaysia etc. Firms try to achieve optimal effects of their productive activities to locations around the globe. The factors that influence the trend of Globalization are: • formal and informal barriers to trade between countries; • barriers to Foreign direct investtnent; • transportation costs; and • issues related to political risk and econo1nic risk. l

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SHIV A DELHI UNIVERSITY SERIES

Drivingforces of globalization. are:

(i) Technology.

Faster and cheaper technology in th.e digital global e c o ­ nomy of the Internet era has broken the national barrier of time and space, thus, integration of national m.arkets have been facilitated with ease. (ii) Liberalization. Strong wave of liberalization induced b y the World Trade Organisation (WTO) as ,veil as unilateral negotiations and decisions undertaken by the countries v.or!d over. (iii) Trade Flows. Re1noval of trade barriers tilne and again has facilitated a rising growth rate of the world trade over the years. Ne1,v technology under IT revolution has created distribution channel, ,,vhich is difficult to be blocked under the protectionist trade policy. For example, French government's restriction on Am.erican films tends to be futile when these are shown through satellite or Internet (Economist, 1999). (iv) Capital Flows. In the Internet Age, capital has become internationally more mobile. (v) Factor Mobility. .tvfobility of individuals, information and kno,�,Jedge, as agents of production and countries has smoothened the growth process of globalization. Several complex and sensitive issues are inherent in the process and prollieration of globalization including the role of culture and political/ social acceptance and alternation of the required attitudes towards the change and involvement of the people at large in the global arena. Q. 2. Is globalization desil:able? Also state its limitations. Ans. Yes, Globalization is desirable. Removing barriers to international trade and investment are the twin. engines driving the global economy to,vards greater prosperity. Globalization has increased internation.al trade and cross-border investm.ent. It �rill result in lower prices for goods and services. Globalization stimulates economic gro�rth, raises the incomes of consumers and helps to create jobs in participating countries. The economic principle of co1nparative advantage is crucial in understanding the benefits of free trade and globalization. The concept of co1nparative advantage states that even if country A can produce two goods n1ore efficiently than country B and i f cow1tiy B can produce only one good more efficiently than country A, then it benefits both countries to specialize and produce the good that they have the con1parative advantage in producing. Limitations of Globalization. Anti Globalist movements and protests are increasing rapidly. People are protesting against a wide range of issues such as job losses in industries, do�'Ill>Vard pressure o n the wage rates of unskilled workers, environmental degradation and cultural imperialism of global corporations and MNCs. International inequality has increased by globalization. It has shown several negative effects on undeveloped countries. For exa,nple, per capita gross domestic product not risen in Africa. Significant number of undeveloped countries have been affected by detrimental effects on their currencies and cmormous levels of debt. There have been big intervals among q11alified and unqualified workers both in terms of salaries and amounts of

has

1. INTRODUCTION TO INTERNATIONAL BUSINESS

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unemployment. The consequence of globalization will have a great impact on wodd politics, income inequality and environmen t . The benefits and costs of Globalization are being strongly debated among businessmen, economists and politicians. The debate focuses on the impact of globalization on jobs, wages, environm.ent, ,v-orking conditions and national sovereignty.

Q. 3. Why companies globalise? Explain with suitable examples. Ans. Globalisation is the process of interaction and integration among the

people, companies and goverrunents of different nations. Globalisation refers to th e shift toiv-ards a more integrated and interdependent world econo1ny. Globalisation has increased in.ternational trade and cross border investlnent. It results in lower prices for goods and services. I t stimulates economic growth, raises the incomes of consmners and helps t o create ernployinent in different nations. Many companies need to vary aspects of their product-1nix and operations fron1 country to country depending on local tastes and preferences. Globalisation facilitates sourcing of goods and services fron1 locations around the world to take advantage of regional and national bom1daries in the cost and quality of factors of production. For example: IBM (International Business Machines Corporation.) is an American multinational technology company headquartered i n Armonk, New York, United States, with operations in over 170 countries. manu.factm·es computer hardware and software. One of its products is IBM Think Pad X31 laptop computer ,-vhich is designed. in U. S . , the case, keyboard and hard drive are ma.de in Thailand; display screen and rn.e:roory are made in South Korea; built-in wireless card is produced from Malaysia etc. In this way the firm tries to achieve optim.al effects of the productive activities of different locations around the globe. Amazon is an online retail company that sells products such as books, e-books, electronics, Kindle e-book readers and tablets. It is considered the largest online retailer in the vvorld. Amazon owes most of its success to its immense selection of products at competitive prices. Amazon's success is also due in part t o the success of the A1nazon Kindle, which is the leading e-book reader. In addition to th e United States, Amazon also has retail ,-vebsites specifically for t h e UK, Canada, Japan, China, France, India and several other countries.

It

A variett; of factors have contrilntted to the process of globalisation. S01ne of the 1nost important globalisation drivers are: (1) Containerization. The costs of ocean shipping have come do,,vn, 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, and it makes markets more contestable globally. (ii) Technological changes. Rapid and sustained technological changes have reduced the cost of transmitting and communicating kifonnation­ knov.rn. as "the death of distance" -a key factor behind trade in knowledge, products using web techl1ology. (iii.) Economies of scale. Due t o globalisation there has been. an increase in the minimum efficient scale associated with some industries. If the

(MES)

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SHIV A DELHI UNIVERSITY SERIES

MES is rising, a domestic market may be regarded as too small to satisfy

the selling needs of these industries. Many emerging countries have their ow:n transnational corporations. (iv) ·ouferences in tax systen1S. The desire of businesses to benefit from Jo,ver unit Jabour costs and other favourable production factors abroad has encouraged countries to adjust their tax systems to attract foreign direct investment (FDI). Many countries have become engaged in tax competition between each other in a bid to ,vin lucrative foreign investment projects. (v) Less protectionism. Old forn1s of non-tariff protection such as i.tnport licensing and foreign exchange controls have gradually been disn1antled. National Borders have opened and average in1port tariff levels have fallen. There has been a rise in n o n -tariff barriers such as i.tnport quotas as countries have struggled to achieve real economic growth and as a response to persistent trade and current account deficits. (vi) Growth Strategies of Transnational and Multinational Companies. In their pursuit of revenue and profit growth, global businesses and brands have invested significantly in expanding mtemationally. This is particularly the case for businesses owning brands that have proved they have the potential to be successful globally, particularly i.n faste.r­ growmg economies fuelled by growing numbers of middle-class consumers. Benefits ofglobalisation. are: (1) Encourages produce.rs and consumers to benefit from deeper division of labour and economies of scale. (ii) Competitive markets reduce monopoly profits and mcentive which com.pets the businesses to seek cost-reducing innovations. (ii) Enhanced growth has Jed to higher per capita incom.e-and helped many of the poorest co· untries to achieve faster economic growth and reduce extreme poverty. (-iv) Gains from sharing of ideas , skills , technologies across national borders. (v) Opening up of capital markets allows developi.t1g countries to borrow money to cover a domestic savings gap. (vi) Increased a�•vareness among consumers of challenges from cli.tnate change and wealtl1/mcome mequality. (vii) Competitive pressures of globalisation may prompt improved governance and better labour protection. Q. 4. What do you 1uean by huemational bu.siness? List and explain the factors responsible for the gro,vth of International Business in the recent past. Ans. lntemational Business is a process in ,,v-hich a. firm conducts business transactions all over the v-•orld. These transactions mclude the transfer of goods, services, technology, managerial knowledge and capital to other countries. International business engages in international trade or investment. It mvolves export or i.tnport from other countries. Features of .lnternation.al business (i) Large Scale operations. In International Business, all the business

1. INTRODUCTION TO INTERNATIONAL BUSINESS

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transactions are conducted on a very huge scale. Production and marketing activities are conducted on a large scale. (ii.) Integration of Economies. International Business integrates the economies of m.any countries. It uses finance, labour, infrastructure of one country in another country. (iii) Dominated by developed countries and MNCs. International business is majorly dominated by developed countries and their MNCs. For example, USA, Europe and Japan. (iv) Keen competition. International Business has t o face huge co1npetition in the world n1arket. The co111petition is between developed countries and developing countrys' MNCs. (v) Role of Science & Technology. International business gives a lot of importance to the use of Science & Technology. Inten1ational Business helps Global Companies to transfer top high-end technologies to the developing countries. (vi) International restrictions. International Business also faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments regulate International Business through trade blocks, tariff barriers, foreign exchange restrictions etc. (vii) Sensitive nature. International Business is very sensitive in natui:e. A.n.y change in economic policies, technology, political environment of a country has a huge impact on it. Marketing research shottld be conducted to find out and study these changes.

Factors responsible for the growth of International Business are as follows: • Technology. Technology has been a very important facilitating factor of International Business. It is a universal factor that crosses national and cultural boundaries. Once a technology is developed, it soon becomes available evety'l,vhere in the ,,vorld. For exainple, teclmology revolution like possession of patented technology encourages internationalization. International business has facilitated globalization of 1nedical and healthcare sector. Technology makes it imperative for the business firms t o capture 1narkets in various cow1tries and share the rising costs and risks. • Transportation and comn1wiication revolution. The International Technology revolution has made an ilnmense contribution to the emergence of international trade. The Internet and the World Wide vVeb have revolutionized the speed of illfonnation search and its disse1nination for global business. The develop111ents in the field of transportation such as air cargo, containerization and refrigeration, and supertonnage cargo ships have enabled quick and safe transportation of goods 1,vorldv;1 ide. • Con�petition. Another import.:.nt force driving International Business is increasing competition. Competition. compels firms to explore .n.e,,v ,,vays of increasing their efficiency, extending theiJ: international markets and by shifting certa.in production activities to reduce cost5. • Global marketing and R&D. Global marketing is marketing on a

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SHIV A DELHI UNIVERSITY SERIES ,vorld\.vide scale by taking commercial advantage of global operational differences, similarities an.d opportunities in order to meet global objectives. MNCs have invested in research and development areas in order to explore tradin.g techniques, standards and practices. • Regional Integration. The proliferation of regional integration schemes, like European Union (EU), North An1erica Free Trade Agreement (NAFTA), e t c . have created a borderless world behveen the member countries by reducing trade blocs and fostering the globalization trend. Tius has increased the cross-border investments and financial flo,vs among nations. • Emergence of Global Institutions. These institutions include The General Agreeme11t on Tariffs and Trade (the GATT), the World Trade Organizations (WTO); the International Monetary Agreement behveen nations and their functions are enshrined in inten1ational treaties.

Q. 5. How do you define International business? Compare and contrast International business with don1estic business.

Ans. International business, as the term suggests, includes any type of business activity that crosses national boundaries. No simple or universally accepted definition exists for the term international business. At one end of the definitional spectrum, it is also defined as an organization that buys and/or sells goods and services across hvo or n1ore national boundaries, even if the management is located in a single country. At the other end of the spectrum, it is equated only with those big enterprises which have operating units 01ttside their O\.Vl1 country. In the middle are institutional arrangements tnat provide for some managerial direction of economic activity taking place abroad but stop short of controlling o,-vnership of the business carrying on the activity, for 1:xample, Joint \Tentures with locally owned businesses or with foreign governments. Difference between International Trade and Dom.estic Trade. The scope of international trade is ·much wider than domestic trade, it involves the study of trade beyond the political boundaries of the country: • Mobility of Labour and Capital. The mobility of Jabour and capital is more within a country than in case of different countries. It is so mainly because of the san1e social, economic and political system v.1 ithin a country whereas in case of international ·trade there are restrictive immigration/ financial laws which prevent free mobility of labour and capital. Community attachment and patriotism also act as an impediment in the n1obility of labour from one country to anotl1er. According to classical economists, free flow of labour and capital from one country to another leads to difference in the cost of production of an item thereby making international trade possible. • Different monetary Set-up. Within a country there is a single currency wbich acts as a medium of exchange an.d facilitates the internal trade of goods and services whereas in case of international trade one needs to acquire the cuxrency before importing goods from that country. The exchange rate has a tremendous influence o.n the trade between the countries.

1. INTRODUCTION TO INTERNATIONAL BUSINESS

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• Different fiscal policies. Different countries have different modes of public spending and taxation policies whe.reas within a country generally the same tax structure is followed, which can lead t o inflow or outflow of capital from a particular coun.try. • Production Cost. The cost of production of an. item within a coun.try is nearly the same whereas it differs considerably between two countries. It is mainly because the social security laws, wage rates, taxes etc. are same within a country whereas these 1nay differ in two countries. The minimum wage rate in developed countries is much higher than the wage rates in underdeveloped countries because of higher cost of living. Hence a Jabour intensive item produced in a developed country n1ay cost much more than in a developing econon1y. • Product Immobility. A well-developed system of transport can help the easy movement of goods and services within a country at a minimal cost. I n case of international trade �v-e not only have to take distance into consideration but also the interest of the country cannot be ignored. • Nationalistic Feelings. In case of domestic trade there are no nationalistic feelings involved. Any organization v-•orking ,,vithin the "boundaries of a country is least suspected whereas in case of international trade, business o.tganizations v-rorking in an.other country are looked down upon by the host country. Their business is tenned as a drain on the economy. Sometimes certain organized groups hinder their en.try into the market, and slogans such as SWADESHl can be termed as a case in point. • Different Political set-ups. There a.re uniform la,\Ts concerning trade, commerce. and taxation within a country v-•herea� they differ in case of international trade. Every govemm.ent tries to protect its dom.estic business and industry from foreign intervention. Very often the direct or indirect state intervention influences the international trade whereas no such steps are taken in domestic trade. • Different Commercial Policies. Any country can impose a variety of restrictions on international transactions while the same are not i1nposed on domestic transactions. The restrictions may b e in the form of (1) Tariffs, (ii) Import quotas, (iit) Voluntary export restraint, (iv) Export Subsidies, (v) International Commodity Agreements, and (vi) Exchange control. Different Market Considerations. Difference in U1e demand pattern, sales techniques, market requirements and the like affect international transactions. Every country has its own policies regarding inflation, econon1ic gro,,vtl1 and employment vvhile these policies ,videly differ when lA/'e take different countries into consideration. [2012 Q. 6. Distinguish between Domestic and International Business. Ans. International business is the outgrowth of Dotnestic business. lvfost of the multinational enterprises (MNEs) started their operations in the domestic .market. Domestic business occurs ,vithin the boundaries of a single nation, whereas international "business transactions cross national borders. Cultural, political, legal, tta.de and technological en.vironme.nts overseas are likely to be different from country to country and .region to region within one country.

SHIV A DELHI UNIVERSITY SERIES

8

Main distinguishing features between International bus-in.ess and Domestic business: (i.) Scope. Scope of international business is quite Ivide. It includes not only merchandise exports, but also trade in services, licensing and fran.chising as well as foreign investments. Domestic business pertains to a limited territory. (ii) Benefits. International bnsiness benefits both the nations and firms. Domestic business has lesser benefits when compared to International business. (iii) Market Fluctuations. Firms conducting trade internationally can withstand market fluctuations and huge losses as their operations are widespread. Though they face losses in one area they may get profits in other areas. This provides for stabilizing effect during seasonal market fluctuations. Domestic business has to face this situation which results in lov1r profits and in some cases losses too. (iv) Modes of Entry. International business ranges from exporting/importing t o contract manufacturing abroad, licensing and franchising, joint ventures and setting up wholly o·wned subsidiaries abroad. Firms involved in dom.estic trade do have options but not as many as the the firms �th international business. (v) Sharing of Technology. International business provides for sharing of the latest technology that is inn.ovated in various firms across the globe which in conseq11ence will improve the mode and quality of their production. (vi.) Political relations. International business obviously improves the political climate among the nations ,,.,hich gives rise to Cross -national cooperation and agreement. Nations co-operate m. o re on transactional issues.

Q. 7. What are the complexities involved in international business? Compare and contrast it with domestic business. [2014 Ans. Co1nplexities in Intenzational Business:

(1)

There are different types of entry 1nodes. Each type has its own merits and demerits. A company has to make significant analysis of different entry modes. It is determined by a number of factors, such as transportation costs, trade barriers, political risks, business risks. (ii) Different countries have different labour-mixes. This means that Ivh:ile in one country, more skilled ivorkers are available, th e others may not have sufficient availability of skilled personnel. If cheap labour is available in one country, the others may have costly labour resources. (iii) Countries differ in their cultures, political system, economic system, legal system and levels of economic development. Managers need to recognize the1n and mu.st also adopt the appropriate policies and strategies for coping with them. (iv) International business involves cross-border trade and investments and managers must find v.1 ays to work within the limits imposed by specific governmental interventions.

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(v) International transactions involve converting money into different currencies. Managers must develop policies for dealing ,>\lith exchange rate movements. A .firm that adopts a ,vrong policy in this respect .may lose large amounts of m.oney, ,vhereas the right policy can increase the profitability of the company. Managing an international business is different from m.anaging a do1nestic business. The reasons are: (i) Countries are different. (ii) The range of problems faced by a manager in an international business is much wider and n1ore co1nplex than those confronted by a rnanager in a domestic business. (ii-I) International business operates in intenmtional trade and investment environment. (iv) International business focuses on the 11ature of the foreign exchange rnarket and the emerging global monetary system.

Q. 8. "Entry into International business is an incremental process in which a f.ixm gradually increases its foreign market presence/' Do you agree? Explain giving reasOll.S. Ans. Entry into International business is an incremental process. There are

various reasons in support of this statement: (1) Fir.n,s first gain experience from the domestic 1narket before they move in to the foreign markets. (ii) Firms start their foreign. operations from culturally and geographically close countries and .move gradually to geographically more distant countries. (iii) Firms start their foreign operations by using traditional export items and gradually move to catering to m.ore intensive and demanding operation modes both at the company and target country level. (iv) Firm's expansion in the sales, objects/products, operations and market strategy concerns help in ex'Pansion to ne,v foreign markets. (v) Finally, the firm will not comn1it higher levels of resources to the market until it has acquired increasing levels of experience and knowledge and therefore the internationalization evolves step •,vise at a relatively slow pace because of local market regulations and organisational learning. Tlzere are some basic entry decisions taken by any firm while stepp·ing into international -ina·rkets:

(a) Which markets to enter

• Long run profit potential • Size of the n1arket • Grov,rth rate • Cost and risks involved • Domestic coinpetition • Availability of reso1.1rces • Political and legal environment. (b) \'\Then to enter those markets or timing of the industry

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SHIV A DELHI UNIVERSITY SERIES

• First mover advantage-capture demand, establish strong brand name, build sales volume, pre-empt rivals, cost adva:otage etc. • First mover disadvantage-pioneering cost�, chance of failure due to ignorance of the foreign environment. • Late entrants-observe and learn from 1nistakes made by early entrants, no pioneering costs. (c) On what scale to enter • Small scale entry-learn and gather information, less risk but difficult to build market share or to capture early mover advantage. • Large scale entry-strategic commitment, easier to attract customers, affects competition but reduces resources available to support other expansions. Large scale entry reduces competition because it can prevent competitors to enter the market. Q. 9. Explain the various stages of irtternationalisation of busirtess.

Or

Discuss tl1e process of iuternationalisatiou of business. Ans. Most of the con1panies go through different stages of internationalisation. Some companies start their business at the international level having 100 per cent exports. Even in the case of the hundred per cent export oriented companies, the development of their international business passes th.Tough different stages of evolution. A company having domestic operations goes through different stages before it becomes truely global. Following are the important stages in the internationalisation of any business. 1. Domestic con,pany. Most of the i.ntei·nationaJ companies have their origin as domestic companies. A purely domestic company operates dom.estically because it never considers the option of going international. The growing stage of the company ends ,vhen it reaches gro,vth limits in its primary markets. The co1npany diversifies into nev-r markets, products and technologies instead of focusing o n international markets. Domestic market constraints, foreign market prospects, increasing co1npetition etc. make the company reorient its strategies and may encourage it to enter into foreign n1arkets. A domestic co1npany can extend its products and services to foreign markets by exporting, licensing and franchising. The company can develop a more serious approach toivards international business and move to the next stage of development i.e., international company. 2. Multinational company. In this stage the international co1npany becon1es multinational. In other vvords when a con1pany decides to respond to n1arket differences, it evolves into the stage three of internationalisation process. The company adopts a multidemensional marketing strategy to operate in different countries under multinational companies. Each foreign Sttbsidiary is 1nanaged as if it ,-vere an independent city state. The subsidiaries are part of an area structure in which each cotmtry is part of a regional organisation that reports to wodd headquarter. 3. Global con1pany. The global company may have either a global

1. INTRODUCTION TO INTERNATIONAL BUSINESS

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marketing strategy or global sourcing strategy. It ,vill either focus on global market9 and source from the home or a single country to supply these markets or it will .focus on the domestic market and source .from the world to supply its dom.estic net.\rork. Production marketing etc., however, can be global in respect of global companies. Such companies are integrated world enterprises that link global resources with global markets a t a profit. Q. 10. Write a brief note on orientation in the context of international business. Or Explain the various stages/approaches of orientation in international business. Or Discuss the EPRG frame,vork in the context of international business. Ans. The degree and nature of involvement in international business or the international orientations vary widely. The EPRG (Ethnocentric, Polycentric, Regiocentric and Geocentric) fran1e,,vork is helpful in understanding the levels of involvement of firn15 in international business. The EPRG scheme identifies four types of attitudes or orientations towards inte1nationalisation. These are associated with successive stages in the evolution of international operations. l. Ethnocentric approach (Home country orientation) 2. Polycentri.c app.roach (Host counti·y o.rientation) 3. Geocentric approach (vVorld orientation) The above mentioned stages are assumed to reflect the goals an.d philosophies of the company followed by it in cli£ferent stages of internationalisation. Under different stages a .finn adopt9 different strategies, approaches and policies. 1. 'Ethnocentric approach. Under this approach, foreign operations are as secondary to doni.estic operations. TI1e 1nanagement of the vie,v-ed , coni.pany vievvs don1estic techniques and personnel as far m.ore superior to foreign markets. Plans for overseas markets are developed in the hom.e office, utilising policies and procedures identical to those employed in the do1nestic 1narket. Foreign marketing is usually ad1ninistered by an e>-.-port department or international division and the marketing personnel include people primarily fT01n the ho1ne cow1try. Foreign market operations are conducted from a home country base and there is likely to be a strong dependence on export agents. 2. Polycentric approach. In this stage a company starts realising the importance of overseas markets. The company starts believing that local personnel and techniques are best suitable to deal with local n1arket conditions. Subsidiaries are established in overseas markets and each subsidiary operates independently of the others. It establishes its own marketing objectives and plans. While formulating the marketing strategy the environment of each market is taken into consideration. In this stage the company prepares its business strategies as per the local conditions. 3. Regiocent.ric approach.. A regiocentric company views different regions as di.fferent markets. A particulai: region ½>ith certain. important co.mmon marketing features is considered as a single .market irrespective of

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international boundaries. Strategy integration, organisational approach and product policy tend to be implemented at regional headquarters on the one hand betv,een regional headquarters and individual subsidiaries on the other. 4. Geocentric approach. Under this approach, a company vie1,vs the entire ,vorld as a single market. It develops standarised marketing mix, projecting a uniform image of the company and its products for the global market. The business of a company follo,.ving this approach is usually characterised by sufficiently distinctive national markets where the ethnocentric approach is unworkable. Thus this approach views the entire globe as a single market. National environmental constraints can restrict multinational operations and can make th.is approach unfeasible for certain companies. Q. 11. What are the different modes of entry into international business? Give their advantages and disadvantages.

Or

Discuss the co1ttractual entry 1nodes used by fu1ns to enter international business. Ans. Contractual entry m.odes are used in case of intangible products such as technology, patents, etc. ,iVhen a coi:npany develops a particular technology through i ts own research and development programme, it likes to recover the cost of research and development. 11,erefore, it sells the technology either to a domestic firm or to a foreign firm. But in this case, the pri,vacy o.£ techn.o)ogy is not secured and the firm's o,-vnership advantage is always at stake. Thus, in order to maintain the o,-vnership advantage, the firm. passes on the technology only to its own. subsidiary located abroad. I n case, the host country's governm.ent does not permit any foreign investment, the subsidiary of the firm in that host country cannot exist and therefore transfer of technology through contractual deals is the only way out. Different types of Entry in.odes in international Business. Foreign market entry 1nodes differ in tenns of risk, control and conu:nitrnent of resources tl1ey require and the return on invesln1ent. There are two major types of entry modes. Equity and Non-equity 1nodes. (i) Equity mode includes Joint Ventures and ltVholly oumed subsidiaries. (ii) Non-equity 1node includes Export and Contract11al agreetnents. E:>.:port. It refers to selling of goods produced in one's 01,vn country for use or resale in other countries. It may be in the forn, of merchandise export. For example, export of clothing, raw materials, computers, etc., Or Export of services, For exmnple, ton.rism, banking, insurance, engineering, manage111ent services, etc. Exports may be direct or indirect. Advantages of Export: • It avoids substantial costs of establishing manufacturing operations in the host cou:ntry. • It is less risky and less costly.

1. INTRODUCTION TO INTERNATIONAL BUSINESS

13

• It gives flexibility to enter in a large number of 1narkets outside the producer's country. Disadvantag. es of Expol't: • Fluctuations in exchange rate may cause losses to the Ell.-porting £inn. • Less control over m.arketing and sale of product. • Transportation cost is an important factor. If it is very high, it may vvipe out profits. Cont1:ach1al agreeme11ts. Licensing, Franchising, Turnkey projects. 1. Licensing. A licensing agreen1ent allov.s foreign firms, either exclusively or non-exclusively, to 1nanufacture a proprietor's (Exporter's) product for a fixed tenn in a specific 1narket. Adval1tages of Licensing: • Obtain extra in.come for technical knov.r-ho,-v and services. • Quickly expand ,vithout much risk and large capital investm.ent. • Pave the ,vay for future investments in the market. • Political risk is nu.nitnized as the Licensee is usually 100% local • ls highly attractive for companies that are ne"v- in International Business. Disadvantages of Licensing: • Lo,-ver income than in. other entry n1odes. • Loss 0£ control ovel' the licensee manufacturer and his marketing operations an.d practices leading to loss of quality. • Risk of having trademark and reputation nrined by an incompetent partner. 2. Franchising. A firm in one country (the franchiser) authorizes a firm in a another countly (the franchisee) to ulilize its operating system as ·well as its brand names, trademarks and logos etc. The franchisor receives royalty payments ,.vhich amounts to sorne percentage of the franchisee's revenues. Advantages of Franchising: • Lo,,v political risk • Lo�v cost • Simultaneous expansion into different regions of the world. • Well selected partners bring financial investment as well as 1nanagerial capabilities to the operation. Disadvantages of Franchising: • Franchisees may tum into future competitors. • A wrong franchisee may ruin the company's name and reputation in the market. 3. Turnkey projects. A turnkey project refers to a project when clients pay contractors to design and consb:uct new facilities and train personnel. It is a way fo.r a foreign company to export its process and technology. Advantages of Turnkey projects: Possibility for a company to establish a plant and earn profits in a foreign country where FDI opportunities are !united and lack of expertise in a specific area.

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Disadvantages of Turnkey projects: • Risk of revealing con,pany's secrets to rivals. • Take over of the plant by the host country. 4. Wholly Owned Subsidiaries. A iv11olly owned subsidiary includes two types of strategies: Greenfield invest111ent and Acquisitions. To decide which entry mode to use depends on the ground situation. The firm can either set up a new operation in a foreign country, kno,vn as Greenfield venture, or it can aquire an established fin:n in that host nation and use that firLn to promote its products (acquisitions). Advantages of Wholly O�vned Subsidiaries: • Wholly owned subsidiary gives the firn1 tight control over operations in different countries. • It may be beneficial if a fir1n is trying to realize location and experience curve economies. Disadvantages of Wholly Owned Subsidiaries: • It is a costly method of serving a foreign 1narket from Capital investment point of viewr. • By applying acquisitions, some co1npanies significantly increase their levels of debt which can have negative effects on the firm because high debt may cause bankruptcy. 5 . Joint Vent'Ures. A JV refers to establishing a firn1 that is jointly 01.vned by t\vo or more independent finns. There are five common objectives in a Joint venture: market entry, risk/reward sharing, techJ.1o)ogy sharing and joint product development, and confo1111ing to govenunent regulations. Other benefits include political connections and distribution channel access. Disadvantages Joil1t Venttu:e: • Conflict over asymmetric ne,v investments. • Misti:ust ove:r proprietary kno�,vledge. Q. 12. Identify the mode of entry in the following cases .rnd explain its advantages and disadvantages: [2015 (1) Airtel has purchased Zain Telecommunications in South Africa. (2) There are a large no. of Pizza-hut restaurants in India but none of theni. is owned by Pizza-hut. (b) (1) Mode of entry-Acquisition. International acquisition is one in which a firm acquires an existing host country. By acquiring a current business, the purchaser gains control over tl1e acquired firm's assets, employees, technology, brand names and disttibution. It is faster than any other n,ode. Advantages of Acquisition: • Speed. It provides the ability to speedily acquire resources and competencies not held in house. It allo-.vs entry into new products and new markets. Risks and costs of new product development decrease. • Market power. It builds market presence. Market share increases. Competition decreases. Excessive competitio:n can be avoided by shut down of capacity. Diversification is aggrieved and synergistic benefits are gained.

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• Overcomes en.try barrier. It overcomes market entry barrier b y acquiring an existing organization. The risk of competitive reaction decreases. • Financial gain. Organization with low sha:re value or low price earning ratio can be acquired to take short-term gains through assets stripping. • Resources and competencies. Acquisition. of resources and competencies not available in-house can be a m.otive for m.erger and acquisition. • Stakeholder expectations. Stakeholders may expect growth through acquisitions. Disadvantages ofAcquisition: • Integration problems. The activities of new and old organizations may b e difficult to integrate. Cultural fit can be proble1natic. All organizations will involve some conflict and turbulence du.ring the process of acculturation. Employees may resist it. • High cost. The acqttirer may pay high cost, especially in cases of hostile takeover bids. Value may not be added for the acquirer. • Financial consequences. The returns from acquisitions n1ay not be attractive. Executed cost saving may not materialize. • Unrelated diversification. This may create problem of managing resources and competencies. • Too much focus. Too much managerial focus on acquisition can be detrimental to internal development. (2) Model of Entry-Franchising. It is a contractual agreement of goods, services and busineS-s model for specified fees usually a signing fee and percentage of the franchisee's revenue or profits. The franchiser provides trade mark, operating system, well-k:no,vn products as well as service support such as advertising, quality assurance, specialized training to the franchisee. Advantages of Franchising: • association ,.vith a 'l-\7ell established brand, reputation and product or service; • assistance with site selection, lease negotiation, site development, builders and shop .fitters; • assistance ,vith outlet design and equipment purchasing; • initial n1anagement training and continuing management assistance; • access to group/national market research, along ,.vith advertising and mercha:ndi�ing assistance; • access to established standard procedures, operating .manuals and stock control systems; • assistance in securing finance and som.etimes financial assistance in establishing the business; • access to financing packages which n1ay b e more attractive and easier to access than. for non-franchised businesses; and • access to established financial systems and checks which can provide early '\\1arning signals to highlight trouble spots. Disadvantages of Franchising: • inconsistent product quality may affect product image negatively.

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• the agreement gen.erally prohibits the originating firm from exploiting the assets in parti. cular foreign markets. • does not give firm tight control over manufacturing, .marketing and strategy to realize experience curve and econo1nies of scale. • firtn can lose control over the competitive advantage of their technological know-hovv.

Q. 13. "\\That is a Transnational Corporation (TNC)? Explain its characteristic

features.

Ans. A Transnational Corporation is an enterprise that manages production or delivers services in 1nore than one country. A 1NC is a corporation that has its headquarters in one country, knovvn as the hon1e country and operates in several other countries, knov-rn as 1wsl countries. Examples of TNCs. Royal Dutch Shell Group (Netherlands/United Kingdom); Daimler Chrysler AG (Germany/USA), Unilever (Netherlands/United Kingdom); Rio Tinto Pie (Australia/United Kingdom). The growth in the number and size of transnational corporations since the 1950s has generated controversy because of their economic and political power and the mobility and con1plexity of their operations. Features/Characteristics of Transnational corporations: (i) Transnational companies operate in two or more countries, including in its country of origin. Its business, such as sales, extraction or manufacturing and spans multiple countries. Its management system focuses on a global or regional outlook. (ii) Trans.national companies tend to adapt their services or goods to the local preferences of the host countries. (iii) They also strive to craft a business m.odel that suits the particular regions in which they operate by blending their strategies with the development policies of the host countries. (iv) There is often an emphasis on green and sustainable development in the local region as a result of studying and responding to the local ecological environment's needs. (v) Transnational co1npanies emphasize their o,'1'11 global strategies that ensure tl1eir continued thriving in the international scene and their long­ term development and expansion. The rnain advantages of Transnational corporations: (i) The investment level, employment level, and income level of the host country increases due to the operation of 1NCs. (ii) TI1e industries of the host country get latest technology from foreign countries through TNCs. (iii) The host country's business also gets management expertise from. TNCs. (iv) The domestic traders and market intermediaries of the host country get increased business from the operation of T.NCs. (v) TNCs break protectionism, curb local monopolies, create competition among dom.estic companies and thus enhance their competitiveness. (vi) Domestic ind1.1stries ca.n make use o.f R and D outcom.es of 1NCs. (vii) The host country can reduce imports and increase exports due to goods

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produced by TNCs in the host coui1try. This helps to improve balance of payment. (viii.) Level of industrial and economic development increases due to the gro,vth of TNCs in. the host country. The li1n.itations of Transnational Corporations. Som.e critics argue that trans­ national corporations exhibit no loyalty to the countries in which they are incorporated but act solely in their 01"'11 best interests. Transnational corporations with headquarters in the United States have played an increasingly dominant role in the world economy. This dominance is most pronounced in the developing countries that rely prin1arily on a narrow range of exports, usually primary goods. A transnationals corporation has the ability to disrupt traditional economies, impose monopolistic practices, and assert a political and economic agenda on a country. The basic difference between a 1n11ltinational tind a transnational lies in the fact that transnational con1pany is borderless, as i t does not consider any particular country as its base, home or headquarters. Multinationals have branches in other countiies, whereas transnational have subsidiaries.

2. International Business Environment:

National and foreign environments and their components-Physical, Economic, Demographic, cultural and political-legal environments; Global trading environment; Recent Trends in World Trade in goods and Services; Trends in India's foreign trade.

Q . l. l\That do you understand by Business Environment? Ans. The business environment is the set of forces su;rround:ing an. organisation

that has the potential to affect the way it operates and has access to resources. It may be visualized in terms of three layers surrounding the organisation. from. the General environm.ent to Specific environm.ent and to Domain, beginning with the immediate internal environment of the organisation, to the general environment. The environment influences the organisation, i.e., its strategy, structure and operations. The General environment. It includes those sectors that might not have direct ilnpact o n the daily operations of the finn but will influence it. It is less overt and indirect but creates 1najor opportunities and threats to all industries and to all organisations in a given industry, but in different ways v1hich may be favourable or unfavourable in varying degrees. It consists of several sectors or dimensions such as -economic, political legal, technological, cultural and social. Each sector has its O"-'Il structural, regulatory and ethical practices. The Specific environrnent. It consist of forces of stakeholder groups that directly affect an organisation's capacity to attract resources. It entails suppliers, customers, shareholders, unions and distributors, etc. with whom th.e organisation interacts on regular basis and on whose support depends its survival and grov-rth. An. organisation's strategy and achievement of goals largely depend on how much it satisfies them. Governrnent and international forces prevail both in general. as well as specific envi.ron1nent. The Organisa-tional Do,nain. It refers to the particular ra.nge of goods and services that the organisation produces, the customers and other stakeholders and market it serves. Earlier these environmental forces were seen as centred on the home country of the business, but the environmental horizon of business has now widened and gro'l-vn. to many countries requiring consideration of internal forces along v-rith global forces.

11

Pollttcol &

lntemcttonol

Socio ! and Cultvrol forces Customers

I

forces

[Ths DlslJlbutcrs

I

[Th& Organlsatton

Govetnment

Supplieved to make in1ports using the foreign exchange they have earned through exports. These steps have profound influence on India's performance on foreign trade front. India's e:>q,orts (m.erchandise and services) which also had robust growth of 30.1% in the five pre-crisis years (2003-07) decelerated to 16.0% per cent in the fi,,e post-crisis years (2009-13). Though the outlook is still better, the situation is still fragile for both ,vorld and Indian trade. Trends in. India's foreig11 trade in. the last decade. Foreign trade includes all the imports and exports to and fro.m India. At the level of Central Government it is administered by the Ministry of Commerce and Industry. Trends in India's Foreign Trade:

(� India's m.erchandise exports reached a level of US$ 304.62 billion during 2011-12 showing a grovvth of 21.30 per cent as compared to a grov.,th of 40.49 per cent during the previous year. Despite the recent setback faced by India's export sector due to global slowdo,vn, merchandise exports still recorded a Compound Annual Growth Rate (CAGR) of 20.3 per cent from 2004-05 to 2011-12. (ii) As per WTO's International Trade Statistics 2012, in merchandise trade, h1dia is the 19th largest exporter in the ,vorld with a share of 1.7 per cent and the 12th largest importer v.rith a share of 2.5 per cent in 2011. (iii) Exports recorded a gro,-vth of 21.30 per cent during Apr-Mar 2011-12. The Government has set an export target of US$ 360 billion for 2012-13. The 111erchandise exports ha,1e reached US$ 265.95 billion in 2012-13. (iv) Value of imports during 2012-13 was US$ 448. 0 4 billion as against US$ 446.94 billion during the previous year shov.1ing a growth of 0.25 per cent in$ terms. Oil imports were valued at US$ 155.57 billion during 2012-13 which ,vas 11.92 per cent higher than oil imports valued US$ 139.00 billion in the previous year. (v) The trade deficit in 2012-13 (Apr-Feb) was estimated at US $ 182.09 billion which was higher than the deficit of US$ 169.81 billion during 2011-12. (zri) E>rports of the top five cornmodities during the period 2012-13 (April­ January) registered a share of 50.8 per cen,t in US$ terms mainly due to significant contribution in the exports of Petroleum (Crude & Products), Gems & Je1-vellery, Transport Equipments, Machinery and Instruments and Drugs, Pharmaceuticals & Fine Chemicals. (vii) India's Gems and Jewellery exports declined by 9.3 per cent to US$ 39 billion in 2012-13 because of lov.1er den1and :fro1n global n,arkets, especially in the US and Europe.

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(viii) TI\e share of Asia comprising of East Asia, ASEAN, West Asia, Other West Asia, North East Asia and South Asia accounted for 50.78 per cent of India's total ex'Ports in US$ terms. The share of Europe and Atnerica in India's exports stood at 18.88 per cent and 18.77 per cent respectively. USA has been the most important country of export destination follovved by UAE (12.20 per cent), Singapore (4.79 percent), China (4.59 per cent) and Hong Kong (3.95 per cent). Q. 3. (a) Distinguish between 'Balance of Trade' and 'Balance of Payn1e11t

Account'. Briefly explain the reasons for the adverse balance of payments sihtation in India. 8 (b) Briefly explain the role ofWTO as regulator and promoter of world trade. Ans. (a) Difference between Bala.nee

of Paynte.nt and Balance of Trade.

7

Balance of Paytnent Balance of Trade Balance of payn1ent 1S a Balance of trade is a statement that keeps a h·ack staten,ent that captures the of all economic transactions counhy's export and import done by the country 'vvHh of goods with the rest of the the rest of the ,.,orld. world. 2. Records Transactions related to both Transactions related to goods and services are goods only are recorded. recorded. They are not included in the 3. Capital They are included in transfers Balance of payment account. Balance of trade. 4. Focus It focuses on the clear vie¼' It focuses on a partial vie,-v of the economic position of of the country's econonuc status. the country. Under Balance of payment Balance of Trade can be 5. Outcom.e account both the receipts favourable, unfavourable or balanced. and payment sides tally. 6. Components Current account and capital BOT is a component of account are the U\illll CUJ:Tent account of balance con,ponents of BOP. of payment. The main causes of adverse Balance of Pay,nents situation iri India a1·e: I. Econontlc factors: (a) The 1nain cause of adverse BOP situation in India is imbalance ben,veen exports and in1ports. The country's volun1e of exports have always been less than the volume of imports. (b) Another reason behind deficit on BOP is large scale development expenditure that results i.n larger voluxne of impo.rts. (c) High rate of inflation within the country encourages i1nports. This also results in excess of imports over exports. (d) Cyclical fluctuations like depression, recession in general business activity causes deficit in BOP. Basis 1. :tv[ea.ning

.

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IL Political factors: Political instability and frequent change of ruling govenunent causes imbalance between in:flov.1 and outflo,v of capital. III. Social factors: (a) Changes in tastes and preferences of the people influence U,e pattern and volu1ne of exports as well as imports resulting in disequilibrium in BOP. (b) Another major reason behind deficit in BOP is massive population of the country. Due to large scale population, the country has been depending heavily on imports. Large imports are required by the country to cater to the needs of the massive population of the country. Tiris has been the main reason behind the mismatch between tl1e country's exports and in1ports. (b) WTO. See Q. 1 & Q. 2, Chapter 4, International and Econotnic organization. [Pages 45 -46

Or

\Vhat are the 1neasures taken by the Government of India to promote FDI in India? 'Briefly analyze the impact of such measures in the recent years. 15 Ans. A investm.ent made by foreign business entity into a business entity in another counb.y is called Foreign Direct Investment. Foreign invest:J.nent is the investment originating from other countries. Foreign Direct Investment plays an important role in. the developm.ent of an economy. It helps in achieving a certain. degree of financial stability development an.d growth. In order to attract Foreign Direct Investment (FDI), the Governm.ent has put in place a policy fra1nework on FDI which is transparent, predictable and easily comprehensible. Ever since coming to power, the NDA government has taken a number of steps to bolster the FD! scen,.rio in India. It has enabled international entities like Carrefour and Wahnart to con1e and invest in the multi-brand retail 1narket in India. The retail market in India has been growing at a su.bstantial rate and at present, it is \¥orth son1e,,\/'here around 28 billio11 dollars. It is expected that in 2020, this value will reach approximately 260 billion dollars. The Indian government has announced a number of reforms and has implem.ented several industrial policies: • TI1e FD! is allowed in India through collaborations such as Joint Venture collaborations, preferential allotinents and investment through EURO issues. • It has opened an FDI route by setting up of 100% EO'Us /EHTPs/ STPs, etc. and entering into Foreign technology agreement. • FD! is encouraged in almost all the economic activities under the automatic route. • Huge amounts of FD! is corning into India through non-resident Indians, international companies and various other foreign investors. • FDI Approval in India is also done by the Foreign Investment Promotion Board. The time taken by Foreign Investment Promotion Board for approving the proposals for foreign direct investment in India is betv.•een four to six weeks.

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Foreign Direct Investment (FDI) and .Economic Growth: The economic development witnessed du.ring the pa.st two decades h1 India rests to a great extent on Foreign Direct Investment (FDI). FDI has been a vital non-debt financial force behind the economic upsurge in India. Special investm.ent vantages like cheap cost wages and tax exemptions o n the amount being invested attract foreign companies to invest in India. FDI in India is done across a wide range of industries and its relentless influx reflects the tremendous scope, faith and trust that foreign investors have in the Indian econo1ny. To ensure an. uninterrupted inflow of FD! in India, the Indian govermnent has created conducive 'LTade atn1osphere and effective business policy 1neasures in place. This strategy is reflected in the steps taken by the govenm1ent, such as easing out the restrictions levied on sectors like stock exchanges, power exchanges, defence, telecommunications and PSU oil refineries to name a fev,. The Indian Market for ffil: The last fiscal (2014-15) year sa\.V' a considerable increase in the FD! made in India. India's pro-growth business policies have contributed a great deal in making this possible. The first five rnonths of the 2014-15 fiscal year noticed a net inflow of US$ 14.l million FDI in h1dia, amounting to a good 33.5 per cent rise in the FDI influx. Advantages of ffiI in India: There are several benefits of increasing foreign direct investment in India. First of all, with more FDI, consumers will be able to save 5 to 10 per cent on their expenses because products v.rill be available at much less rates and to top it all, the quality ,,\>'ill be better as well. It i.s also expected that the farm.ers who face a Jot of economic problems 1,vill also get better payment for their produce. It is expected that their earnings v.rill increase by 10 to 30 per cent. FDI is also supposed to have a positive effect on the employn1ent scenario by generating approximately 4 million job opporh1nihes. Areas like logistics ,,v-ill be benefited as ,-veil because of FD! and it is assumed that 6 million jobs will be created. The governments-both central and state-will be benefited because of FD!. An addition of 25-30 billion dollars to the national treasury is also expected. Invest1nents in India during 2015-16: The Indian goven1ment, during the 2014-15 fiscal year, armounced that it would allow FD! worth US$ 14.65 billion into the railways infrastructure. Son1e of the most expensive and largest raihvay projects will be carried out under these investments. Hundred per cent FD! into the health sector will be allovved by l:he Department of Industrial PoliC)' and Pron1otion (DIPP) to enable indigenous 1nanufactwing and reduc-eimports of 1nedical devices, By the next fiscal year, the value of n1edical devices in the world market will be ,vorth US$ 400 billion. The equity investment in the real estate is expected to go t\.v-o-fold as the Indian government has allo1ved 100 per cent FD! into the construction sector. Q. 4. 'Economi.c integration is achieved after pa.ssing through different stages.' Analyze the statement by giving suitable exam.pies. How successfully has ASEAN promoted integration in the Asian region? 15 Ans. Econornic Integration. See Q. 1, Chapter 5, Regional Economic Integration. [Page 55

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ASEA.N. See Q. 3, Otapter 5, Regional Economic Integration.

Or

[Page 58

What are the different functions of foreign exchange market? 'Distinguish between the Foreign Exchange risk and Foreign Exchange exposure. Ans. Functions of Foreign Exchange Market. See Q. 5, Chapter 6, International Financial Environment. [Page 64 Difference betiveen Foreign Exchange Risk and Foreign Exchange Exposure. Foreign Exchange Risk is defined as the net potential gains or losses which can

arise from exchange rate changes to the foreign exchange exposure of an enterprise. It is possible that an adverse exchange rate movement may turn an otherwise profitable deal into a loss. It is also possible that an unexpected movement in the exchange rate is favourable and bring windfall profits. O n the other hand, Foreign Exchange Exposure is defined as the extend to which the transactions, assets and liabilities of an enterprise are deno1ninated in currencies other than the reporting currency of the enterprise itself. The reporting cutTency is normally U1e national currency of the parent company. Exposure arises because the enterprise denominates transaction in a foreign cun·ency o r it operates in a foreign market. Foreign exchange risk is related to the variability of the domestic currency, values of assets, liabilities or operating income due to unanticipated changes in exchange rates, '"'hereas Foreign Exchange exposure is ,IThat is at risk. Exposure relates to the total value of assets, liabilities or cash £101¥s of an enterprise denominated in foreign currency, 1¥hile Foreign Exchange risk relates to the excess or shortfall in the cash flows or value of assets or liabilities likely to arise on account of exchange rate fluctuations. Q. 5. (a) What is Outsourcing? Discuss the different factors, which play a key role in a firm's decisions to outsource some of its business operations. 8

(b) Explain the concept of strategic alliances. 'Briefly explain the advantages and disadvantages of strategic alliances. 7

Ans. (a) 'Business Process Outsourcing (BPO). Outsourcing means to engage the services of an external service provider (i.e. the outsourcer) to manage and deliver services in respect of one or more business activities of non-core nature to the client (or outsourced). In an outsourcing agreement, there are two parties - U1e client con1pany or U1e outsourced who l'l'ants a business activity to be externally perfo1med, and the vendor or the external service provider or the outsourcer who manages and delivers U1e services to the client con1pany. Business Process Outsourcing n1ay b e defined as, "the contracting out of a

cornpany's i n -house function partic11lar task area."

t(1

a preferred vendor tvith a high quality leoel in a

the delegation of one or ,nore, IT enabled business processes to a third parhJ that otons, administers and n1an11ges the business processes according to a defined set ofmetric.s." According to Gal'ner, "BPO is

ln simple �vords, BPO means getting a business task accomplished through an ou.tside agency. For exan1ple, the advertisement of its prod,icts can be done by a company itself, and it could be done through some advertising agency. The latter

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case i.e., getting advertisement done through an advertising agency is an instance of outsouxcing. BPO cons·ists of hiring out the rotttine and regular tasks on contract to an outside specialist agency. The idea of business process outsourcing h.as its origin in the Core Com.petency Theory, propounded by famous management consultant C.K. Prahlad. The basic contention of the Competency Theory is that a business enterprise should identify what are its core competencies and should focus only on them.

Nature of Outsourcing:

(i) The

i.e., "a business enterprise m.ust concentrate its attention only on its core ac/:i.vities like 1nan1ifacturing, 1narketing, etc.; a:n.d get non-core activities done through s01ne extenml agency." idea behind outsourcing is that of specialisation

(ii) Outsourcing is getting routine business activities done through exte1nal service providers on a regular basis.

Need for outsourcing of business operations by a firm: (1) Concentration on core co1npetency areas leading to specialisation.

(ii) (iii)

(iv) (v)

(vi)

(vii)

(viii)

Outsourcing enables an enterprise to concentrate its attention on core competency areas like manufacturing, ma . rlider public consultation. 9 . Tiueat to water security. 10. Bypassing local governments and ignoring local communities. 11. Increases regional disparities. Approval mechanism for SEZ For approval of SEZ, the developer submits the proposal for establish1nent of SEZ to the concerned state govern1nent. The State Govem1nent has to forv-rard th.e proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. The Board of Approval has been constituted by the Central Govern1nent in exercise of the po,vers co.nferrcd under the SEZ Act. All the decisions are ta.ken in

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the Board of Approval by consensus. The Board of Approval has 19 Members. Its constitution is as follows:

Departnie11t

S.No.

(i)

(i1)

Secretary, [)epartrnent of Commerce

Members Chairman

JV!ernber, CBEC

Member

(iii)

. M ember, IT, CBDT

(iv)

Member

JointSecretary (l3anking Division), Department of Economic Affairs, Ministry of Finance

Member

(v)

JointSecretary (SEZ), Department of Commerce

Member

(vt)

JointSecretary, DIPP

Member

JointSecretary, Mi.J.ustrv of Science and Technology

1-lernber

JointSecretary, Nlinistry of SmallScale Industries and Agro and Rural Industries

Member

(ix)

JointSecretary, Ministry of Home Affairs

Member

(x)

JointSecretarv, Ministrv of Defence

Mernber

(x1)

JointSecretary, Ministry of Environment and Forests

'tvfernber

(vii) (viii)

(xii)

JointSecretary, Ministry of Lav-• and Justice

Member

(xiii)

Joint Secretary, .Ministry of Overseas Indian Affairs

Member

(xiv)

JointSecretary, Mlnistry of Urban Develop·ment

Me1nber

(xv)

A nominee of theState Govenunent concen1ed

Meinber

(xvi)

Director General of Foreign Trade or his non1inee

Member

Development Conlffiissioner concerned

Member

A professor in the Indian Institute of lvianagement or the Indian Institute of Foreign Trade

1,iernber

(xvii) (xviii) (xix)

Director or DeputySecretary, lvlinistry of Co1nm.erce and In.du�:• .,, . Departmei1t of Commerce

Member Secretary

The SEZ rules provide for:

• Simplified procedures £or developn1ent, operation and maintenance of the

Special Economic Zones and for setting u p units and conducting business inSEZs. • Single wi11dow clearance for setting up a unit in aSpecial Economic Zone. • Single window clearance on 1natters relating to Central as ,-v-ell asState Governments. • Simplified co1npliance ptocedirres and documentation ·1-vith an emphasis on self certification. Ad1ni11istrative set up: The functiorung of theS'EZs is governed b y a three tier administrative set up. The Board of Approval is the apex body and is headed by theSecretary, Departtnent of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. Each Zone is headed by a Development Comn:tissioner, who i9 ex-officio chairperson of the Approval Comn'littee.

INTERNAT[ONAL BUSINESS-2020 (MAY)

13S

Once an SEZ has been approved by the Board of Approval and Central Government has notified U1e area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of w1its in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Custon1S Authorities and representatives o f State Government. All post approval clearances including grant of importer-exporter code number, change i n U1e nru.ne of the con1pany or in1plementing agency, broad banding diversification, etc. ru.·e given at the Zone level by U1e Development Commissioner. The performance of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provisions of Foreign Trade (Developn1ent and Regulation) Act, in case of violation of the conditions of approval. Q. 6. What induces disequilibrium in Balance of Paymen.ts in developing countries? Also ex_plain the relevaltCe of export promotion and in1port substitution as measures to control the deficit in. t'he Balance of Payments. Ans. Export promotion and import substitution both are very significant 1neasures to attain favourable balance of payn1et1ts and balance of trade situation. Export pro11,otion comprises all those government and non-goverrune:nt efforts, rules, procedures, courses of action. and techniques that are adopted to boost exports in terms of value as ,-vell as volume. Thus all those measures, schemes, policies, procedures and m.ethods that are adopted for increasing export are known as export promotion n1easures. For developing economies like India export promotion plays a key role in attaining the objective of self reliance. Export pr o·motion is the policy of the government designed to encourage the exporters to export more goods fron1 the country than before. Exports are lifeline and n1otive power for economic gro,vth and development. E:>(port promotion refers to those policies and measures ,vhich can result into maximum increase in the exports of a cou;ntry. There is an imperative necessity to promote exports in Indian economy due to fue follo,ving reasons: To earn foreign exchange

(i) (ir)

(iii.) (iv)

(v)

(vi) (vii.) (viii.) (ix) (x) (xi) (xii.) (xiii)

To motivate organizations to export To promote interests of Indian exporte:rs and keeping co1nmitment of To import capital goods To reduce bureaucratic hurdles To correct unfavourable balance of trade To ·reduce foreign loans To achieve the objective of self reliance To sell surplus production

wro

To fu1ru.1ce in1ports Export of new products Defray the cost of defence imports, to ensure successful planning, etc. To contribute to the economic develop1nent of country. Import substitution., on the other hand, 1neans production of those goods that are in1ported fron1 foreign countries. I1nport substitu·tion is essential for achieving self sufficiency.

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SHIV DAS DELHI UNIVERSITY SERIES

Following points highlight the role and in,po,.tance of import substitution:

(1) It reduces itnports (ir) It incr.eases self sufficiency

(iii) It is a source of earning valuable foreign currencies (iv) It reduces imbalance in foreign trade (v) It encourages industrial. develop.ment (vi.) Creates new sources of recruitment (vii.) It saves local currency (viii) It reduces foreign debts (ix) It reduces dependence on foreign countries (x) It offers overall assistance in increasing exports and rapid economic development of the country. Import substitution is a strategy under trade policy that abolishes the ilnport of foreign products and encourages for the production of domestic goods. Post independence h,dia adopted this policy by imposil,g heavy tariffs on irnport duty. In,port substitution ain,s at blocking itnports of manufactured goods to help the domestic economy by increasing the demand for domestically produced goods. For large developing economies like India, import substitution can offer several advantages such as econonuc growth, itnproved GDP, employment generation and elin,ination of poverty, develop robust domestic n,anufacturing base and industrializatio11, etc. The 1nain objective of the policy of import substitution is to encourage national production, development of the new products to stin1ulate demand and itnport restrictions. Import substitution can also b e discussed as a policy strategy that attempts to utilize underused capacities, reduce regional unemployment or protect infant industries. Import substitution policy is a set of measures that aim at stitnulating production and co111petitiveness of domestic goods, increasing of domestic demand and optimization of demand for imports. It is determined by the need to redu.ce the dependence of transitive economy on econo.m ic leaders. Tariff regulation, quotas, introduction of limitation lists and multiplicity of the nation.al currency are used under this strategy. Moreover, preferential loans and taxation, overvaluation of the currency, govern:m.ental regulation, etc. are also used under import subsf'itu.tion policy.

J:J:JJ