1.

2 INTERNATIONAL BUSINESS

Objectives:
1. To familiarize the students with the concepts, functions and practices of international business.
2. To enable them get global perspective on issues related to business.

Module – 1
Nature of International Business (IB). Drivers of IB. IB and domestic business compared. Routes of
globalization, players in International Business. Evolution of IB. Theories of IB. Mercantilism, Theory of
Absolute Advantage. Theory of Comparative Advantage. National Competitive Advantage. Environment of
IB. Political, legal, technological, cultural, economic factors.

Module – 2
International Strategic Management – nature, process – scanning global environment – formulation of
strategies – implementation of strategies – evaluation and control. Organisational designs for IB. Factors
affecting designs. Global product design. Global area design. Global functional design. International
division structure.

Module – 3
International Human Resource Management (IHRM). IHRM and domestice HRM compared. Scope of
IHRM. HR planning. Selection of expartriates. Expat training. Expat remuneration. Expat failures and
ways of avoiding. Repatriation. Employee relations.
International operations Management. Nature - operations management and competitive advantages.
Strategic issues – sourcing v/s vertical integration, facilities location, strategic role of foreign plants,
international logistics, managing service operations, managing technology transfers.
International Financial Management – Nature - compared with domestic financial management. Scope –
current assets management, managing foreign exchange risks, international taxation, international
financing decision, international financial markets, international financial investment decisions.
International financial accounting – national differences in accounting, attempts to harmonise differences.
Financing foreign trade – India‘s foreign trade, balance of trade and balance of payments, financing export
trade and import trade.

International Marketing – nature compared with domestic marketing. Benefits from international
marketing. Major activities – market assessment, product decisions, promotion decisions, pricing
decisions, distribution decisions. Note: (https://www.enotesmba.com/2015/08/international-
marketing-management-notes.html)

Module – 4
Integration between countries. Levels of integration. Impact of Integration. Regional trading blocks
– EU, NAFTA, Mercosur, APEC, ASEAN, SAARC, Commodity agreements. GATT, WTO – functions,
structure, agreements, implications for India. International Strategic Alliances – Nature - Benefits. Pitfalls,
scope, managing alliances.

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 Module – 1

1.1 Introduction and Nature of International Business (IB).

1.2 Drivers of IB. IB and domestic business compared.
1.3 Routes or modes of globalisation,
1.4 players in International Business.
1.5 Evolution of IB.
1.6 Theories of IB ,mercantilism, Theory of Absolute
Advantage. Theory of Comparative Advantage. National
Competitive Advantage.
1.7 Environment of IB. Political, legal, technological,
cultural, economic factors.

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1.1 Introduction to International Business Nature of International
Business.

Meaning of International Business

International business is a business that involves transactions between parties in different global
locations. it can involve exchange of goods and services as well as technologies and people. When
you purchase an item in international website (such as Amazon, AliExpress or E bay) you are
taking part in an international business transaction. your purchase sets in motion a financial
transaction (your payment for the goods), a logistic transaction (the good are being sent to you
from China) and a consumer transaction (you are purchasing goods).

Definition:

International Business: It is defined as the process of extending the business activities from
domestic to any foreign country with an intention of targeting international customers, It is also
defined as the conduction of business activities by any company across the nations .

It can also be defined as the expansion of business functions to various countries with an objective
of fulfilling the needs and wants of international customers

1.1.1 Nature of international business

The main aspects of international business are as follows:

A) Long term - international business is complex and requires investment of time and money
and therefore, the main priority is to create a reliable system and relationship that will be able to
handle it over time - to make profit. Thus, if you are looking to have quick deals of quick wins, I
would suggest a different path of work. from my experience, at its best, international business is
like farming - you prepare, you work hard and wait and finally, you reap what you saw. So -
INTERNATIONAL BUSINESS IS A MARATHON AND NOT A 100 M DASH. TAKE A DEEP
BREATH AND HAVE LOTS OF PATIENCE.

B)Cultural difference - people act differently in different places, according to their local values,
ethics, traditions, etc. It means that you and your international partner to business, may have a
completely different perception regarding basic things. The concept of time differs between many
regions (you may think that the other party is breaching the contract by not delivering on a said
date, while the other party does not consider 1 or 2 days as a significant delay). The letter that
your lawyer sent to the customer maybe a perfectly accepted document in the US, but will be
perceived as a threat or lack of trust, when sent to company in central Asia or former soviet union.
So - IT IS IMPORTANT TO UNDERSTAND THE LOCAL WAYS OF DOING BUSINESS AND
THE PREVAILING CONCEPTS.
C)Different countries - different laws. When working internationally, it is important to
understand what is the applicable law that governs your transaction. You cannot assume that
whatever works in Arizona or in France, will necessarily be the same as in Japan, Israel or
Azerbaijan. This understanding must be reflected in your contractual obligations so that the
transaction will be performed as planned. So - IT SI IMPORTANT TO MAKE SURE THAT YOU
CLEARLY UNDERSTAND THE LAW WHICH WILL GOVERN YOUR TRANSACTION.

D)Logistics - You may have the best prices, and you have found the perfect customer, but if you
fail to create a perfect supply chain, then you will either lose your, money, your goods or your
customer - most of the time you will loose it all. it is quite easy to move goods around the globe,

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but you need to understand all the constraints and make sure that it is either taken care by you, by
your business partner or by professionals who can take care of it. So - DO NOT
UNDERESTIMATE THE CRUCIAL ROLE OF LOGISTICS IN INTERNATIONAL BUSINESS
AND MAKE SURE IT IS HANDLED CORRECTLY.

E)Language - You may speak good English or Russian and your customer my have good
command of French and English - it will usually result that both of you will be communicating in a
language that is not your mother tongue. this also applies to your marketing collateral and your
web presence. it can lead to misunderstanding and lack of trust. Therefore, it is important to make
sure that you are on the same page (pun intended) and that you have invested resources to either
translate/localize your documents/web/etc, or that you have someone that has control of the
language of your business partner. So - MAKE SURE THAT YOU ARE COMMUNICATING
CORRECTLY AND AGREE ON THE LANGUAGE YOU USE.

F)Partners - when you work globally, you will need local partners that will do different tasks for
you - representation, communication, logistics, sales, distribution, etc. it is not a question whether
you need a partner but rather who should you choose as your partner. Sometimes you don’t have a
choice because you need a local representative or a local legal assistance. Make sure you pick good
partners. How? look for references, prior experience and an expertise in your domain. So - LOCAL
PARTNER IS A MUST AND USUALLY IS AN ASSET WHEN YOU ARE WORKING
INTERNATIONALLY.

G)Time - when working globally, the time difference must be taken into account so that you will
not bother your business partners during their weekends, or set conference calls in the middle of
the night. it will also allow you to set realistic expectations as to when to send and receive replies
to emails, have telemarketing, etc. when you understand the global time zones, you can work
more efficiently, say, by preparing and sending information to be visible for your partner, first
thing when he start his day, etc. So - DON’T FORGET THE TIME DIFFERENCE.

H)Distance - since you are doing business in a different country, you need to take into account
the distance - it affects delivery time, logistics, taking into account expiration dates and most
importantly - what happens when something goes wrong and you will need to resolve it remotely.
you cannot just get a refund or ask them to send you something so it will be delivered to you
withing a day or so - they are far far away! So - DON’T FORGET THE DISTANCE BETWEEN YOU
AND YOUR BUSINESS PARTNER AND TAKE IT INTO ACCOUNT WHEN PLANNING

I) Risk - international business involves many parties and many factors - each of them may go
wrong. You may never see or meet your business partner so true identity is also a challenge. Risk
must be taken into account when you are pricing and when you are planning the business -
deliveries, international payments, etc. Local partner may reduce the risk but increase your costs
and reduce your net profit. So - TRY TO REDUCE RISK AND MAKE SURE THAT YOU HAVE A
CONTINGENCY PLAN IN PLACE.

1.1.2 Features of International Business

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1. Separation of producers from buyers : In case of inland trade, buyers and producers
are in close contact with each other, as they belong to the same nation. But in the case of
international business, producers and buyers are separate from each other, as they belong
to different nations.
2. Payment in foreign currency: In international business, payment is made in foreign
currency. Here, different currencies of different countries are involved.
3. An idea about international rules: People in international business should have a
clear idea of international rules and the mechanism to exchange one currency for another.
4. A large number of middlemen: The procedure for export and import are too
complicated and involves a large number of middlemen. They render their services for the
easy development and expansion of international business.
5. Intense competition: In the case of international business, the competition is intense.
Producers from many countries compete with one another to sell their products. Here the
quality, design, packing, price, advertisement, etc., all play a very important role in
decision-making.
6. Involving greater risk: A greater risk is involved in international business as the
commodities have to be carried long distances and even to cross the oceans.

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 7. Law of comparative cost: A country specializes in the production of those goods for
which the country has maximum advantages. It exports such goods together countries. It
imports those goods which it cannot produce or for which it has no specific advantage.
8. Territorial specialization: International business arises from regional specialization.
India has a specific advantage for the production of jute and tea. Therefore, India exports
these commodities. The U.K. has a specific advantage for the production of quality steel at
a low cost, which India cannot. So, India imports steel from U.K. and exports jute and tea
to U.K.
9. Reciprocal assistance: Developed countries (like the U.S.A., U.K., Germany, etc.) help
India for its industrial development by exporting technical know-how, capital, etc., to
India. Similarly, India assists underdeveloped countries (like Bangladesh, Vietnam, etc.)
towards their industrial development.
10. Conversant with different laws of the country :  Traders engaged in international
business must be conversant with the different laws of the countries concerning trade
activities. Traders should also be aware of trade restrictions imposed by foreign countries
for the national interest.
11. Domination and control of the government : Each Government of a country
dominates and controls international business in matters of:

 Determination of exchange rates,

 Permission to import or export, etc.

12.  The multiplicity of documents: A good number of documents are required in

international business, right from the stage when the exporter receives an order to the
stage when goods are finally delivered.

1.1.3: Reasons to enter into International business:

(7) main reasons to enter international business are:

1.Absolute advantage: When a country has a monopoly in producing specific products or when
the country produces a product more cheaply than all other nations of the world it is called the
absolute advantage. Absolute products are mainly given by nature. For example, South Africa
produces diamond, Saudi Arabia, and some Middle Eastern Countries produce oil, gold etc.
2.Comparative advantage: A country should produce and sell those types of goods and
services in which it enjoys more advantages than any other country and exchanged the surplus
with that country. For example, USA produces aircraft, computer, etc. and exchanges their
surplus with Bangladesh.
3.Stay Competitive: No matter what production you are involved in today you will find
competition remaining to go international. If you are continually trying to increase your company,
then an international plan is crucial to your success as well. It doesn’t positively mean you have to
construct a new headquarter in an adopted country but should include operational methods on
how to improve relationships and serve international consumer needs/desires. In today’s world,
you will always have global customers.
4.Opportunities Abroad: Just as students are stealing their educational studies to different
countries to gain even more enriching possibilities, companies will find themselves in comparable
situations. What you may do strongly within our own country’s border may reap an even bigger
honor in another country. It may include new attachments, resources, financial receipts, and
company enhancements. The possibilities are limitless.
5.Growth As a Company: If an organization wants to continue to expand and generate a strong
business culture throughout themselves then they must leave their snug nest as home and take
risks into newer regions. As I mentioned earlier in this column company’s must look at developing
new carriers for their company to develop and teach their employees new fundamental skill sets to
remain competitive in today’s international world. No organization wants to be looked down upon
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or seen as archaic in keeping up with the new standards of today’s modern world.
6.Skilled Personnel: For a company to succeed long term they must have a talented,
intelligent, and multicultural workforce that can take them to new levels. A workforce of different
backgrounds and cultures brings forth new ideas, viewpoints, and knowledge that would have
otherwise been unheard of in a workforce of similar backgrounds. A multicultural workforce is
enhancing in many positive aspects and helps with your company’s expansion internationally.
Local employees who are knowledge about the foreign culture give you a great advantage in
connections, product development, and research or long-term projects.
7.Take Advantage of Technology: Technology has grown for businesses in ways silent.
However, one main significant trait it brings its ability to connect the world. You can deal with
customers abroad, manage projects from a distant country, and hold conferences over a video
conference. With all these highly important and useful methods at your fingerprints.

Following are the advantages of international business:

1. Earning valuable foreign currency: A country is able to earn valuable foreign currency by
exporting its goods to other countries.
2. Division of labor: International business leads to specialization in the production of goods.
Thus, quality goods for which it has maximum advantage.
3. Optimum utilization of available resources: International business reduces waste of
national resources. It helps each country to make optimum use of its natural resources. Every
country produces those goods for which it has maximum advantage.
4. Increase in the standard of living of people: Sale of surplus production of one country to
another country leads to increase in the incomes and savings of the people of the former country.
This raises the standard of living of the people of the exporting country.
5. Benefits to consumers: Consumers are also benefited from international business. A variety
of goods of better quality is available to them at reasonable prices. Hence, consumers of importing
countries are benefited as they have a good scope of choice of products.
6. Encouragement to industrialization: Exchange of technological know-how enables
underdeveloped and developing countries to establish new industries with the assistance of
foreign aid. Thus, international business helps in the development of the industry.
7. International peace and harmony: International business removes rivalry between
different countries and promotes international peace and harmony. It creates dependence on each
other, improves mutual confidence and good faith.
8. Cultural development: International business fosters exchange of culture and ideas between
countries having greater diversities. A better way of life, dress, food, etc. can be adopted from
other countries.
9. Economies of large-scale production: International business leads to production on a
large scale because of extensive demand. All the countries of the world can obtain the advantages
of large-scale production.
10. Stability in prices of products: International business irons out wide fluctuations in the
prices of products. It leads to stabilization of prices of products throughout the world.
11. Widening the market for products: International business widens the market for
products all over the world. With the increase in the scale of operation, the profit of the business
increases.
12. Advantageous in emergencies: International business enables us to face emergencies. In
the case of natural calamity, goods can be imported to meet necessaries.
13. Creating employment opportunities: International business boosts employment
opportunities in an export-oriented market. It raises the standard of living of the countries
dealing international business.
14. Increase in Government revenue: The Government imposes import and export duties for
this trade. Thus, Government is able to earn a great deal of revenue from international business.

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Disadvantages of international business are as follows:

1. Adverse effects on the economy: One country affects the economy of another country
through international business. Moreover, large-scale exports discourage the industrial
development of importing country. Consequently, the economy of the importing country
suffers.
2. Competition with developed countries : Developing countries are unable to compete
with developed countries. It hampers the growth and development of developing countries
unless the international business is controlled.
3. Rivalry among nations: Intense competition and eagerness to export more
commodities may lead rivalry among nations. As a consequence, international peace may
be hampered.
4. Colonization: Sometimes, the importing country is reduced to a colony due to economic
and political dependence and industrial backwardness.
5. Exploitation: International business leads to exploitation of developing countries the
developed countries. The prosperous and dominant countries regulate the economy poor
nations.
6. Legal problems: Varied laws regulations and customs formalities followed different
countries, have a direct b earring on their export and import trade.
7. Publicity of undesirable fashions: Cultural values and heritages are not identical in all
the countries. There are many aspects, which may not be suitable for our atmosphere,
culture, tradition, etc. This indecency is often found to be created in the name of cultural
exchange.
8. Language problems: Different languages in different countries create barriers to
establish trade relations between various countries.
9. Dumping policy: Developed countries often sell their products to developing countries
below the cost of production. As a result, industries in developing countries of the close
down.
10. Complicated technical procedure: International business in highly technical and it
has the complicated procedure. It involves various uses of important documents. It
required expert services to cope with complicated procedures at different stages.
11. Shortage of goods in the exporting country : Sometimes, traders prefer to sell their
goods to other countries instead of in their own country in order to earn more profits. This
results in the shortage of goods within the home country.
12. Adverse effects on home industry: International business poses a threat to the
survival of infant and nascent industries. Due to foreign competition and unrestricted
imports upcoming industries in the home country may collapse.

1.3 Drivers of IB.

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The media and almost every book on globalization and international business speak about
different drivers of globalization and they can basically be separated into five different groups:

a) Technological drivers

Technology shaped and set the foundation for modern globalization. Innovations in the
transportation technology revolutionized the industry. The most important developments among
these are the commercial jet aircraft and the concept of containerization in the late 1970s and
1980s. Inventions in the area of microprocessors and telecommunications enabled highly effective
computing and communication at a low-cost level. Finally the rapid growth of the Internet is the
latest technological driver that created global e-business and e-commerce.

b) Political drivers

Liberalized trading rules and deregulated markets lead to lowered tariffs and allowed foreign
direct investments in almost all over the world. The institution of GATT (General Agreement on
Tariffs and Trade) 1947 and the WTO (World Trade Organization) 1995 as well as the ongoing
opening and privatization in Eastern Europe are only some examples of latest developments.

c) Market drivers

As domestic markets become more and more saturated, the opportunities for growth are limited
and global expanding is a way most organizations choose to overcome this situation. Common
customer needs and the opportunity to use global marketing channels and transfer marketing to
some extent are also incentives to choose internationalization. (Ferrier, 2004).

d) Cost drivers Sourcing efficiency and costs vary from country to country and global firms can
take advantage of this fact. Other cost drivers to globalization are the opportunity to build global
scale economies and the high product development costs nowadays. (Ferrier, 2004)

e) Competitive drivers

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With the global market, global inter-firm competition increases and organizations are forced to
“play” international. Strong interdependences among countries and high two-way trades and FDI
actions also support this driver.

1.3.1 IB and domestic business compared.

Difference Between Domestic and International Business

A) Comparison Chart
B) Key Differences

Comparison Chart
BASIS FOR INTERNATIONAL
DOMESTIC BUSINESS
COMPARISON BUSINESS

Meaning A business is said to be International business is

domestic, when its one which is engaged in
economic transactions economic transaction with
are conducted within the several countries in the
geographical boundaries world.
of the country.

Area of operation Within the country Whole world

Quality standards Quite low Very high

Deals in Single currency Multiple currencies

Capital Less Huge

investment

Restrictions Few Many

Nature of Homogeneous Heterogeneous

customers

Business research It can be conducted It is difficult to conduct

easily. research.

Mobility of factors Free Restricted

of production

Key Differences Between Domestic and International Business

The most important differences Between domestic and international business are classified as
under:

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 1. Domestic Business is defined as the business whose economic transaction is conducted
within the geographical limits of the country. International Business refers to a business
which is not restricted to a single country, i.e. a business which is engaged in the economic
transaction with several countries in the world.
2. The area of operation of the domestic business is limited, which is the home country. On
the other hand, the area of operation of an international business is vast, i.e. it serves many
countries at the same time.
3. The quality standards of products and services provided by a domestic business is relatively
low. Conversely, the quality standards of international business are very high which are set
according to global standards.
4. Domestic business deals in the currency of the country in which it operates. On the
contrary, the international business deals in the multiple currencies.
5. Domestic Business requires comparatively less capital investment as compared to
international business.
6. Domestic Business has few restrictions, as it is subject to rules, law taxation of a single
country. As against this, international business is subject to rules, law taxation, tariff and
quotas of many countries and therefore, it has to face many restrictions which are barriers
in the international business.
7. The nature of customers of a domestic business is more or less same. Unlike, international
business wherein the nature of customers of every country it serves is different.
8. Business Research can be conducted easily, in domestic business. As against this, in the
case of international research, it is difficult to conduct business research as it is expensive
and research reliability varies from country to country.
9. In domestic business, factors of production are mobile whereas, in international business,
the mobility of factors of production are restricted.
1.4 Routes of globalisation
Modes of entry into an International Business:-
There are some basic decisions that the firm must take befor forien expansion like: which markets
to enter, when to enter those markets, and on what scale.

Which foreign markets?

-The choice based on nation’s long run profit potential.
-Look in detail at economic and political factors which influence foreign markets.
-Long run benefits of doing business in a country depends on following factors:
- Size of market (in terms of demographics)
- The present wealth of consumer markets (purchasing power)
- Nature of competition
By considering such factors firm can rank countries in terms of their attractiveness and long-run
profit.

Timing of entry:-
It is important to consider the timing of entry. Entry is early when an international business
enters a foreign market before other foreign firms. And late when it enters after other
international businesses. The advantage is when firms enters early in the foreign market
commonly known as first-mover advantages
First mover advantage;-
1. it’s the ability to prevent rivals and capture demand by establishing a strong brand name.
2. Ability to build sales volume in that country.so that they can drive them out of market.
3. Ability to create customer relationship.
Disadvantage:
1.firm has to devote effort, time and expense to learning the rules of the country.
2.risk is high for business failure(probability increases if business enters a national
market after several other firms they can learn from other early firms mistakes)
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Modes of entry:--
1. Exporting
2. Licensing
3. Franchising
4. Turnkey Project
5. Mergers & Acquisitions:
6. Joint Venture
7. Acquisitions & Mergers
8. Wholly Owned Subsidiary

1.Exporting :
It means the sale abroad of an item produced ,stored or processed in the supplying firm’s home
country. It is a convenient method to increase the sales. Passive exporting occurs when a firm
receives canvassed them. Active exporting conversely results from a strategic decision to establish
proper systems for organizing the export functions and for procuring foreign sales.

Advantages Of Exporting :
a. Need for limited finance;
If the company selects a company in the host country to distribute the company can enter
international market with no or less financial resources but this amount would be quite less
compared to that would be necessary under other modes.

b. Less Risks;
Exporting involves less risk as the company understand the culture , customer and the market of
the host country gradually. Later after understanding the host country the company can enter on
a full scale.

c. Motivation for exporting:

Motivation for exporting are proactive and reactive. Proactive motivations are opportunities
available in the host country. Reactive motivators are those efforts taken by the company to export
the product to a foreign country due to the decline in demand for its product in the home country.

2.Licensing :
In this mode of entry ,the domestic manufacturer leases the right to use its intellectual property
(ie) technology , copy rights ,brand name etc to a manufacturer in a foreign country for a fee. Here
the manufacturer in the domestic country is called licensor and the manufacturer in the foreign is
called licensee. The cost of entering market through this mode is less costly. The domestic
company can choose any international location and enjoy the advantages without incurring any
obligations and responsibilities of ownership ,managerial ,investment etc.

Advantages;
1. Low investment on the part of licensor.
2. Low financial risk to the licensor
3. Licensor can investigate the foreign market without much efforts on his part.
4. Licensee gets the benefits with less investment on research and development
5. Licensee escapes himself from the risk of product failure.

Disadvantages:
1. It reduces market opportunities for both
2. Both parties have to maintain the product quality and promote the product . Therefore one
party can affect the other through their improper acts.
3. Chance for misunderstanding between the parties.
4. Chance for leakages of the trade secrets of the licensor.
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5. Licensee may develop his reputation
6. Licensee may sell the product outside the agreed territory and after the
expiry of the contract.

3.Franchising
Under franchising an independent organization called the franchisee operates the business under
the name of another company called the franchisor under this agreement the franchisee pays a fee
to the franchisor. The franchisor provides the following services to the franchisee.
1. Trade marks
2. Operating System
3. Product reoutation
4. Continuous support system like advertising , employee training , reservation services quality
assurances program etc.

Advantages:
1. Low investment and low risk
2. Franchisor can get the information regarding the market culture, customs and environment of
the host country.
3. Franchisor learns more from the experience of the franchisees.
4. Franchisee get the benefits of R& D with low cost.
5. Franchisee escapes from the risk of product failure.

Disadvantages :
1. It may be more complicating than domestic franchising.
2. It is difficult to control the international franchisee.
3. It reduce the market opportunities for both
4. Both the parties have the responsibilities to maintain product quality and product promotion.
5. There is a problem of leakage of trade secrets.

4.Turnkey Project:
A turnkey project is a contract under which a firm agrees to fully design , construct and equip a
manufacturing/ business/services facility and turn the project over to the purchase when it is
ready for operation for a remuneration like a fixed price , payment on cost plus basis. This form of
pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. Eg
nuclear power plants , airports,oil refinery , national highways , railway line etc. Hence they are
multiyear project.

5.Mergers & Acquistions:

A domestic company selects a foreign company and merger itself with foreign company in order to
enter international business. Alternatively the domestic company may purchase the foreign
company and acquires it ownership and control. It provides immediate access to international
manufacturing facilities and marketing network.

Advantages :
1. The company immediately gets the ownership and control over the acquired firm’s factories,
employee, technology ,brand name and distribution networks.
2. The company can formulate international strategy and generate more revenues.
3. If the industry already reached the stage of optimum capacity level or overcapacity level in the
host country. This strategy helps the host country.

Disadvantages:
1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers regulation,
mergers and acquisition specialists from the two countries.
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2. This strategy adds no capacity to the industry.
3. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign
companies.
4. Labour problem of the host country’s companies are also transferred to the acquired company.

6.Joint Venture
Two or more firm join together to create a new business entity that is legally separate and distinct
from its parents. It involves shared ownership. Various environmental factors like social ,
technological economic and political encourage the formation of joint ventures. It provides
strength in terms of required capital. Latest technology required human talent etc. And enable the
companies to share the risk in the foreign markets. This act improves the local image in the host
country and also satisfies the governmental joint venture.

Advantages:
1. Joint venture provide large capital funds suitable for major projects.
2. It spread the risk between or among partners.
3. It provide skills like technical skills, technology, human skills , expertise , marketing skills.
4. It make large projects and turn key projects feasible and possible.
5. It synergy due to combined efforts of varied parties.

Disadvantages:
1. Conflict may arise
2. Partner delay the decision making once the dispute arises. Then the operations become
unresponsive and inefficient.
3. Life cycle of a joint venture is hindered by many causes of collapse.
4. Scope for collapse of a joint venture is more due to entry of competitors changes in the partners
strength.
5. The decision making is slowed down in joint ventures due to the involvement of a number of
parties.

7.Acquisitions & Mergers:

A mergers is a voluntary and permanent combination of business whereby one or more firms
integrate their operations and identities with those of another and henceforth work under a
common name and in the interests of the newly formed amalgamations.

Motives for acquisitions:

1. Removal of competitor
2. Reduction of the Co failure through spreading risk over a wider range of activities.
3. The desire to acquire business already trading in certain markets & possessing certain specialist
employees & equipment.
4. Obtaining patents, license & intellectual property.
5. Economies of scale possibly made through more extensive operations.
6. Acquisition of land, building & other fixed asset that can be profitably sold off.
7. The ability to control supplies of raw materials.
8. Expert use of resources.
9. Tax consideration.
10. Desire to become involved with new technologies & management method particularly in high
risk industries.

8.Wholly Owned Subsidiary

Subsidiary means individual body under parent body. This Subsidiary or individual body as per
their own generates revenue. They give their own rent, salary to employees, etc. But policies and
trademark will be implemented from the Parent body. There are no branches here. Only the
14
certain percentage of the profit will be given to the parent body.

A subsidiary, in business matters, is an entity that is controlled by a bigger and more powerful
entity. The controlled entity is called a company, corporation, or limited liability company, and
the controlling entity is called its parent (or the parent company). The reason for this distinction
is that a lone company cannot be a subsidiary of any organization; only an entity representing a
legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on
their own initiative, a business entity can only act through its directors, officers and employees.

The most common way that control of a subsidiary is achieved is through the ownership of shares
in the subsidiary by the parent. These shares give the parent the necessary votes to determine the
composition of the board of the subsidiary and so exercise control. This gives rise to the common
presumption that 50% plus one share is enough to create a subsidiary. There are, however, other
ways that control can come about and the exact rules both as to what control is needed and how it
is achieved can be complex (see below). A subsidiary may itself have subsidiaries, and these, in
turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a
group, although this term can also apply to cooperating companies and their subsidiaries with
varying degrees of shared ownership.

Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For
this reason, they differ from divisions, which are businesses fully integrated within the main
company, and not legally or otherwise distinct from it.

Subsidiaries are a common feature of business life and most if not all major businesses organize
their operations in this way. Examples include holding companies such as Berkshire Hathaway,
Time Warner, or Citigroup as well as more focused companies such as IBM, or Xerox Corporation.
These, and others, organize their businesses into national or functional subsidiaries, sometimes
with multiple levels of subsidiaries.

Approaches in International Business

1. ETHNOCENTRIC ORIENTATION:

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

2. REGIOCENTRIC ORIENTATION :

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

3. GEOCENTRIC ORIENTATION :

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

4. POLYCENTRIC OPERATION :

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

1.5 players in International Business.

These are some of the findings presented in the Global Thinking study by IESE's International
Research Center on Organizations (IRCO) in collaboration with ERES Relocation Services in
Spain. The report was written by IESE professor José Ramón Pin and researcher Pilar García
Lombardía.

With all these changes afoot in the global context, the authors note that HR departments should
become strategic partners of senior management to best identify "expatriate-able" talent in their
organization.

Detecting the talent

Dividing international key players’ profiles into four categories that correspond to the business
factors is recommendable for the design of efficient mobility policies adapted to each company’s
needs. In this way, selection, training and promotion processes, such as the implementation of
agreed remuneration flexible policies, are eased.

1. Ready and Willing: Self-Designed Careers. To a large extent, this category corresponds to
"global nomads": people with an international lifestyle who see mobility as a way to satisfy both
personal and professional goals in their lives. Global nomads tend to be young, flexible and willing
to accept posts that older colleagues might reject or accept only under highly beneficial, strongly
compensated terms. People with this profile might hail from any country, although in recent years
the percentage coming from China and India has grown substantially.

Global nomads view their career as a never-ending string of international opportunities, so

motivating and retaining them is not easy. Traditional economic incentives are not the best way to
increase loyalty to their current employer. They respond better to new challenges in order to
develop their skills and a career path with the promise of multiple international assignments with
varying responsibilities.

2. High-Potential, Emerging Talent. This group is made up of potential future leaders who
are interested in acquiring international experience. In many cases, they come from the "global
nomads" group and may end up becoming strategic leaders in a few years, thanks to their
commitment to their company's culture and mission.

3. Technical Experts With Experience. These are people with expertise and technical skills
suited to meet the particular needs of a company. They are specialists able to solve problems or
carry out specific projects anywhere in the world. When they emerge from the "global nomads"
16
group, a competitive advantage is clear: unlike most technical experts, they are already
accustomed to working abroad.

4. Strategic Business Leaders. This group consists of experienced, high-performing

executives with a strong sense of corporate mission. They are extremely valuable to the company,
especially if they have developed their career in-house, as one of their most important jobs is to
spread the company's culture and mission around the world. One of the main goals of a global
talent-management strategy is to establish policies that ensure the company has enough of these
strategic leaders.

1.6Evolution of IB.
The business across the borders of the countries had been carried on since times immemorial.
But, the business had been limited to the international trade until the recent past. The post-World
War If period witnessed an unexpected expansion of national companies into international or
multinational companies. The post 1990s period has given greater fillip to international business.
In fact, the term international business was not in existence before two decades. The term
international business has emerged from the term international marketing, which in turn,
emerged from the term ‘export marketing’.
International Trade to International Marketing: Originally, the producers used to export their
products to the nearby countries and gradually extended the exports to far-off countries.
Gradually, the companies extended the operations beyond trade. For example, India used to
export raw cotton, raw jute and iron ore during the early 1900s. The massive industrialization in
the country enabled us to export jute products, cotton garments and steel during 1960s.
India, during 1980s could create markets for its products, in addition to mere exporting. The
export marketing efforts include creation of demand for Indian products like textiles, electronics,
leather products, tea, coffee etc., arranging for appropriate distribution channels, attractive
package, product development, pricing etc. This process is true not only with India, but also with
almost all developed and developing economies. International Marketing to International
Business: The multinational companies which were producing the products in their home
countries and marketing them in various foreign countries before 1980s started locating their
plants and other manufacturing facilities in foreign/host countries. Later, they started producing
in one foreign country and marketing in other foreign countries. For example, Uni Lever
established its subsidiary company in India, i.e., Hindustan 7 Lever Limited (HLL). HLL produces
its products in India and markets them in Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the
international trade is expanded into international
marketing and international marketing is expanded into international business.

Why do the Business firms of a country go to other countywide?

The basic question of "why do the Business firms of a country go to other countywide?" might
have been in your mind. The answer is to achieve Higher Rate of Profits. We have discussed in
various courses/ subjects like Principles and Practice of Management, Managerial Economics and
Financial Management that the basic objective of the business firms is to earn profits. When the
domestic markets do not promise a higher rate of profits, business firms search for foreign
markets, which promise for higher rate of profits. For example, Hewlett Packard earned 85.4% of
its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned
US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit
from its domestic market in 1994.
Some of the domestic companies expanded their production capacities more than the demand
for the product in the domestic countries. These companies, in such cases, are forced to sell their
excess production in foreign developed countries. Toyota of Japan is an example.

1.7 Theories of IB ,mercantilisms, Theory of Absolute Advantage.

Theory of Comparative Advantage. National Competitive Advantage.
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THEORIS OF INTERNATIONAL BUSINESS
International trade is the purchase, sale or exchange of goods and services across national border.
International trade produces many benefits to countries both exporting and importing products.
For countries importing products, the benefits are that they get goods or services they cannot
produce enough of on their own. Likewise, for the exporter, one of the benefits is though the trade
they can also get either the goods or services they need or the money in which to purchase these
goods from another country or source. International trade also helps the economic of the
countries.

International trade encompasses many aspects in relation to various countries. There are many
theories regarding international trade. Some of these include mercantilism, absolute advantage,
comparative advantage, factor proportions theory, international product life cycle, new trade
theory and national competitive advantage.

MERCANTILISM

ORIGIN OF MERCANTALISM
DEFINITION OF

Mercantilism is an economic theory and practice common in Europe from the 16th to the 18th
century that promoted governmental regulation of a nation’s economy for the purpose of
augmenting state power at the expense of rival national powers. In particular, it demands a
positive balance of trade. It was the economic counterpart of political absolutism.
The main goal was to increase a nation's wealth by imposing government regulation concerning
all of the nation's commercial interests. It was believed that national strength could be maximized
by limiting imports via tariffs and maximizing exports.Mercantilism was a cause of frequent
European wars in that time and motivated colonial expansion.

Most of the European economists who wrote between 1500 and 1750 are today generally
considered mercantilists; originally the Standard English term was "mercantile system". English
merchant Thomas Mun (1571–1641) as a major creator of the mercantile system, especially for his
Treasure by Foreign Trade (1664) and Perhaps the last major mercantilist work was James
Steuart’s Principles of Political Economy published in 1767.

POLICIES OF MERCANTILISM
High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist
policy. Other policies have included:
• Building a network of overseas colonies;
• Forbidding colonies to trade with other nations;
• Banning the export of gold and silver, even for payments;
• Forbidding trade to be carried in foreign ships;
• Export subsidies;
• Promoting manufacturing with research or direct subsidies;
• Maximizing the use of domestic resources;
• Restricting domestic consumption with non-tariff barriers to trade.
18
Mercantilism in its simplest form was bullionism, but mercantilist writers emphasized the
circulation of money and rejected hoarding. Their emphasis on monetary metals accords with
current ideas regarding the money supply, such as the simulative effect of a growing money
supply.

CRITICISMS OF MERCANTILISM
Adam Smith and David Hume were the founding fathers of anti-mercantilist thought. A number
of scholars found important flaws with mercantilism long before Adam Smith developed an
ideology that could fully replace it. Critics like Hume, Dudley North, and John Locke undermined
much of mercantilism, and it steadily lost favor during the 18th century.
Mercantilism contained many interlocking principles. Precious metals, such as gold and silver,
were deemed indispensable to a nation’s wealth. If a nation did not possess mines or have access
to them, precious metals should be obtained by trade. It was believed that trade balances must be
“favorable,” meaning an excess of exports over imports.
Later, mercantilism was severely criticized. Advocates of laissez-faire argued that there was really
no difference between domestic and foreign trade and that all trade was beneficial both to the
trader and to the public. They also maintained that the amount of money or treasure that a state
needed would be automatically adjusted and that money, like any other commodity, could exist in
excess. They denied the idea that a nation could grow rich only at the expense of another and
argued that trade was in reality a two-way street. Laissez-faire, like mercantilism, was challenged
by other economic ideas. Compare laissez-faire.

1.7.2 Theory of absolute advantage

DEFINITION OF 'ABSOLUTE ADVANTAGE'
The ability of a country, individual, company or region to produce a good or service at a lower cost
per unit than the cost at which any other entity produces that good or service.
Entities with absolute advantages can produce something using a smaller number of inputs than
another party producing the same product. As such, absolute advantage can reduce costs and
boost profits.
In economics, the principle of absolute advantage refers to the ability of a party (an individual,
or firm, or country) to produce more of a good or service than competitors, using the same
amount of resources. Adam Smith first described the principle of absolute advantage in the
context of international trade, using labor as the only input.
Since absolute advantage is determined by a simple comparison of labor productivities, it is
possible for a party to have no absolute advantage in anything; in that case, according to the
theory of absolute advantage, no trade will occur with the other party. It can be contrasted with
the concept of comparative advantage which refers to the ability to produce a particular good at a
lower opportunity cost.

ORIGIN OF THE THEORY

The main concept of absolute advantage is generally attributed to Adam Smith for his 1776
publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he
countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich
simultaneously by following mercantilism because the export of one nation is another nation’s
import and instead stated that all nations would gain simultaneously if they practiced free trade
and specialized in accordance with their absolute advantage. Smith also stated that the wealth of
nations depends upon the goods and services available to their citizens, rather than their gold
reserves. While there are possible gains from trade with absolute advantage, the gains may not be
mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial
exchanges.

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1.7.3 Theory of comparative advantage

DEFINITION OF COMPARATIVE ADVANTAGE

Comparative advantage refers to the ability of a party to produce a particular good or service at a
lower marginal and opportunity cost over another. Even if one country is more efficient in the
production of all goods (absolute advantage in all goods) than the other, both countries will still
gain by trading with each other, as long as they have different relative efficiencies.
For example, if, using machinery, a worker in one country can produce both shoes and shirts at 6
per hour, and a worker in a country with less machinery can produce either 2 shoes or 4 shirts in
an hour, each country can gain from trade because their internal trade-offs between shoes and
shirts are different. The less-efficient country has a comparative advantage in shirts, so it finds it
more efficient to produce shirts and trade them to the more-efficient country for shoes. The net
benefits to each country are called the gains from trade.

ORIGINS OF THE THEORY

The idea of comparative advantage has been first mentioned in Adam Smith's Book The Wealth of
Nations: "If a foreign country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our own industry, employed in a
way in which we have some advantage." But the law of comparative advantages has been
formulated by David Ricardo who investigated in detail advantages and alternative or relative
opportunity in his 1817 book On the Principles of Political Economy and Taxation in an example
involving England and Portugal.

EFFECTS ON THE ECONOMY

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Conditions that maximize comparative advantage do not automatically resolve trade deficits. In
fact, many real world examples where comparative advantage is attainable may require a trade
deficit. For example, the amount of goods produced can be maximized, yet it may involve a net
transfer of wealth from one country to the other, often because economic agents have widely
different rates of saving.

CONSIDERATIONS OF THE THEORY

Development Economics
The theory of comparative advantage, and the corollary that nations should specialize, is criticized
on pragmatic grounds within the import substitution industrialization theory of development
economics, on empirical grounds by the Singer–Prebisch thesis which states that terms of trade
between primary producers and manufactured goods deteriorate over time, and on theoretical
grounds of infant industry and Keynesian economics. In older economic terms, comparative
advantage has been opposed by mercantilism and economic nationalism. These argue instead that
while a country may initially be comparatively disadvantaged in a given industry (such as
Japanese cars in the 1950s), countries should shelter and invest in industries until they become
globally competitive.

Free mobility of capital in a globalized world

Ricardo explicitly bases his argument on an assumed immobility of capital:" ... if capital freely
flowed towards those countries where it could be most profitably employed, there could be no
difference in the rate of profit, and no other difference in the real or labor price of commodities,
than the additional quantity of labor required to convey them to the various markets where they
were to be sold."

CRITICISMS OF THE THEORY

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Economist Ha-Joon Chang criticized the comparative advantage principle, contending that it may
have helped developed countries maintain relatively advanced technology and industry compared
to developing countries. In his book Kicking Away the Ladder, Chang argued that all major
developed countries, including the United States and United Kingdom, used interventionist,
protectionist economic policies in order to get rich and then tried to forbid other countries from
doing the same. For example, according to the comparative advantage principle, developing
countries with a comparative advantage in agriculture should continue to specialize in agriculture
and import high-technology widgets from developed countries with a comparative advantage in
high technology.

1.7.4 Heckcher-ohlin model theory

DEFINITION OF HECHCHER-OHLIN MODEL THEORY
The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical model of
international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of
Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns
of commerce and production based on the factor endowments of a trading region. The model
essentially says that countries will export products that use their abundant and cheap factor(s) of
production and import products that use the countries' scarce factor(s).

FEATURES OF THE MODEL

Relative endowments of the factors of production (land, labor, and capital) determine a country's
comparative advantage. Countries have comparative advantages in those goods for which the
required factors of production are relatively abundant locally. This is because the profitability of
goods is determined by input costs. Goods that require inputs that are locally abundant will be
cheaper to produce than those goods that require inputs that are locally scarce.
For example, a country where capital and land are abundant but labor is scarce will have
comparative advantage in goods that require lots of capital and land, but little labor — grains. If
capital and land are abundant, their prices will be low. As they are the main factors used in the
production of grain, the price of grain will also be low—and thus attractive for both local
consumption and export. Labor intensive goods on the other hand will be very expensive to
produce since labor is scarce and its price is high. Therefore, the country is better off importing
those goods.

THEORETICAL DEVELOPMENT OF THE MODEL

The Ricardian model of comparative advantage has trade ultimately motivated by differences in
labour productivity using different technologies. Heckscher and Ohlin didn't require production
technology to vary between countries, so (in the interests of simplicity) the H-O model has
identical production technology everywhere. Ricardo considered a single factor of production
(labour) and would not have been able to produce comparative advantage without technological
differences between countries (all nations would become autarkic at various stages of growth,
with no reason to trade with each other). The H-O model removed technology variations but
introduced variable capital endowments, recreating endogenously the inter-country variation of
labour productivity that Ricardo had imposed exogenously. With international variations in the
capital endowment (i.e. infrastructure) and goods requiring different factor proportions, Ricardo's
comparative advantage emerges as a profit-maximizing solution of capitalist's choices from within
the model's equations

ASSUMPTIONS OF THE THEORY

The original, 2x2x2 model was derived with restrictive assumptions, partly for the sake of
mathematical simplicity. Some of these have been relaxed for the sake of development. These
assumptions and developments are listed here.

21
Both countries have identical production technology
This assumption means that producing the same output of either commodity could be done with
the same level of capital and labour in either country. Actually, it would be inefficient to use the
same balance in either country (because of the relative availability of either input factor) but, in
principle this would be possible.

Production output must have constant return to scale

Both of the countries in the simple HO model produced both commodities, and both technologies
have constant returns to scale (CRS). (CRS production has twice the output if both capital and
labour inputs are doubled, so the two production functions must be 'homogeneous of degree 1').
These conditions are required to produce a mathematical equilibrium. With increasing returns to
scale it would likely be more efficient for countries to specialize, but specialization is not possible
with the Heckscher-Ohlin assumptions.

The technologies used to produce the two commodities differ

The CRS production functions must differ to make trade worthwhile in this model. For instance if
the functions are Cobb-Douglas technologies the parameters applied to the inputs must vary. An
example would be:
Arable industry: A = {{K}^{1/3}}{{L}^{2/3}}
Fishing industry: F = {{K}^{1/2}} {{L}^{1/2}}
Where A is the output in arable production, F is the output in fish production, and K, L are capital
and labour in both cases.

Labor mobility within countries

Within countries, capital and labor can be reinvested and re-employed to produce different
outputs. Like the comparative advantage argument of Ricardo, this is assumed to happen
costlessly.

Capital mobility within countries

It is further assumed that capital can shift easily into either technology, so that the industrial mix
can change without adjustment costs between the two types of production.

CRITICISM AGAINST THE HECKSCHER–OHLIN MODEL

Although H-O model is normally thought to be basic for international trade theory, there are
many points of criticism against the model.

Poor predictive power

The original Heckscher–Ohlin model and extended model such as the Vanek model performs
poorly, as it is shown in the section "Econometric testing of H-O model theorems". Daniel Trefler
and Susan Chun Zhu summarises their paper that "It is hard to believe that factor endowments
theory [editor's note: in other words, Heckscher–Ohlin–Vanek Model] could offer an adequate
explanation of international trade patterns."[6].

Factor equalization theorem

Heckscher–Ohlin theory is badly adapted to the analyze South-North trade problems. The
assumptions of HO are unrealistic with respect to North-South trade. Income differences between
North and South is the concern that third world cares most. The factor price equalization theorem
has not shown a sign of realization, even for a long time lag of a half century.[10]

Identical production function

The standard Heckscher–Ohlin model assumes that the production functions are identical for all
countries concerned. This means that all countries are in the same level of production and have
the same technology. This is highly unrealistic. Technological gap between developed and
developing countries is the main concern for the development of poor countries.
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Capital as endowment
In the modern production system, machines and apparatuses play an important role. What is
named capital is nothing other than these machines and apparatuses, together with materials and
intermediate products which will be consumed in the production process. Capital is the most
important of factors, or one should say as important as labor. By the help of machines and
apparatuses, the human being got a tremendous production capability..

No room for firms

Standard Heckscher–Ohlin theory assumes the same production function for all countries. This
implies that all firms are identical. The theoretical consequence is that there is no room for firms
in the HO model. By contrast, the New Trade Theory emphasizes that firms are heterogeneous.

Political background for HO-Model

From the middle of the 19th century to 1930s, giant flow of immigration took place from Europe
to North America. It is estimated that more than 60 million people crossed the Atlantic Ocean.
Some politicians worried if these immigrants may cause various troubles (including cultural
conflicts). For those politicians HO-theory provided a good reason “in support of both restrictions
on labor migration and free trade in goods.”

1.7.5 Porter’s diamond theory of national advantage or National Competitive

advanrage.

ME PORTER’S DIAMOND THEORY

The diamond model is an economical model developed by Michael Porter in his book The
Competitive Advantage of Nations, where he published his theory of why particular industries
become competitive in particular locations. Afterwards, this model has been expanded by other
scholars.
The Diamond Model of Michael Porter for the competitive advantage of Nations offers a
model that can help understand the comparative position of a nation in global competition. The
model can also be used for major geographic regions.
Porter's diamond model suggests that there are inherent reasons why some nations, and
industries within nations, are more competitive than others on a global scale. The argument is
that the national home base of an organization provides organizations with specific factors, which
will potentially create competitive advantages on a global scale.

TRADITIONAL COUNTRY ADVANTAGES

Traditionally, economic theory mentions the following factors for comparative advantage for
regions or countries:
1. Land
2. Location
3. Natural resources (minerals, energy)
4. Labor, and
5. Local population size.
Because these 5 factors can hardly be influenced, this fits in a
rather passive (inherited) view regarding national economic
opportunity.

FOUR DETERMINANTS OF NATIONAL

ADVANTAGE:

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Factor Conditions
Factor conditions include those factors that can be exploited by companies in a given nation.
Factor conditions can be seen as advantageous factors found within a country that are
subsequently build upon by companies to more advanced factors of competition. Factors not
normally seen as advantageous, such as workforce shortage, can also be seen as a factor
potentially strengthening competitiveness, because this factor may heighten companies' focus on
automation and zero defects.

Demand conditions
If the local market for a product is larger and more demanding at home than in foreign markets,
local firms potentially put more emphasis on improvements than foreign companies. This will
potentially increase the global competitiveness of local exporting companies.
A more demanding home market can thus be seen as a driver of growth, innovation and quality
improvements. For instance, Japanese consumers have historically been more demanding of
electrical and electronic equipment than western consumers. This has partly founded the success
of Japanese manufacturers within this sector.
A more demanding local market leads to national advantage. A strong trend setting local market
helps local firms anticipate global trends.

Related and Supporting Industries

When local supporting industries and suppliers are competitive, home country companies will
potentially get more cost efficient and receive more innovative parts and products. This will
potentially lead to greater competitiveness for national firms.
Local competition creates innovations and cost effectiveness. This also puts pressure on local
suppliers to lift their game.
Firm Strategy, Structure, and Rivalry
The structure and management systems of firms in different countries can potentially affect
competitiveness. By using Porter's diamond, business leaders may analyze which competitive
factors may reside in their company's home country, and which of these factors may be exploited
to gain global competitive advantages. Business leaders can also use the Porter's diamond model
during a phase of internationalization, in which leaders may use the model to analyze whether or
not the home market factors support the process of internationalization, and whether or not the
conditions found in the home country are able to create competitive advantages on a global scale.
Finally, business leaders may use this model to asses in which counties to invest and to assess
which countries are most likely to be able to sustain growth and development.

THE ROLE OF THE GOVERNMENT IN THIS MODEL

 To encourage
 To stimulate
 To help to create growth in industries

CRITICISMS OF PORTER’S DIAMOND MODEL

In his famous book, The Competitive Advantage of Nations, Porter studied eight developed
countries and two newly industrialized countries (NICs). The latter two are Korea and Singapore.
Porter is quite optimistic about the future of the Korean economy. He argues that Korea may well
reach true advanced status in the next decade (p. 383). In contrast, Porter is less optimistic about
Singapore.
Porter has used the diamond model when consulting with the governments of Canada and
New Zealand. While the variables of Porter's diamond model are useful terms of reference when

24
analyzing a nation's competitiveness, a weakness of Porter's work is his exclusive focus on the
'home base' concept. In the case of Canada, Porter did not adequately consider the nature of
multinational activities. In the case of New Zealand, the Porter model could not explain the
success of export-dependent and resource-based industries. Therefore, applications of Porter's
home-based diamond require careful consideration and appropriate modification.

1.8Environment of IB. Political, legal, technological, cultural, economic

factors.

The International Environment

International managers face intense and constant challenges that require training and
understanding of the foreign environment. Managing a business in a foreign country requires
managers to deal with a large variety of cultural and environmental differences. As a result,
international managers must continually monitor the political, legal, sociocultural, economic, and
technological environments.

The political environment

The political environment can foster or hinder economic developments and direct investments.
This environment is ever‐changing. As examples, the political and economic philosophies of a
nation's leader may change overnight. The stability of a nation's government, which frequently
rests on the support of the people, can be very volatile. Various citizen groups with vested
interests can undermine investment operations and opportunities. And local governments may
view foreign firms suspiciously.

Political considerations are seldom written down and often change rapidly. For example, to
protest Iraq's invasion of Kuwait in 1990, many world governments levied economic sanctions
against the import of Iraqi oil. Political considerations affect international business daily as
governments enact tariffs (taxes), quotas (annual limits), embargoes (blockages), and other
types of restriction in response to political events.

Businesses engaged in international trade must consider the relative instability of countries such
as Iraq, South Africa, and Honduras. Political unrest in countries such as Peru, Haiti, Somalia,
and the countries of the former Soviet Union may create hostile or even dangerous environments
for foreign businesses. In Russia, for example, foreign managers often need to hire bodyguards;
sixteen foreign business people were murdered there in 1993. Civil war, as in Chechnya and
Bosnia, may disrupt business activities and place lives in danger. And a sudden change in power
can result in a regime that is hostile to foreign investment; some businesses may be forced out of a
country altogether. Whether they like it or not, companies are often involved directly or indirectly
in international politics.

Political environment meaning and definition:

Meaning: Political environment refers to the influence of the system of government and
judiciary in a nation. The system of government in a nation wields considerable impact on its
business. A political system that is stable, honest, efficient and dynamic and which ensures
political participation to the people and assures personal security to the citizens, is a primary
factor for economic development.

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Definition: Acc. to „Doole and Lowe’ – „The political environment of international business
includes any national or international political factors that can effect the organisations operations
or its decision making.‟

Political factors constitute an important environment factor in International Business.

Actually politics and economics are inter-related as one influences the other. That was the reason
for early writers of Economics preferred to caption their work as Political Economy. Political
system, political parties in power, political parties in the opposition, political maturity of the
parties, number of political parties, political awareness of people, political stability and the like
have great impact on the business environment in a country. The economic policies pursued by a
Government are to a great extent the by-product of political environment that impacts businesses
very often.

Basic Political Ideologies

Political ideology refers to, ‘the body of ideas, theories, aims and means to execute the ideas,
adapt the theories and fulfill the aims that constitute a sociopolitical programme for action’.
Depending on the mix of different ‘ideas, theories, aims and means’, there exists Pluralism,
Democracy and Totalitarianism as alternative ideologies.

Pluralism: It involves coexistence of different ‘ideas, theories, aims and means’. Pluralism may
be existing due to lack of convergence because the polity is made of different interest groups based
on ethnicity, language, religion, race and so on and no one group is dominant enough to overrule
the rest. Contrary to popular belief that existence of too many ideologies of different ethnic groups
might break the polity into disarray and lead to eventual disintegration, such disintegration hadn’t
happened. Western nations with capitalistic orientations have this style. The best example is the
USA. Individuals have civil liberties and political rights. Civil liberties are measured in terms of
freedom of press, equality of all individuals in the eye of law, personal social freedoms and
freedom from extreme forms government indifference or interference. Political rights enjoyed
depend on the degree of fair and competitive elections, the ability of people to endow their elected
representative with real power, the ability of people to float political parties or competitive and
competent political groupings to voice their ideologies and existence of safeguards on the rights of
minorities.

Totalitarianism: It involves, ‘only one idea, theory, aim and means’. No alternative ideology is
allowed to co-exist. There is lack of tolerance. The best example is China. Former USSR was an
example. But there used to be the tendency to break away. And that happened with the USSR
breaking up into present Russia and over dozen countries. Of course, countries do unite even
under totalitarian system do as it happened with Taiwan, Singapore and Hong Kong getting
attached to mainland China late 1990s. China could ensure economic growth, but USSR couldn’t.
people want development ultimately. As long as this core aim is fulfilled, they stand up together.
Individuals have no civil and political freedom. There could be fascism or communist regimes.
About 25% of countries are still totalitarian.

Democracy: It involves, a mix of pluralism and totalitarianism. There used to be individual

freedom with checks and balances. The degree of political rights and civil liberties enjoyed
however vary. Certain rights allowed, certain restricted and certain denied too. India falls in this
category. It is the largest democracy in the world in theory. 75% of countries have democracies of
some order. Of them, 1/3rd are more pluralistic, 1/3rd are some 50:50 type and remaining 1/3rd
are more totalitarian.

Politico- economic System

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Political system refers to the set of factors relating to political institutions, the political parties and
their ideologies, the form of state governance and the role of the state and its functionaries vis-a-
vis, the role of individuals and their organizations. Every country has a political system of its own.
There are different forms of political system. A brief summary of each of the forms is presented
below.

Capitalism: Capitalism is a politico-economic system wherein, private ownership and initiative,

individual freedom to produce, exchange, consume and distribute, market mechanism and
consumer sovereignty and limited role of government are found. In short capitalism may be called
as ‘free enterprise economy’ where state control on businesses is not existing or minimum. The
capitalist political system is pro-private businesses. Competitive efficiency is rewarded in the
market. Businesses flourish through efficiency, innovation and serving the consumers. Businesses
are directed by market mechanism, least influenced by governmental factors. Whatever influence
from Government is pro-domestic business. The western economies like the USA, Canada,
Western Europe, etc. have capitalist political system. Since efficiency is rewarded, higher levels of
performance are achieved. These economies generally do very well, they attract foreign
investment, they introduce latest technologies, patent protection is of high order and so on. Crony
capitalism is a pejorative term describing an allegedly capitalist economy in which success in
business depends on close relationships between businessmen and government officials. It may
be exhibited by favoritism in the distribution of legal permits, government grants, special tax
breaks, and so forth.

Crony capitalism: Crony capitalism is evidenced by politician oriented/owned/controlled

business world. Self-serving friendships and family ties between businessmen and the
government influences the economy and society. This type of capitalism benefits the political
owners and not the consumers. A variant of this form involves ‘collusion among market players’.
While perhaps lightly competing against each other, they will present a unified front to the
government in requesting subsidies or aid (sometime called a trade association or industry trade
group). This is marked by entry walls for new comers, preventing competition. Another variant of
crony capitalism encourages businesses to stay in the good graces of political officials.
Connections with political bigwigs and lobbyists are more important than actual competition as
such in this form of capitalism. Corrupt governments may favor one set of business owners who
have close ties to the government over others, based on racial, religious, or ethnic favoritism. In
smaller countries this is more popular. Anti-capitalists call it a natural consequence of collusion
between those managing power and trade, either by common control or through ‘deals’. Since
businesses make money and money leads to political power, business will inevitably use their
power to influence governments.

Welfare Capitalism: Capitalism has certain limitations such as neglect of certain business not
yielding good profits or those involving greater risk. Individual ‘good’ may not aggregate to
collective ‘good’. So, some state role is needed. Herein the government intervenes and fills up the
gaps to ensure maximum social advantage. Government supplements and does not substitute
private entrepreneurship. The characters of capitalism are applicable to this system in total
subject to the above referred to variation. Government relationship with the business takes the
same pattern as in the case of capitalism, except that government intervenes in a small way to
ensure social welfare of people at large.

Socialism: Socialistic political system is characterized by state ownership of production,

exchange and distribution. The main features of this system are: i) Government ownership and/or
control of factors of production, ii) Government direction of production, exchange and
distribution, iii) Central Planning of resource mobilization, allocation, pricing etc. iv) Restriction
private businesses, v) restriction on individual freedom and initiative, vi) government interference
in income distribution, vii) government direction on physical distribution and pricing of products,
viii) consumer is not the king, only the state is all powerful and so on. In a socialist political
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system businesses are run and/ or closely controlled by the state. Businesses are run by
bureaucrats and not by people with business acumen. Businesses are distanced from profit goal.
State policy determines which industry to be developed and which is not to be developed. Private
initiative is not nurtured, sometimes is even curbed. Business is dominated by the government
bodies.

Communism: A communist political system is nothing but 100% state control of all human
activities. It is also known as state capitalism. Production, exchange, consumption and
distribution are all state controlled. The difference between socialism and communism is that in
communism, consumption is also state controlled. Businesses are run almost like government
departments. The dominant environment of business is, truly, the government factor.

Mixed Economy: Mixed economy is said to be the ‘golden mean’ of capitalism and socialism.
Side by side public and private ownership exist. This system is in vogue in India. The features of
capitalism and socialism are jointly present in this system. Private initiative, freedom of
enterprise, consumer sovereignty, individual saving and investment, profit orientation and
market mechanism are all there. But it is not entirely free of government control. State initiative,
state enterprise, state investment, social objectives like equal distribution, balanced development
of all regions, concessions and privileges for the less privileged, reservations for the benefit of
weaker sections, etc are found.

Functioning of Political Parties

The political parties in power influence the business environment to a great extent, irrespective of
political system. The influence can be pro-business or anti-business. A pro business political party
in power can vest the business community an environment of growth, competition and concern.
Anti-business party in power would wield a threat of intimidation.

The integrity of the political leaders and their kith and kin is a great factor to reckon with. Besides,
the real power within the political party in power counts. Now businesses themselves identify with
one or other party and who gets rewards depend whose person are in power. When there happens
a coalition government, not just one single political party dictates terms for the businesses.

There are multiple concerns. Businesses struggle to please too many political leaders. Parties in
opposition and their leaders have the role to question government’s decisions in the
parliament/legislature. Now-a-days, they exhibit their power in organizing strikes and stalling
conduct of business in the parliament or legislature on smaller issues. In a multiparty system,
with coalition governments running the government involves lot of compromises despite their
common minimum programme. The leaves the business community disillusioned.

Political maturity of the parties and people and Political Stability

Political maturity of parties involves respecting the verdict; the ruling party must not be
vindictive; the opposition parties must not be spiteful. Of late these values are given up in the air.
Incident free political rallies, absence of hooliganism, terminological pleasance in referring to
individual members, issue based expression of view points, freedom to elected members to
express their views irrespective of party affiliation, etc are the hallmarks of political maturity.
Impartiality of police system and political non-intervention in its action are real test of political
maturity. These are far to expect. An air of uneasiness prevails which suffocates businesses.

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Opportunistic ideologies are followed for short-term electoral gains. That is no maturity. The
lesser the number of parties, more the political maturity of people and the better the governance
would be. The developed world nations have fewer political parties, while less developed countries
have too many political outfits. Businesses suffer more uncertainty with more number of political
parties, because the policy environment becomes shaky.

Political stability is a crucial factor. The political system, the number of parties, ideologies of
parties, animosities amongst different parties, leadership characters of political parties, the
commitment of parties taking power to honor commitments made by previous governments, etc
influence political stability. Political stability also means consistency in political decisions, much
needed for inspiring confidence in the minds of business community, both national and
international. Lack of political stability is an indication of excessive risk businesses suffer.

The legal environment

Among the many components of the marketers operating environment, there exists the laws
which governs business activities, which comprises the legal environment.
Legal environment refers to the legal system obtaining in a country. The legal system
than refers to the rules and laws that regulate behaviour of individuals and organisations. Failure
to comply with the laws means that penalities will be inflicted by the courts depending on the
seriousness of the offence.

The economic environment

Managers must monitor currency, infrastructure, inflation, interest rates, wages, and taxation. In
assessing the economic environment in foreign countries, a business must pay particular attention
to the following four areas:
 Average income levels of the population. If the average income for the population is
very low, no matter how desperately this population needs a product or service, there
simply is not a market for it.

 Tax structures. In some countries, foreign firms pay much higher tax rates than
domestic competitors. These tax differences may be very obvious or subtle, as in hidden
registration fees.

 Inflation rates. In the U.S., for example, inflation rates have been quite low and
relatively stable for several years. In some countries, however, inflation rates of 30, 40, or
even 100 percent per year are not uncommon. Inflation results in a general rise in the level
of prices, and impacts business in many ways. For example, in the mid ‐1970s, a shortage of
crude oil led to numerous problems because petroleum products supply most of the energy
required to produce goods and services and to transport goods around the world. As the
cost of petroleum products increased, a corresponding increase took place in the cost of
goods and services. As a result, interest rates increased dramatically, causing both
businesses and consumers to reduce their borrowing. Business profits fell as consumers'
purchasing power was eroded by inflation. High interest rates and unemployment reached
alarmingly high levels.

 Fluctuating exchange rates. The exchange rate, or the value of one country's currency

in terms of another country's currency, is determined primarily by supply and demand for
each country's goods and services. The government of a country can, however, cause this
exchange rate to change dramatically by causing high inflation—by printing too much
currency or by changing the value of the currency through devaluation. A foreign investor
may sustain large losses if the value of the currency drops substantially.

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When doing business abroad, businesspeople need to recognize that they cannot take for granted
that other countries offer the same things as are found in industrialized nations. A country's level
of development is often determined in part by its infrastructure. The infrastructure is the
physical facilities that support a country's economic activities, such as railroads, highways, ports,
utilities and power plants, schools, hospitals, communication systems, and commercial
distribution systems. When doing business in less developed countries, a business may need to
compensate for rudimentary distribution and communication systems.

Global Economy Meaning:

. Global economy refers to an integrated world economy with unrestricted and free movement of
goods, services and labour transnationally. It is characterized as a world economy with an unified
market for all goods produced across the world. It thus gives domestic producers an opportunity
to expand and raise capacity according to global demand.

Types of Economic System

An international manager has to be aware of the economic systems that prevail in a country,
before venturing into a nation. The economics systems are a means of understanding of the
economic environment of any country. The economic systems are of three types, which serves to
explain, whether the business are privately owned, government owned or there is a combination
of private a government ownership. The three economic system are –

(1) Market Economy or Allocation – In market economy, also called capitalism, all
production functions are privately owned. Consumers are sovereign and theydecide what the
producers should produce and supply. Prices of the products are determined by the forces of
demand and supply. The system of capitalism stresses the philosophy of individualism believing
in private ownership of all agents of production, in private sharing of distribution processes that
determine the functional rewards of each participant, and in the individual expression of
consumer choice through a free market place. Ex-United States, Japan.

(2) Command Economy or Allocation – In a command economy also called socialism,

planning is a must. Decisions relating to all the economic activities – What to produce, how to
price- are determined by the Central government. In a pure command economy the tools of
production are organised, managed owned by the governments, with the benefits acuring to the
public. The objective of command economy, consistent with collective ideology, is for government
to own and run business for the good of society. Consumer soverignity does not exist in command
economy as the consumption pattern is dictated by the state, as the government considers itself a
letter judge of resource allocation then the citizens. Ex – Hungry, Poland.

(3) Mixed Economy or allocation – Mixed economy falls between a market economy and a
command economy. As „Keegan‟ opines – „There are no pure market or command allocation
systems among the world economies. All are mixed in nature. ‟ Largely followed in India, Sweden,
Italy, France, mixed economies have both the private sector along with the government
ownership. The economic set-up under this philosophy is split into three parts – - Sectors in
which both production and distribution are entirely managed and controlled by the State to the
complete exclusion of private enterprise. - Sectors in which state and private enterprise jointly
participate in production as well as distribution. - Sectors in which the private enterprise has
complete access, subject only to the general control and regulation of the state.

The sociocultural environment

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Definition of culture: Acc. to „Hoebal‟ – “Culture is the integrated sum total of learned
behavioural traits that are shared by members of a society.”

Culture is a complex and multifaceted concept, becomes easier to hire and train literate people.
The social institution of education affects literacy, which in turn affects marketing promotion. It is
much easier to communicate with a literate market than to the one in which more of symbols and
pictures are used countries rich in educational facilities attract high-wage industries and also it. It
encompasses the following elements:

(1) Material Culture – It includes the tools of the artifacts in a society excluding those physical
things found in nature unless they undergo some technological procedure. It can be divided into 2
parts – (a) Technology (b) Economics

(a) Technology includes the techniques used in the creation of material goods. It is the technical
know-how possessed by the people of a society.

(b) Economics is the manner in which people employ their capabilities and the resulting benefits.
It includes production of goods and services, their distribution, consumption, income derived
from the creation of utilities and means of exchange. International marketers needs to know the
material culture of a foreign land for making production and operational decisions. „Cateora‟
opines that material culture affects the level of demand, the quality and types of product
demanded and their functional features, as well as the means of production of these goods and
their distribution. Thus, the knowledge of material culture helps the international marketer to
understand the opportunities available in the foreign country

(2) Social Institutions – Social Institutions refers to the way people relate to other people. It
includes family, education, political structures, social organisations, where people organize their
activities in order to live in harmony with one another. These institutions teaches acceptable
behaviour to live in a societal setup. Each institution has an effect upon marketing because each
influences behaviour values and the pattern of life. In cultures where the social organizations
result in close – knit family units, it is more effective to aim a promotional campaign at a family
unit then at an individual farm by member.
(3) Man and the Universe – This includes religion, superstitions and their related power
structures. Religion is the most sensitive element of a culture. It affects lifestyles, beliefs,
attitudes, social customs etc. Acceptance of certain types of food, clothing and behaviour are
frequently affected by religion and such acceptance can extent to the acceptance or rejection of
promotional messages. An International Marketer cannot afford to ignore the importance of
myths, beliefs, superstition etc because they are an integral part of the cultural fabric of a society
and influences all manners of behaviour.
(4) Asthetics – Closely interwoven with the effect of people and the Universe are the cultural
asthetics i.e. artistic tastes of a culture, as expressed in arts, music, drama, dance etc. The
asthetics are of interest to the International marketer because of their role in interpreting the
symbolic meanings of the various methods of artistic expressions, colour and standards of beauty
in a particular culture. Without the culturally correct interpretation of the society ‟s asthetic value,
product styling is seldom successful. Insensitivity to the asthetic value, not only leads to
ineffective advertising, but it can also leads to offending the proposed customer or creating a
negative impression. Thus, we need to understand the asthetic value in the international arena.
(5) Language – Language is the foundation of any culture. It includes speech, written characters,
numerals, symbols and gestures of non-verbal communication. It is an obvious cultural difference
that is essential to be learned for the success of any international business practice. It helps to
determine success in the following ways –

(a) It provides a clearer understanding of a given situation.

31
(b) It establishes the most effective and flaltering bridges to local people. Speaking the local
language helps the international manager to have a direct access to the hosts willingness to
communicate openly in their own language.
(c) Language, properly and effectively learned, provides one of the most practical means of
understanding another culture.
(d) An understanding of the local language allows the person to pick up nuances, clinches, implied
meanings and other information that is not stated ontight
(e) It builds confidence and earn the respect and admiration of the local people, thereby making
managers more effective. Thus, there is a strong interrelationship between culture and language.

(6) Customs and Manners – Customs are common or established practices. It dictates how
things are to be done and what society collectively expects its members to do. Manners are
behaviours that are regarded as appropriate in a particular society. These are the pointers of an
individual‟s character and are used in carrying the things as dictated by customs. Customs and
manners differ from country to country. Table manners, business etignettes, bodily expressions
all large from region to region. Observing manners and respecting customs are essential
ingredients of successful negotiations in far and near Eastern cultures. The international manager
should understand the manners and customs of host country citizens. Failure to understand and
respect local customs and manners may land the manager in trouble, besides losing business.

Factors of culture affecting International Business

There are number of compulsory or forceful factors of culture that effects international business.
Altitudes and values affect business behaviour, from what products to sale to how to organise,
manage and control operations. Thus, it becomes necessary to know and analyse these factors.

(1) Social Stratification System – In every culture values of some people are higher than
others and this indicates a person class or status within that culture. In business terms, this might
mean valuing members of managerial groups more highly then members of production groups.
However, what determines the ranking or social stratification system varies substantially from
country to country. A person‟s ranking is partly determined by individual factor and partly by the
person‟s affliations or memberships in the given groups.
(2) Motivation – It has been observed that employees who are motivated to work hard and for
long, prones to be more productive as compared to non-motivated employees. On an aggregate
basis this influences the economic development of a country. International Organisations are
more interested in the economic development of a country as market for their product increases
as economy grow. They are also interested for this motivational factor as higher productivity
yields to minimisation of production cost & optimisation of the available resources. This increases
the profits, which is the ultimate objective of every business activity.
(3) Relationship Preference – There are a number of factors that affects business practices
within the social stratification. No single group can be a weak or a strong pressure group within a
social set up. There are national differences in norms that influence management styles and
marketing behaviour. It becomes necessary for the international manager to understand the
complexities of different cultural values and offer useful tips to manage multicultures. One
important point of study is the employees preferences as far as their conduct with their bosses,
subordinates and superiors is concerned. Power distance focuses on how a society deals with
inequalities in the intellectual and physical capabilities of people. High distance power cultures
are found in societies that has inequalities of power and wealth. In such countries, an autocratic
style of management is preferred. Low power distance cultures are found in societies where such
inequalities are lowered as far as possible. A Consultive style of leadership style is preferred in
such societies. Attributes of individualism and collectivism are required in each organisation
depending on the need and the societal norms. Individualism exists where people are valued in
terms of their own achievements, status etc. Collectivist Societies view people as a group.
Uncertainty avoidance relates to norms, values and beliefs with regard to the tolerance for
32
ambiguity. Higher & lower uncertainty avoidance shows the readiness to take risks and accept
change. On the other hand, countries with high Masculinity Scores place a great deal of
importance on earnings, recognition, advancement and challenge; While low masculity scores
place great emphasis on a friendly work environment, corporation and employment.
(4) Risk Taking Behaviour – Nationalities differs in how people are happy to accept things,
the way they are & low they feel about controlling their destinies. A culture exhibiting uncertainty
avoidance on the higher note, forbids the international marketer to launch in that particular
society. On the other hand, a belief in falatism, that every event is inevitable, may prevent people
from accepting the basic cause and effect relationship. The effect on business in countries with a
high degree of fatalism is that people plan less for uncertainties. Trust is one force that acts as a
prime factor for considering the International business activities. In societies where trust is high,
there tends to be better opportunities for growing business.
(5) Information and task processing – The most important factor that becomes imperative
for IB is the processing of the information collected and using it aptly on the conduct of various
activities. All the countries on the globe, reflects varied cultures, thus it becomes crucial to
understand and interpret the cultures rightly, as any kind of misinterpretation will land the
international marketer on the wrong perceptions, thus affecting the overall strategy. Thus, all the
above factors becomes imperative for international business conduct.

levels of culture in Multinational Management

The international manager needs to be aware of the three levels of culture that influences overseas
operations:

(1) National Culture – It is the dominant culture within the political boundaries of a country.
Political bound do not necessarily reflect cultural boundaries. Formal education is given and
business is generally conducted in the language of the dominant culture. Most International
businesses take place within the constraints of political boundaries of the nation-state. The
dominant culture of the nation-state has the greatest impact on international business.
(2) Business Culture – For an international manager, the way the others (Germans, Indians,
Koreans, Japan etc.) do business is more important. Business culture guides for everyday business
interactions. It tells people the correct, acceptable ways to conduct business in a society. Business
etiquettes are taught in business culture, as what to wear to a meeting, when and how to use
business cards, whether to shake hands or embrace etc. Thus, the conduct of business eliquettes
in other country is focussed.
(3) Occupational and Organisational Culture – It has been observed that organisation-
specific and occupation-specific cultures develops within the rational and business culture.
Organisational culture refers to the philosophies, ideologies, values, assumptions, beliefs, norms
etc that knit an organisation together and are shared by its employees. Organisational cultures
leads to institutionalisation, glorification or deification. The employees feel a strong bond with the
company and they began to identify with it. This in turn makes the organisation clannish and the
members becomes ethnocentric, clannish organisations often pose problems to international
managers, as a clan culture leads to the collapse of several joint ventures between Indian
companies and overseas firm such as Tatas and IBM, DCM with Toyota etc. The occupational
culture cannot be ignored by the international manager. Different occupational groups such as
physicians, professors, lawyers etc. have different culture, called occupational cultures. The
norms, beliefs and expected ways of behaving of people in the same occupational groups,
regardless of which organisation they work for comprises the occupational culture. This becomes
quintessence for the international manager to know thelevels of culture, before studying the
cultural environment of a country.

The technological environment

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The technological environment contains the innovations, from robotics to cellular phones, that
are rapidly occurring in all types of technology. Before a company can expect to sell its product in
another country, the technology of the two countries must be compatible.

Companies that join forces with others will be able to quicken the pace of research and
development while cutting the costs connected with utilizing the latest technology. Regardless of
the kind of business a company is in, it must choose partners and locations that possess an
available work force to deal with the applicable technology. Many companies have chosen Mexico
and Mexican partners because they provide a willing and capable work force. GM's plant in
Arizpe, Mexico, rivals its North American plants in quality.

Consumer safety in a global marketplace

The United States leads the world in spending on research and development. As products and
technology become more complex, the public needs to know that they are safe. Thus, government
agencies investigate and ban potentially unsafe products. In the United States, the Federal Food
and Drug Administration has set up complex regulations for testing new drugs. The Consumer
Product Safety Commission sets safety standards for consumer products and penalizes companies
that fail to meet them. Such regulations have resulted in much higher research costs and in longer
times between new product ideas and their introduction. This is not always true in other
countries.

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 Module – 2

2.1 International Strategic Management.

2.2 nature, process –
2.3 scanning global environment
2.4 formulation of strategies
2.5 implementation of strategies
2.6 evaluation and control.
2.7 Organizational designs for IB.
2.8 Factors affecting designs.
2.9 Global product design.
2.10 Global area design.
2.11Global functional design.
2.12 International division structure.

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2.1 International Strategic Management.
The role of strategy:

Strategy can be defined as the actions that managers take to attain the goals of the firm.
To be profitable in a competitive environment, affirm must pay continual attention to both
reducing the costs of value creation and to differentiating its product offering in such a manner
that consumers are willing to pay more for the product than it costs to produce it.
Strategy is about identifying how best a firm can go about creating value. It is often helpful for
a firm to base each value creation activity at the location where factors are most conducive to the
performance of that activity.
International strategic planning is a process of evaluating the internal and external
environment by multinational organizations, through which they set their long-term and short-
term goals and then they implement a specific plan of action in order to achieve those objectives.

Strategic management is the process of systematically analyzing various opportunities and

threats vis-à-vis organizational strengths and weaknesses, formulating and arriving at strategic
choices through critical evaluation of alternatives and implementing them to meet the set
objectives of the organization. Area of strategic compulsions 1. Orientation for globalization 2.
Emerging E-commerce and Internet culture 3. Cut-throat competition 4. Diversification 5. Active
pressure groups 6. Motive for corporate social responsibility (CSR) and ethics.

2.2
2.2.1 nature : In concept, SM process in an MNC is similar to that in any other form of
organization.
• The main complicating factors being the numerous country and regional environments it has to
analyze and understand before considering various strategic options.
• Strategy implementation can be more difficult because different cultures have different norms,
values and work ethics.

Example1:
Tata Steel (Group of Tata) succeed in acquiring another that is four times as large. The Tata
Group (from Tea to Truck Conglomerate, most widely admired business group in India) spent 3
billion dollars on 19 acquisitions in five continents, from the Eight O’ Clock Coffee Co. in US to
Daewoo in South Korea.

Example2:
Ford Motor, which has re-entered the market in Thailand and despite a shrinking demand for
automobiles, there is beginning to build a strong sales force to garner market share. The firm’s
strategic plan is based on offering the right combination of price and financing to a carefully
identified market segment. • In particular, Ford is working to bring down the monthly payments
so that customers can afford a new vehicle. This is the same approach that Ford used in Mexico,
where the currency crisis of 1994 resulted in serious problems for many multinationals.

Example 3:
Toyota is another MNC which has benefited vastly from strategic management. The company is
going beyond the automotive market. In the process, Toyota is assessing environmental

36
opportunities and threats and examining its internal strengths and weaknesses so that the firm’s
strategic thrust can exploit its strengths and sidestep any shortcomings.

Process :

Environmental Scanning- Environmental scanning refers to a process of collecting,

scrutinizing and providing information for strategic purposes. It helps in analyzing the internal
and external factors influencing an organization. After executing the environmental analysis
process, management should evaluate it on a continuous basis and strive to improve it.

Strategy Formulation- Strategy formulation is the process of deciding best course of action for
accomplishing organizational objectives and hence achieving organizational purpose. After
conducting environment scanning, managers formulate corporate, business and functional
strategies.

Strategy Implementation- Strategy implementation implies making the strategy work as

intended or putting the organization’s chosen strategy into action. Strategy implementation
includes designing the organization’s structure, distributing resources, developing decision
making process, and managing human resources.

Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The
key strategy evaluation activities are: appraising internal and external factors that are the root of
present strategies, measuring performance, and taking remedial / corrective actions. Evaluation
makes sure that the organizational strategy as well as it’s implementation meets the
organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic
management plan. Present businesses that have already created a strategic management plan will
revert to these steps as per the situation’s requirement, so as to make essential changes.

2.3 scanning global environment

Environmental Scanning – Identifying Market Opportunities and Threats Organisations do
environmental scanning to identify important trends and determine if they represent present or
future market opportunities or threats. The process of environmental scanning is consisting of
identifying relevant environmental factors and trends and assessing their potential impact on the
organization’s markets and marketing activities. If the trend creates market opportunity
marketers have to take timely decision to take advantage of the opportunity. If the trend poses
marketing threat decisions are taken to minimise the threat.

2.4 formulation of strategies

Steps in Strategy Formulation Process
Strategy formulation refers to the process of choosing the most appropriate course of action for
the realization of organizational goals and objectives and thereby achieving the organizational

37
 vision. The process of strategy formulation basically involves six main steps. Though
these steps do not follow a rigid chronological order, however they are very rational and can be
easily followed in this order.

1. Setting Organizations’ objectives - The key component of any strategy statement is to

set the long-term objectives of the organization. It is known that strategy is generally a
medium for realization of organizational objectives. Objectives stress the state of being
there whereas Strategy stresses upon the process of reaching there. Strategy includes both
the fixation of objectives as well the medium to be used to realize those objectives. Thus,
strategy is a wider term which believes in the manner of deployment of resources so as to
achieve the objectives.

While fixing the organizational objectives, it is essential that the factors which influence the
selection of objectives must be analyzed before the selection of objectives. Once the
objectives and the factors influencing strategic decisions have been determined, it is easy to
take strategic decisions.

2. Evaluating the Organizational Environment - The next step is to evaluate the

general economic and industrial environment in which the organization operates. This
includes a review of the organizations competitive position. It is essential to conduct a
qualitative and quantitative review of an organizations existing product line. The purpose
of such a review is to make sure that the factors important for competitive success in the
market can be discovered so that the management can identify their own strengths and
weaknesses as well as their competitors’ strengths and weaknesses.

After identifying its strengths and weaknesses, an organization must keep a track of
competitors’ moves and actions so as to discover probable opportunities of threats to its
market or supply sources.

3. Setting Quantitative Targets - In this step, an organization must practically fix the
quantitative target values for some of the organizational objectives. The idea behind this is
to compare with long term customers, so as to evaluate the contribution that might be
made by various product zones or operating departments.
4. Aiming in context with the divisional plans - In this step, the contributions made by
each department or division or product category within the organization is identified and
accordingly strategic planning is done for each sub-unit. This requires a careful analysis of
macroeconomic trends.
5. Performance Analysis - Performance analysis includes discovering and analyzing the
gap between the planned or desired performance. A critical evaluation of the organizations
past performance, present condition and the desired future conditions must be done by the
organization. This critical evaluation identifies the degree of gap that persists between the
actual reality and the long-term aspirations of the organization. An attempt is made by the
organization to estimate its probable future condition if the current trends persist.
6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of
action is actually chosen after considering organizational goals, organizational strengths,
potential and limitations as well as the external opportunities.

2.5 implementation of strategies

Strategy Implementation - Meaning and Steps in Implementing a Strategy
Strategy implementation is the translation of chosen strategy into organizational
action so as to achieve strategic goals and objectives. Strategy implementation is also
defined as the manner in which an organization should develop, utilize, and amalgamate
organizational structure, control systems, and culture to follow strategies that lead to competitive
38
advantage and a better performance. Organizational structure allocates special value developing
tasks and roles to the employees and states how these tasks and roles can be correlated so as
maximize efficiency, quality, and customer satisfaction-the pillars of competitive advantage. But,
organizational structure is not sufficient in itself to motivate the employees.

An organizational control system is also required. This control system equips managers with
motivational incentives for employees as well as feedback on employees and organizational
performance. Organizational culture refers to the specialized collection of values, attitudes, norms
and beliefs shared by organizational members and groups.

Following are the main steps in implementing a strategy:

Developing an organization having potential of carrying out strategy

successfully.

Disbursement of abundant resources to strategy-essential activities.

Creating strategy-encouraging policies.

Employing best policies and programs for constant improvement.

Linking reward structure to accomplishment of results.

Making use of strategic leadership.

Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential
to note that strategy implementation is not possible unless there is stability between strategy and
each organizational dimension such as organizational structure, reward structure, resource-
allocation process, etc.

Strategy implementation poses a threat to many managers and employees in an organization. New
power relationships are predicted and achieved. New groups (formal as well as informal) are formed
whose values, attitudes, beliefs and concerns may not be known. With the change in power and
status roles, the managers and employees may employ confrontation behaviour.

Strategy Formulation vs Strategy Implementation

Following are the main differences between Strategy Formulation and Strategy Implementation-

Strategy Formulation Strategy Implementation

Strategy Formulation includes planning Strategy Implementation involves all those

and decision-making involved in means related to executing the strategic
developing organization’s strategic goals plans.
and plans.

In short, Strategy Formulation is placing In short, Strategy Implementation

the Forces before the action. is managing forces during the action.

Strategy Formulation is Strategic Implementation is mainly

39
an Entrepreneurial Activity based on an Administrative Taskbased on
strategic decision-making. strategic and operational decisions.

Strategy Formulation emphasizes Strategy Implementation emphasizes

on effectiveness. on efficiency.

Strategy Formulation is a rational Strategy Implementation is basically

process. an operational process.

Strategy Formulation requires co- Strategy Implementation requires co-

ordination among few individuals. ordination among many individuals.

Strategy Formulation requires a great deal Strategy Implementation requires

of initiative and logical skills. specific motivational and leadership
traits.

Strategic Formulation precedes Strategy STrategy Implementation follows Strategy

Implementation. Formulation.

2.6 evaluation and control.

Strategy Evaluation Process and its Significance
Strategy Evaluation is as significant as strategy formulation because it throws light on the
efficiency and effectiveness of the comprehensive plans in achieving the desired results. The
managers can also assess the appropriateness of the current strategy in todays dynamic world
with socio-economic, political and technological innovations. Strategic Evaluation is the final
phase of strategic management.

The significance of strategy evaluation lies in its capacity to co-ordinate the task
performed by managers, groups, departments etc, through control of performance.
Strategic Evaluation is significant because of various factors such as - developing inputs for new
strategic planning, the urge for feedback, appraisal and reward, development of the strategic
management process, judging the validity of strategic choice etc.

The process of Strategy Evaluation consists of following steps-

1. Fixing benchmark of performance - While fixing the benchmark, strategists

encounter questions such as - what benchmarks to set, how to set them and how to express
them. In order to determine the benchmark performance to be set, it is essential to
discover the special requirements for performing the main task. The performance indicator
that best identify and express the special requirements might then be determined to be
used for evaluation. The organization can use both quantitative and qualitative criteria for
comprehensive assessment of performance. Quantitative criteria includes determination of
net profit, ROI, earning per share, cost of production, rate of employee turnover etc.
Among the Qualitative factors are subjective evaluation of factors such as - skills and
competencies, risk taking potential, flexibility etc.
2. Measurement of performance - The standard performance is a bench mark with
which the actual performance is to be compared. The reporting and communication system
help in measuring the performance. If appropriate means are available for measuring the
performance and if the standards are set in the right manner, strategy evaluation becomes

40
 easier. But various factors such as managers contribution are difficult to measure. Similarly
divisional performance is sometimes difficult to measure as compared to individual
performance. Thus, variable objectives must be created against which measurement of
performance can be done. The measurement must be done at right time else evaluation will
not meet its purpose. For measuring the performance, financial statements like - balance
sheet, profit and loss account must be prepared on an annual basis.
3. Analyzing Variance - While measuring the actual performance and comparing it with
standard performance there may be variances which must be analyzed. The strategists
must mention the degree of tolerance limits between which the variance between actual
and standard performance may be accepted. The positive deviation indicates a better
performance but it is quite unusual exceeding the target always. The negative deviation is
an issue of concern because it indicates a shortfall in performance. Thus in this case the
strategists must discover the causes of deviation and must take corrective action to
overcome it.
4. Taking Corrective Action - Once the deviation in performance is identified, it is
essential to plan for a corrective action. If the performance is consistently less than the
desired performance, the strategists must carry a detailed analysis of the factors
responsible for such performance. If the strategists discover that the organizational
potential does not match with the performance requirements, then the standards must be
lowered. Another rare and drastic corrective action is reformulating the strategy which
requires going back to the process of strategic management, reframing of plans according
to new resource allocation trend and consequent means going to the beginning point of
strategic .

41
Strategic control process

Market position standards: These standards indicate the share of total sales in a particular
market that the company would like to have relative to its competitors.
• Productivity standards: How much that various segments of the organization should
produce is the focus of these standards.
• Product leadership standards: These indicate what must be done to attain such a position.
• Employee attitude standards: These standards indicate what types of attitudes the company
managers should strive to indicate in the company’s employees.
• Social responsibility standards: Such as making contribution to the society.
• Standards reflecting the relative balance between short and long range goals.
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b) Measurement of Performance:
The measurement of performance against standards should be on a forward looking basis so that
deviations may be detected in advance by appropriate actions. The degree of difficulty in
measuring various types of organizational performance, of course, is determined primarily by the
activity being measured. For example, it is far more difficult to measure the performance of
highway maintenance worker than to measure the performance of a student enrolled in a college
level management course.

c) Comparing Measured Performance to Stated Standards:

When managers have taken a measure of organizational performance, their next step in
controlling is to compare this measure against some standard. A standard is the level of activity
established to serve as a model for evaluating organizational performance. The performance
evaluated can be for the organization as a whole or for some individuals working within the
organization. In essence, standards are the yardsticks that determine whether organizational
performance is adequate or inadequate.

d) Taking Corrective Actions:

After actual performance has been measured compared with established performance standards,
the next step in the controlling process is to take corrective action, if necessary. Corrective action
is managerial activity aimed at bringing organizational performance up to the level of
performance standards. In other words, corrective action focuses on correcting organizational
mistakes that hinder organizational performance. Before taking any corrective action, however,
managers should make sure that the standards they are using were properly established and that
their measurements of organizational performance are valid and reliable. At first glance, it seems
a fairly simple proposition that managers should take corrective action to eliminate problems -
the factors within an organization that are barriers to organizational goal attainment. In practice,
however, it is often difficult to pinpoint the problem causing some undesirable organizational
effect.

2.7 Organizational designs for IB.

Organization Design Organization design (or organization structure) is the overall pattern of
structural components and configurations used to manage the total organization.

2.8 Factors affecting designs.

Factors Affecting Organizational Design
Although many things can affect the choice of an appropriate structure for an organization, the
following five factors are the most common: size, life cycle, strategy, environment, and
technology.

Organizational size
The larger an organization becomes, the more complicated its structure. When an organization is
small — such as a single retail store, a two‐person consulting firm, or a restaurant — its structure
can be simple.

In reality, if the organization is very small, it may not even have a formal structure. Instead of
following an organizational chart or specified job functions, individuals simply perform tasks
based on their likes, dislikes, ability, and/or need. Rules and guidelines are not prevalent and may
exist only to provide the parameters within which organizational members can make decisions.
Small organizations are very often organic systems.

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As an organization grows, however, it becomes increasingly difficult to manage without more
formal work assignments and some delegation of authority. Therefore, large organizations
develop formal structures. Tasks are highly specialized, and detailed rules and guidelines dictate
work procedures. Interorganizational communication flows primarily from superior to
subordinate, and hierarchical relationships serve as the foundation for authority, responsibility,
and control. The type of structure that develops will be one that provides the organization with the
ability to operate effectively. That's one reason larger organizations are often mechanistic—
mechanistic systems are usually designed to maximize specialization and improve efficiency.

Organization life cycle

Organizations, like humans, tend to progress through stages known as a life cycle. Like humans,
most organizations go through the following four stages: birth, youth, midlife, and maturity. Each
stage has characteristics that have implications for the structure of the firm.

Birth: In the birth state, a firm is just beginning. An organization in the birth stage does not yet
have a formal structure. In a young organization, there is not much delegation of authority. The
founder usually “calls the shots.”

Youth: In this phase, the organization is trying to grow. The emphasis in this stage is on
becoming larger. The company shifts its attention from the wishes of the founder to the wishes of
the customer. The organization becomes more organic in structure during this phase. It is during
this phase that the formal structure is designed, and some delegation of authority occurs.

Midlife: This phase occurs when the organization has achieved a high level of success. An
organization in midlife is larger, with a more complex and increasingly formal structure. More
levels appear in the chain of command, and the founder may have difficulty remaining in control.
As the organization becomes older, it may also become more mechanistic in structure.

Maturity: Once a firm has reached the maturity phase, it tends to become less innovative, less

44
interested in expanding, and more interested in maintaining itself in a stable, secure
environment. The emphasis is on improving efficiency and profitability. However, in an attempt
to improve efficiency and profitability, the firm often tends to become less innovative. Stale
products result in sales declines and reduced profitability. Organizations in this stage are slowly
dying. However, maturity is not an inevitable stage. Firms experiencing the decline of maturity
may institute the changes necessary to revitalize.
Although an organization may proceed sequentially through all four stages, it does not have to. An
organization may skip a phase, or it may cycle back to an earlier phase. An organization may even
try to change its position in the life cycle by changing its structure.

As the life‐cycle concept implies, a relationship exists between an organization's size and age. As
organizations age, they tend to get larger; thus, the structural changes a firm experiences as it gets
larger and the changes it experiences as it progresses through the life cycle are parallel. Therefore,
the older the organization and the larger the organization, the greater its need for more structure,
more specialization of tasks, and more rules. As a result, the older and larger the organization
becomes, the greater the likelihood that it will move from an organic structure to a mechanistic
structure.
Strategy
How an organization is going to position itself in the market in terms of its product is considered
its strategy. A company may decide to be always the first on the market with the newest and best
product (differentiation strategy), or it may decide that it will produce a product already on the
market more efficiently and more cost effectively (cost‐leadership strategy). Each of these
strategies requires a structure that helps the organization reach its objectives. In other words, the
structure must fit the strategy.

Companies that want to be the first on the market with the newest and best product probably are
organic, because organic structures permit organizations to respond quickly to changes.
Companies that elect to produce the same products more efficiently and effectively will probably
be mechanistic.

Environment
The environment is the world in which the organization operates, and includes conditions that
influence the organization such as economic, social‐cultural, legal‐political, technological, and
natural environment conditions. Environments are often described as either stable or dynamic.

In a stable environment, the customers' desires are well understood and probably will remain
consistent for a relatively long time. Examples of organizations that face relatively stable
environments include manufacturers of staple items such as detergent, cleaning supplies, and
paper products.
In a dynamic environment, the customers' desires are continuously changing—the opposite of a
stable environment. This condition is often thought of as turbulent. In addition, the technology
that a company uses while in this environment may need to be continuously improved and
updated. An example of an industry functioning in a dynamic environment is electronics.
Technology changes create competitive pressures for all electronics industries, because as
technology changes, so do the desires of consumers.
In general, organizations that operate in stable external environments find mechanistic structures
to be advantageous. This system provides a level of efficiency that enhances the long ‐term
performances of organizations that enjoy relatively stable operating environments. In contrast,
organizations that operate in volatile and frequently changing environments are more likely to
find that an organic structure provides the greatest benefits. This structure allows the
organization to respond to environment change more proactively.

Advances in technology are the most frequent cause of change in organizations since they

45
generally result in greater efficiency and lower costs for the firm. Technology is the way tasks are
accomplished using tools, equipment, techniques, and human know‐how.

In the early 1960s, Joan Woodward found that the right combination of structure and technology
were critical to organizational success. She conducted a study of technology and structure in more
than 100 English manufacturing firms, which she classified into three categories of core‐
manufacturing technology:

Small‐batch production is used to manufacture a variety of custom, made ‐to ‐order goods. Each
item is made somewhat differently to meet a customer's specifications. A print shop is an example
of a business that uses small‐batch production.

Mass production is used to create a large number of uniform goods in an assembly ‐line system.
Workers are highly dependent on one another, as the product passes from stage to stage until
completion. Equipment may be sophisticated, and workers often follow detailed instructions
while performing simplified jobs. A company that bottles soda pop is an example of an
organization that utilizes mass production.

Organizations using continuous‐process production create goods by continuously feeding raw

materials, such as liquid, solids, and gases, through a highly automated system. Such systems are
equipment intensive, but can often be operated by a relatively small labor force. Classic examples
are automated chemical plants and oil refineries.
Woodward discovered that small‐batch and continuous processes had more flexible structures,
and the best mass‐production operations were more rigid structures.

Once again, organizational design depends on the type of business. The small ‐batch and
continuous processes work well in organic structures and mass production operations work best
in mechanistic structures.

2.9 Global product design.

Global Product Design: It was the common form adopted by most MNC today.
 It assign worldwide responsibility for specific products or product group to separate operating
division within a firm.
 This design work best when the firm has diverse product lines.
 If the product are unrelated, the firm takes on M-form design - Multidivisional - the various
divisions of the firm usually self-contained operations with interrelated activities.
 If the product are unrelated, the firm takes on H-form design - Holding - various unrelated
business function with autonomy .

46
Advantages :
 Manager gain expertise in all aspects of the product.
 Facilitates efficiencies in production because manager are free to manufacture the product
Allow manager to coordinate production at their various facilities.
 Manager able to incorporate new technologies into their product and respond quickly to
technological changes.
 Facilitates geocentric corporate philosophies - to develop greater international skills
internally

Disadvantages :
 Encourage expensive duplication because each product need its own functional
area skills such as marketing and finance.
 Coordination and corporate learning across product groups also becomes more
difficult.

2.10 Global area design.

The global area design organizes the firm’s activities around specific areas or regions of the world.

Disadvantages of Global Area Design

• Firm may sacrifice cost efficiencies
• Diffusion of technology is slowed
• Design unsuitable for rapid technological change
• Duplication of resources
• Coordination across areas is expensive

2.11Global functional design.

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Global Functional Design The global functional design calls for a firm to create departments or
divisions that have worldwide responsibility for the common organizational functions—finance,
operations, marketing, R&D, and human resources management.

Global Functional Design Advantages

•Transference of expertise
•Highly centralized control
• Focused attention of key functions

Disadvantages
• Practical only when firm has few products or customers
•Coordination difficult
• Duplication of resources

2.12 International division structure.

Four major types of international organizational structures. The types are: 1. Expo-
documents against acceptancert Department 2. International division structure 3.
Global Organizational Structures 4. Evolution of Global Organizational Structures.

International Organizational Structures: Type # 1.

Expo-documents against acceptancert Department:
Exports are often looked after by a company’s marketing or sales department in the initial stages
when the volume of exports sales is low. However, with increase in exports turnover, an
independent exports department is often setup and separated from domestic marketing, as shown
in Fig

48
Exports activities are controlled by a company’s home-based office through a designated head of
export department, i.e. Vice President, Director, or Manager (Exports). The role of the HR
department is primarily confined to planning and recruiting staff for exports, training and
development, and compensation.

Sometimes, some HR activities, such as recruiting foreign sales or agency personnel are carried
out by the exports or marketing department with or without consultation with the HR
department.

International Organizational Structures: Type # 2.

As the foreign operations of a company grow, businesses often realize the overseas growth
opportunities and an independent international division is created which handles all of a
company’s international operations (Fig. 17.3). The head of international division, who directly
reports to the chief executive officer, coordinates and monitors all foreign activities.

The in-charge of subsidiaries reports to the head of the international division. Some parallel but
less formal reporting also takes place directly to various functional heads at the corporate
headquarters.

The corporate human resource department coordinates and implements staffing, expatriate
management, and training and development at the corporate level for international assignments.
Further, it also interacts with the HR divisions of individual subsidiaries.

The international structure ensures the attention of the top management towards developing a
holistic and unified approach to international operations. Such a structure facilitates cross-
product and cross-geographic co-ordination, and reduces resource duplication.
49
Although an international structure provides much greater autonomy in decision-making, it is
often used during the early stages of internationalization with relatively low ratio of foreign to
domestic sales, and limited foreign product and geographic diversity.

International Organizational Structures: Type # 3.

Global Organizational Structures:

Rise in a company’s overseas operations necessitates integration of its activities across the world
and building up a worldwide organizational structure.

While conceptualizing organizational structure, the internationalizing firm often

has to resolve the following conflicting issues:

i. Extent or type of control exerted by the parent company headquarters over subsidiaries

ii. Extent of autonomy in making key decisions to be provided by the parent company
headquarters to subsidiaries (centralization vs. decentralization)

It leads to re-organization and amalgamation of hitherto fragmented organizational interests into

a globally integrated organizational structure which may either be based on functional,
geographic, or product divisions. Depending upon the firm strategy and demands of the external
business environment, it may further be graduated to a global matrix or trans-national network
structure.

Global functional division structure:

It aims to focus the attention of key functions of a firm, as shown in Fig. 17.4, wherein each
functional department or division is responsible for its activities around the world. For instance,
the operations department controls and monitors all production and operational activities;
similarly, marketing, finance, and human resource divisions co-ordinate and control their
respective activities across the world.

Such an organizational structure takes advantage of the expertise of each functional division and
facilitates centralized control. MNEs with narrow and integrated product lines, such as
Caterpillar, usually adopt the functional organizational structure.

Such organizational structures were also adopted by automobile MNEs but have now been
replaced by geographic and product structures during recent years due to their global expansion.

50
The major advantages of global functional division structure include:

i. Greater emphasis on functional expertise

ii. Relatively lean managerial staff

iii. High level of centralized control

iv. Higher international orientation of all functional managers

The disadvantages of such divisional structure include:

i. Difficulty in cross-functional coordination

ii. Challenge in managing multiple product lines due to separation of operations and marketing in
different departments

iii. Since only the chief executive officer is responsible for profits, such a structure is favoured only
when centralized coordination and control of various activities is required.

Global product structure:

Under global product structure, the corporate product division, as depicted in Fig. 17.5, is given
worldwide responsibility for the product growth.

The heads of product divisions do receive internal functional support associated with the product
from all other divisions, such as operations, finance, marketing, and human resources. They also
enjoy considerable autonomy with authority to take important decisions and operate as profit
centres.

The global product structure is effective in managing diversified product lines.

Such a structure is extremely effective in carrying out product modifications so as to meet rapidly
changing customer needs in diverse markets. It enables close coordination between the
technological and marketing aspects of various markets in view of the differences in product life
cycles in these markets, for instance, in case of consumer electronics, such as TV, music players,
etc.
51
However, creating exclusive product divisions tends to replicate various functional activities and
multiplicity of staff. Besides, little attention is paid to worldwide market demand and strategy.
Lack of cooperation among various product lines may also result into sales loss. Product
managers often pursue currently attractive markets neglecting those with better long-term
potential.

Global geographic structure:

Under the global geographic structure, a firm’s global operations are organized on the basis of
geographic regions, as depicted in Fig. 17.6. It is generally used by companies with mature
businesses and narrow product lines. It allows the independent heads of various geographical
subsidiaries to focus on the local market requirements, monitor environmental changes, and
respond quickly and effectively.

The corporate headquarter is responsible for transferring excess resources from one country to
another, as and when required. The corporate human resource division also coordinates and
provides synergy to achieve company’s overall strategic goals between various subsidiaries based
in different countries.

Such structure is effective when the product lines are not too diverse and resources can be shared.
Under such organizational structure, subsidiaries in each country are deeply embedded with
nationalistic biases that prohibit them from cooperating among each other.

Global matrix structure:

It is an integrated organizational structure, which super-imposes on each other more than one
dimension. The global matrix structure might consist of product divisions intersecting with
various geographical areas or functional divisions (Fig. 17.7). Unlike functional, geographical, or
product division structures, the matrix structure shares joint control over firm’s various
functional activities.

52
Such an integrated organizational structure facilitates greater interaction and flow of information
throughout the organization. Since the matrix structure has an in-built concept of interaction
between intersecting perspectives, it tends to balance the MNE’s prospective, taking cross-
functional aspects into consideration.

It facilitates ease of technology transfer to foreign operations and of new products to different
markets leading to higher economies of scale and better foreign sales performance. Matrix
structure is used successfully by a large number of MNEs, such as Royal Dutch/Shell, Dow
Chemical, etc.

In an effort to bring together divergent perspectives within the organization, the matrix structure
may also lead to conflicting situations. It inhibits a firm’s ability to respond quickly to
environmental changes in case an effective conflict resolution mechanism is not in place.

Since the structure requires most managers to report to two or multiple bosses, Fayol’s basic
principle of unity of command is violated and conflicting directives from multiple authorities may
compel employees to compromise with sub-optimal alternatives so as to avoid conflict which may
not be the most appropriate strategy for an organization as a whole.

Transnational network structure:

Such a globally integrated structure represents the ultimate form of an earth-spanning
organization, which eliminates the meaning of two or three matrix dimensions. It encompasses
elements of function, product, and geographic designs while relying upon a network arrangement
to link worldwide subsidiaries (Fig. 17.8).

53
  
This form of organization is not defined by its formal structure but by how its processes are linked
with each other, which may be characterized by an overall integrated system of various inter-
related sub-systems.

The trans-national network structure is designed around ‘nodes’, which are the units responsible
for coordinating with product, functional and geographic aspects of an MNE. Thus, trans-national
network structures build-up multidimensional organizations which are fully networked.

The conceptual framework of a trans-national network structure primarily consists

of three components:

Disperse sub-units:

These are subsidiaries located anywhere in the world where they can benefit the organization
either to take advantage of low-factor costs or provide information on new technologies or market
trends.

Specialized operations:

These are the activities carried out by sub-units focusing upon particular product lines, research
areas, and marketing areas design to tap specialized expertise or other resources in the company’s
worldwide subsidiaries.

Inter-dependent relationships:
It is used to share information and resources throughout the dispersed and specialized
subsidiaries.

54
Organizational structure of N.V. Philips which operates in more than 50 countries with diverse
range of product lines provides a good illustration of a trans-national network structure.

International Organizational Structures: Type # 4.

Evolution of Global Organizational Structures:

Organizational structures often exhibit evolutionary patterns, as shown in Fig. 17.9, depending
upon their strategic globalization. The historical evolution of organizational patterns indicates
that in the early phase of internationalization, most firms separate their exports departments
from domestic marketing or have separate international divisions.

Companies with emphasis on global business strategies move towards global product structures
whereas those with emphasis on location base strategies move towards global geographic
structures.

Subsequently, a large number of companies graduate to a matrix or trans-national network

structure due to dual demands of local adaptations pressures and globalization. In practice, most
companies hardly adopt either pure matrix or trans-national structures; rather they opt for hybrid
structures incorporating both.

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56
 Module – 3

International Human Resource Management (IHRM). IHRM

and domestice HRM compared. Scope of IHRM. HR planning. Selection
of expartriates. Expat training. Expat remuneration. Expat failures and
ways of avoiding. Repatriation. Employee relations.

International operations Management:Nature - operations

management and competitive advantages. Strategic issues – sourcing v/s
vertical integration, facilities location, strategic role of foreign plants,
international logistics, managing service operations, managing
technology transfers.
International Financial Management – Nature - compared with
domestic financial management. Scope – current assets management,
managing foreign exchange risks, international taxation, international
financing decision, international financial markets, international
financial investment decisions.
International financial accounting – national differences in
accounting, attempts to harmonise differences. Financing foreign trade –
India‘s foreign trade, balance of trade and balance of payments, financing
export trade and import trade.
International Marketing – nature compared with domestic
marketing. Benefits from international marketing. Major activities –
market assessment, product decisions, promotion decisions, pricing
decisions, distribution decisions.

57
3.1 International Human Resource Management (IHRM).

Introduction:

What is IHRM? Actually, it is not easy to provide a precise definition of international human
resource management (IHRM) because the responsibility of an HR manger in a multinational
corporation (MNC) varies from one firm to another. Generally speaking, IHRM is the effective
utilization of human resources in a corporation in an international environment. IHRM is defined
as “the HRM issues and problems arising from the internationalization of business, and the HRM
strategies, policies and practices which firms pursue in response to the internationalization of
business”.

The term IHRM has traditionally focused on expatriation. However, IHRM covers a far wider
spectrum than expatriation management. Four major activities essentially concerned with IHRM
were recruitment and selection, training and development, compensation and repatriation of
expatriates.

Recent definitions concern IHRM with activities of how MNCs manage their geographically
decentralized employees in order to develop their HR resources for competitive advantage, both
locally and globally. The role and functions of IHRM, the relationship between subsidiaries and
headquarters, and the policies and practices are considered in this more strategic approach.
IHRM is also defined as a collection of policies and practices that a multinational enterprise uses
to manage local and non-local employees it has in countries other than their home countries.

Due to the development of globalization, new challenges occur and increase the complexity of
managing MNCs. IHRM is seen as a key role to balance the need for coordinating and controlling
oversea subsidiaries, and the need to adapt to local environments. Therefore, the definition of
IHRM has extended to management localization, international coordination, and the
development of global leadership, etc.

Defining International HRM from the perspective of a multinational

firm
Before offering a definition of international HRM, we should first define the general field
of HRM. Typically, HRM refers to those activities undertaken by an organization to
effectively utilize its human resources. These activities would include at least the following:
1.Human resource planning
2.Staffing
3.Performance management
4.Training and development
5.Compensation and Benefits
6.Labor relations

We can now consider the question of which activities change when HRM goes international. A
paper by Morgan (1986) on the development of international HRM is helpful in considering this
question. He presents a model of international HRM (shown in Figure 1) that consists of three
dimensions:

1. The three broad human resource activities of procurement, allocation, and utilisation.(These
three broad activities can be easily expanded into the six HR activities listed above).

2. The three national or country categories involved in international HRM activities: (1) the host-
country where a subsidiary may be located, (2) the home-country where the firm is
58
headquartered, and (3) "other" countries that may be the source of labor or finance.

3. The three types of employees of an international firm: (1) host-country nationals (HCNs), (2)
parent-country nationals (PCNs), and (3) third-country nationals (TCNs).3 Thus, for example,
IBM employs Australian citizens (HCNs) in its Australian operations, often sends U.S. citizens
(PCNs) to Asia-Pacific countries on assignment, and may send some of its Singaporean employees
on an assignment to its Japanese operations (as TCNs).

Definition of IHRM
Schuler, Budhwar & Florkowski’s
–world-wide management of human resources with the purpose of enabling the multinational
enterprise to perform successfully.

Dowling and Welch’s (2004)

–highlight the interplay of human resource activities, types of employees, and countries of
operation, (2004: 5).

•Clark et al (2000: 8)
–adopted a broad typology of three areas; "work relations", "employment relations" and
"industrial relations", and their activities, attributed to HRM by

Gospel (1992).
•Scullion’s (1995: 352) succinct yet holistic definition:
–the human resource management issues and problems arising from the internationalization of
business, and the human resource management strategies, policies and practices which firms
pursue in response to the internationalization process.
3.1.1 IHRM and Domestic HRM
SL.N Objective HRM IHRM
O.
1 Meaning HRM is concerned with IHRM is into management of the
management of employees employees in three nation
only in country categories :parent country, host country,
third country.
2 Role HRM role includes IHRM plays a key role in the
hiring people, retaining achievement of a balance between
them, negotiating their the need for control and
salary, performance coordination of foreign subsidiaries
management. and the need to adapt to local
environments.
3 Differences The HRM department The IHRM department has to
does not have to deal overcome multi-cultural differences
with cultural differences to run a local subsidiary of the
as majority of the parent coutry.
employees belong to the
same social community.
4 Perspective The perspective is It brings with it a broader range of
narrow as with respect perspective than the domestic
to the domestic HR department of HRM
issues only.
59
 5

3.1.2 Scope of IHRM.

International human resource activities:

International human resource activities include major operative human resource functions such
as procurement, which involves human resource planning and induction. The second major
activity is allocation; it involves the plan for using human resources among various subsidiaries or
projects. Effective utilization of human resources is the third human resource activity and helps in
maximizing the skills and efficiency of the human resources and productivity.

The activities of international human resource activities cover all the major activities like HR
planning, recruitment, selection, orientation, placement, training & development, remuneration,
and performance evaluation.

Categorization of countries in the concept of IHRM

In the concept international human resource management, the countries having headquarters and
subsidiaries are categorized as follows.

Home country: Where the headquarters is located

Host country: Where the subsidiary is located
Third/other countries: These are the sources of finance and human
resources

Types of employees in IHRM

The name international human resource management itself indicates that human resources are
recruited from various countries. Here nationals of various countries contribute their skills and
efficiently for the growth of the organization. They are mainly three types, parent or home country
nationals, host country nationals, and third country nationals. These three types are differentiated
on the basis of citizens of headquarters of the company, citizens of the subsidiaries of the
company, and citizens of various countries.

60
Home country or Parent Country Nationals (PCNs)
Home country nationals are the employees of the organization and these are the citizens of the
country where the headquarter is located.

Host Country Nationals (HCNs)

Host country nationals are the citizens of the country where the subsidiary is located or when any
organization recruits the nationals of the country where the subsidiary is located.

Third-country Nationals (TCNs)

Third country nationals are the citizens of the other countries, and they are neither the citizens of
the country where the headquarters is located nor the citizens of the country where the subsidiary
located.

3.1.3 HR planning.

According to E.W. Vetter, human resource planning is “the process by which a management
determines how an organisation should make from its current manpower position to its desired
manpower position.

Features of Human Resource Planning:

From the study of various definitions, the following features of human resource planning can be
derived:

1. Well Defined Objectives:

Enterprise’s objectives and goals in its strategic planning and operating planning may form the
objectives of human resource planning. Human resource needs are planned on the basis of
company’s goals. Besides, human resource planning has its own objectives like developing human
resources, updating technical expertise, career planning of individual executives and people,
ensuring better commitment of people and so on.

2. Determining Human Resource Reeds:

Human resource plan must incorporate the human resource needs of the enterprise. The thinking
will have to be done in advance so that the persons are available at a time when they are required.
For this purpose, an enterprise will have to undertake recruiting, selecting and training process
also.

3. Keeping Manpower Inventory:

It includes the inventory of present manpower in the organisation. The executive should know the
persons who will be available to him for undertaking higher responsibilities in the near future.

4. Adjusting Demand and Supply:

Manpower needs have to be planned well in advance as suitable persons are available in future. If
sufficient persons will not be available in future then efforts should be .made to start recruitment
process well in advance. The demand and supply of personnel should be planned in advance.

5. Creating Proper Work Environment:

Besides estimating and employing personnel, human resource planning also ensures that working
conditions are created. Employees should like to work in the organisation and they should get
proper job satisfaction.

International Workforce planning and staffing: International labour market

A labor market is the relationship of communication between the suppliers and the demanders so

61
that they are able to do business together. The global aspect of the labor market refers to the
world and all that contribute within this measure, also known as globalization. Globalization is the
process of integrating regions through societies, political systems, economies, and culture to share
ideas between the countries. Culturally, this is beneficial because we are learning from other
countries and bridging the gap between countries. All around, globalization is a positive action
because we can learn from each other and better our countries with other ideas and in turn work
for the good of the whole world. International labor standards refer to conventions agreed upon
by international actors, resulting from a series of value judgments, set forth to protect basic
worker rights, enhance workers‘ job security, and improve their terms of employment on a global
scale.

The intent of such standards, then, is to establish a worldwide minimum level of

protection from inhumane labor practices through the adoption and implementation of said
measures. From a theoretical standpoint, it has been maintained, on ethical grounds, that there
are certain basic human rights that are universal to humankind.
Thus, it is the aim of international labor standards to ensure the provision of such
rights in the workplace, such as against workplace aggression, bullying, discrimination and gender
inequality on the other hands for working diversity, workplace democracy and empowerment.
Global workforce refers to the international labor pool of workers, including those employed by
multinational companies and connected through a global system of networking and production,
immigrant workers, transient migrant workers, telecommuting workers, those in export-oriented
employment, contingent work or other precarious employment.

International Recruitment function

The changing nature of mobility worldwide means that the HR function in international
organisations has to meet a series of challenges in resourcing:
It has to work within globally co-ordinated systems whilst recognising and being sensitive to local
needs. Practitioners are looking to source talent from increasingly varied places around the world,
so integrating a diverse workforce for maximum organisational and individual performance is
crucial. Increasingly the lines between traditional HR functions are blurred, so resourcing
specialists have to focus on management development and reward issues as well as resourcing
ones.
Merger and acquisition activity means that HR practitioners are engaged in selection
of employees in a changing environment and looking to harmonise HR practices. HR is looking to
maximise the learning opportunities given by global networks to share best practice. Rapidly
changing business situations in volatile global markets means that HR must often
recruit, deploy, develop and shed people at great speed.

3.1.4 Selection of expartriates.

Meaning of Inpatriate
An inpatriate is a foreign employee brought in to work in the headquarters location.
They may be either third country national or local-country national from foreign
locations.

Meaning of expatriate
An expatriate is an employee who works and lives in a country other that that of
their national origin. A more common and preferred term to use is assignee,
whether talking about an expatriate or inpatriate.An individual living in a country
62
other than their country of citizenship, often temporarily and for work reasons.
An expatriate can also be an individual who has relinquished citizenship in
their home country to become a citizen of another. If your employer sends you from
your job in its New York office to work for an extended period in its London office,
once you are in London, you would be considered an expatriate or "expat." 

Meaning of repatriate
An expatriate coming back to home country at the end of foreign assignment.

Selection of expatriate:

Staffing orientation include ethnocentric, polycentric re-giocentric and geocentric approaches.

Each orientation has its own strength and weakneses:

A. Ethno – centric:
Here primary positions are held by citizens of home country (PCNs). Three factors are to be
considered in the staff:
Should be able to adjust in family, cultures and personality problems to avoid failure.
To succeed, should enjoy local entertainment, develop local relationships and communicate with
locals.

To achieve success, expatriates to have open attitude and take training towards host – country.
Under ethno centric, lines of communication are one – directional, i.e. advice from headquarters.
In fact, home country attitude and culture dominates.

B. Poly – centric:

Here primary positions are filled by nationals from host country( HCNs)y.
Advantages of this are:
1. Better local knowledge
2. Reduce personal problems
3. Host country managers can protect a MNC from hostile treatment by host Government.
4. Here subsidiary is allowed some autonomy but financial controls are kept.
5. Top people are limited to subsidiary and not for corporate position

C. Regio-centric:

Here primary positions are by people from countries with similar culture practices and
experienced in management practices (TCNs).

For example, positioning in Sri lanka, South Indians can be preferred.

D. Geocentric:
Under this the best qualified individuals are hired at home and abroad regardless of any
nationality.
Whole world is treated as market to implement global approach. As with PCNs,and HCNs, hiring, TCNs has both
merit as well as demerits. Advantages of TCNs include better talent pool, development of international expertise, and
help in building pan – global culture. More expenses and difficulty of importing managerial and technical employees
are the main drawbacks of depending on TCNs .

63
Advantages of Geocentric Approach

MNC’s can develop a pool of senior executives with international experiences and contacts across
the borders.

 The expertise of each manager can be used for the accomplishment of MNC’s objective as a
whole.
 Reduction in resentment, i.e. the sense of unfair treatment reduces.
 Shared learning, the employees, will learn from each other’s experiences.

Disadvantages of Geocentric Approach

1. The cost of training, compensation, and relocation of an employee is too high.

2. Highly centralized control of staffing is required.
3. Proper scrutiny is required by the HR to select the most suitable person for the job, which
could be time-consuming.
4. This approach is very costly since the recruitment agencies or the consultants are to be hired
for the global search for eligible candidates.
5. Generally, the recruitment agencies or the consultants are hired to find the most suitable
employee equipped with all the necessary skills, residing in any part of the world, to be
employed in the global business.

Types of International staffing:

 Short term – up to 3 month

 Extended - up to 1 year
 Long term – 2-5 years
 Commuter Assignment – Person lives in London but works in Moscow comeand go by weekly
or biweekly basis.
 Rotational Assignment - Used on oil rigs
 Contractual Assignment – Depends on the project.
 Virtual Assignment – Where the employee does not relocate to a host location but manages,
from home – base, international responsibilities for a part of the organization in another
country.

Selection Procedures of Expatriates:

In view of the direct and indirect costs of expatriate failure, and knowing the reasons for their
failure in their assignment,MNCs spend considerable time and effort in screening employees and
their families before selecting them for foreign postings. However, the criteria and the selection
procedures used vary from one MNC to another and from one country to another.
International selection is a two way process between the individual and the
organization. A prospective candidate may reject the expatriate assignment either for personal
reasons, such as family considerations, or for situational factors.However, after an extensive
review of literatures on the selection of expats, the researcher identified18 variables and grouped
them into four categories:

1. Technical Competency
2. Relational Skills
3. Ability to cope with variables and
4. Family Situation

In general the factors involved in expatriate selection are as follows:

64
Expatriate Selection - Example

Western European and Japanese MNCs emphasize technical competence and ability to acclimate
North American corporations select mainly on technical competence Behaviors successful at
home may not work abroad Previous experience abroad may or may not predict future success

Selection techniques of expatriates:

Global companies require the human resources adaptable not only to the job and organizational
requirements, but also to the cultural requirements of various countries. As such, the selection
techniques for global jobs vary from those of domestic jobs. These techniques include:

Interview – structured interview

The monitoring and targeting of disadvantaged group – (staffing practices are strongly
influenced by norms and values that are not covered by the law)
Psychological Testing- mentally fit for international assignment Assessment centre –
Competency assessment .

Selection Techniques in General, important steps are:

Screening the applicant’s background on the basis of

work experience with cultures other than one’s own, previous overseas travel, knowledge of
foreign language and overall Performance
. Testing the candidate's ability to adapt to the new culture and environment.
Testing the ability of the spouse and family members of the candidates to the foreign culture and
environment.
Predicting the adjustment of the candidate.
Testing the skill of adjustment with the host nationals. Job duties and responsibilities

Therefore expatriate must meet 6 basic criteria:

 They must be willing and motivated to go overseas

 They must be technically able to do the job
 They must be adaptable
 They must have good inter personal skills and able to form relationship
 They must have good communication ability and
 They must have supportive families

Scientific orientation of Expatriate:

65
Expatriate’s Success factors:
Rosalie Tung
studied the factors that contributed to expatriate success and identify different variables that
affect success. She groups them into 4 general categories:

1. Job competence :Technical skills: knowledge of HQ and host country operations, general
managerial skills, administrative competence and creativity.

2. Personality traits:Diplomatic Skill: Believe in the mission Congruence of assignment with

career path Interest in overseas experience Willingness to acquire new behavior patterns and
attitudes Interest to learn Host country language and practice Adopting attitude of Non – verbal
communication Ability to interact with business associates.

3. Relational abilities:Social Skill: Ability to tolerate ambiguity, Courtesy and tact Respect,
kindness and behavioral flexibility Cultural empathy and ethnocentrism Integrity confidence and
emotional stability.

4. Environmental variables and family variables :Motivational Skill: Willingness of the

spouse to live overseas, Adaptability and supportiveness of spouse, Stability of marriage.

Six important factors of expatriated managers

• Cultural intelligence (CQ) : ability to adapt across cultures through sensing the different cues
regarding appropriate behavior across cultural settings or in multicultural settings
• Family situation: ability to keep in touch with families collaboratively and continuously
• Flexibility and adaptability: ability to fit changed circumstance
• Job knowledge and motivation: ability to transfer knowledge smoothly and transfer
international assignment into career advancement
• Relational skills: ability to build up relationships more actively
• Extra cultural openness: ability to communicate with others more openly

Big Five” – the predictors of expatriate selection:

a. Reliability: the consistency of a performance measure; the degree to which a performance

measure is free from random error.
b. Validity: the extent to which a performance measure assesses all relevant-and only the
relevant-aspects if job performance.
c. Generalizability: the degree to which the validity of a selection method established in one
context extends to other contexts.
d. Utility: the degree to which the information provided by selection methods enhances the
effectiveness of selecting personnel in real organizations.
e. Legality: describe the government’s role in personnel selection decisions, particularly in the
66
areas of constitutional law, federal laws, executive orders, and judicial precedent.

3.1.5 Expat training. Expat remuneration.

INTRODUCTION OF INTERNATIONAL TRAINING

With the world-wide expansion of companies and changing technologies, Indian Organizations
have realized the importance of corporate training . Training is considered as more of retention
tool than a cost . Today, human resource is now a source of competitive advantage for all
organizations. Therefore, the training system in Indian Industry has been changed to create a
smarter workforce and yield the best results. With increase in competition, every company wants
to optimize the utilization of its resources to yield the maximum possible results. Training is
required in every field be it Sales, Marketing, Human Resource, Relationship building, Logistics,
Production, Engineering, etc. It is now a business effective tool and is linked with the business
outcome.

MEANING OF INTERNATIONAL TRAINING: MEANING OF INTERNATIONAL

TRAINING The subject of training of the employee with regard to international operations is
always a complex one, both from the point of view of the individual employee as well as from the
point of organization.

KEY PEOPLE WHO NEED TO BE TRAINED

 Expatriates
 Spouse
 Children's

EXPATRIATE TRAINING :An expatriates success depends on how fast they ‘Acculturate’
(absorb) in the host country. In expatriate training focuses : On ascertaining the cultural
awareness of the individual, and On ascertaining the ‘fit’ for the host country’s culture, how
similar/ dissimilar is the culture of the expats’ culture from that of the host country.

TYPES OF EXPATRIATE TRAINING:

 Cultural awareness programme or cross culture training
 Language training
 Diversity training
 Other related issues in training

Fundamental difference between Training and CCT:

Training Cross Cultural training

Based on management philosophy but highly concentrate Based on management philosophy
on staffing approach: Ethnocentric – Parent country Poly but highly concentrate on staffing
centric – Host country Geocentric – Best suited areas Re- approach:
geocentric – Any where Ethnocentric–Parent country
Poly centric– Host country
Geocentric–Best suited areas
Re-geocentric – Any where

Types of CCT:
 Environmental briefing – geography, climate, housing, and schools.
 Cultural orientation – cultural institutions, value systems of the host county.

67
 Cultural assimilators - inter cultural encounters.
 Language training – communication effectiveness
 Sensitivity training – to develop attitudinal flexibility.
 Field experience – to make the expatriate familiarize with the challenges of assignment.

Cross-Cultural Training Methods

Companies use a variety of methods to teach expatriates cross-cultural skills, aimed at facilitating
interactions with a foreign culture. This section gives an introduction to the main methods, their
focus, timing and activities used to convey the training. A summary of different training methods
along with their attributes has been compiled and is presented in Table 1. The summary includes
the training methods identified from the different academic sources presented in this section, as
well as sequential training where different methods are combined. While some methods are more
commonly used than others, they have all been included to give a comprehensive overview of the
subject.
Table 1. Overview of the cross-cultural training methods, their focus, timing of implementation
and general activities used to convey the training:

SL. Training Focus Timing Activity

NO

1 Didactic Training factual information Predeparture Lectures or

regarding working and/Or post informal
and living arrival briefings
conditions as well as
cultural aspects of
the host country

2 Experimental Training Practical learning Pre-departure Look-seetrips,

culture general and/or post- workshops,sim
and/or culture arrival ulations
specific
3 Attribution Learning to think Pre-departure Cultural
and act as a host assimilator
national,culture
specific

4 Language Facilating specific Pre-departure Traditional

intercultural and/or post- teaching
communication arrival

5 Cultural Awareness Understanding Pre-departure Role-Plays,Self

culture as a Assessment
concept,culture exercises
general
6 Interaction Learning to focus on Pre-departure Overlaps, on-
rewarding activities, and/or post- the-job training
culture general arrival

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7 Cognitive behaviour Learning to focus on Pre-departure Counselling
modification rewarding
activities,culture
general

8 Sequential Synergies from Pre- Combining

combined training departure,pos different
culture general and t-arrival and training
culture specific. repatriation methods.

1. Didactic general culture training:–Called as educative training. –Seeks to incur a cognitive

understanding of a culture so that its norms and behaviour can be easily be appreciated by the
assignees.

Methods of imparting training are –

•lectures,
•seminars,
•study materials,
•discussions,
•videotapes,
•culture-general assimilators.

Didactic specific culture training:–Seeks to instruct about the cultural nuances of the
expatriates host country.

Methods of imparting training are –

•area studies,
•videotapes,
•orientation,
•primary visits,
•case studies

2.Experiential Training
Experiential training is conveyed using a number of methods including, not only, practical
exercises, workshops and simulations, but also more genuine concepts such as look-see visits to
the host country (Caligiuri et al., 2001). Look-see trips can provide a first real experience of the
country for the expatriate and sometimes his or her family. They give the opportunity to meet
people in the new country and get aview of the new environment and the workplace. To be
effective they need to be well planned, which can make them costly. The problem can also be that
since they are designed to give the expatriate a positive view, they may not show the true picture
of the host country (Brewster, 1995, p. 63). Bennett et al. (2000) argues that predeparture
programs have the most effect if they are held after a look-see trip to the host country, since the
expatriates get many of his or her basic questions answered and can build a sense of the host
location before entering the training program.

Experiential training aims at preparing the expatriate in a more direct way, building
beyond the mere intellectual experience. The experiential training can also be either culture
general or aimed towards a specific culture (Gertsen, 1990). The training is based on the concept
of learning by doing and is conveyed by using practical
exercises. This prepares the expatriate intellectually and emotionally to adapt to the new culture
and enables him or her to develop certain skills that can be used when confronted with the new
culture (Grove & Torbiörn, 1985). This is, according to Grove and Torbiörn (1985), one of the

69
most promising training methods.

3.Attribution Training
Attribution training tries to give the expatriate skills in thinking and acting as a host national. It is
aimed at giving the expatriate an insight into the cultural point of view in the host country. This
enables the expatriate to explain and understand host national behavior. By teaching such skills,
the aim is to make the expatriate’s attributes more isomorphic to the new culture.
Attribution training is closely connected, but not limited, to a teaching method called
“cultural assimilator” (Grove & Torbiörn, 1985). This method consists of a series of intercultural
short episodes, judged to be critical for the interactions between members of two cultures. In the
episodes, encounters between members of two different cultures are used to practice interactions
with a new culture.

4.Language Training
Language training involves teaching the expatriate the native language and/or the business
language of the host country. While fluency can take months or even years to attain there are still
benefits of using this training method (Tung, 1981a). The method is often used in CCT and is an
effective way of preparing an expatriate since lack of 14 language skills can slow down an
adjustment process. Even though fluency in the native language is not attained, the ability to enter
informal discussions, use common courtesies and show cultural empathy can help to facilitate
adaptation to the host culture (Brewster, 1995, pp. 64-65). Forster (2000) also concludes that
some knowledge of the local language is important to send visible signals of politeness and to
better understand the culture of the host country.
Language barriers can prevent the expatriate from processing information posted in
the local language, both privately and at a professional level, and this prevents integration
(Brewster, 1995, pp. 64-65). Knowledge of the local language does, as mentioned, facilitate
cultural adjustment,
and Puck et al. (2008) mention language skills as the dimension with the strongest effect on
expatriate adjustment. In a study by Forster (2000), respondents did not regard pre-departure
language training as very important, but criticism from respondents partly included the short
duration of most of the courses.

5.Cultural Awareness Training

The goal of Cultural Awareness training is to give the expatriate insight about the concept of
culture and cultural differences, by teaching awareness about the home culture. Training activities
include self-awareness building and value ranking charts, but the goals can also be reached with
more culture-general approaches, such as simulation games and perceptual exercises (Grove &
Torbiörn, 1985). Other methods include role-plays and self-assessments and can be a good way of
building selfawareness,
which translates into acceptance of oneself and an ability to adapt to the host culture.

6.Interaction Training
The method of Interaction training is based on interactions between new expatriates and
expatriates with more experience of the local culture. It can take place before departure with
previous expatriates or at the arrival in the host country. Overlaps in expatriate placements are a
sometimes-used training method, which can be very beneficial for the expatriate’s adjustment
process. Benefits with overlaps include the possibility to explain tasks, introduce contacts and
otherwise coach in the management and operation of the workplace.
Families can also benefit in a similar way from interactions with the outgoing family
(Brewster, 1995, p. 64). 15 Although the benefits are clear with this model, most actors do not use
it. The reasons are cost issues and doubts in its value. There are also problems with organizing
since the development of expatriate placements are hard to predict, and often are the result of
short notice. This makes overlaps hard to manage even for very skilled Organizations.

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7.Cognitive Behavior Modification

This method is among the less used training methods when training an expatriate. The expatriates
get to name what activities they find rewarding or punishing in the home culture context. By
making such distinctions, the expatriate can hopefully apply the same process in the host country
and enable him or her to identify and focus on rewarding activities and feel positive about facing
challenges of the host culture.

8.Sequential Training
The early ideas about CCT suggested that it should be carried out before the departure, and some
researchers still think that pre-departure training helps the expatriate to form realistic
expectations prior to arrival (Caligiuri et al., 2001). Several researchers have, however, suggested
the training to be more efficient when parts of it are held after arrival in the new culture (Grove &
Torbiörn, 1985). One reason to concentrate much of the training to the post-arrival phase is the
very short time span between selection and departure, in some cases less than a month (Torbiörn,
1976, p. 106).
Another reason is that it may be difficult to understand, and later recall, abstract social
behavior of the host culture if it is learned in a non-authentic environment (Selmer et al.,
1998).Consensus as to whether CCT should be held pre-departure or post-arrival has not been
reached, and a new model – Sequential training – has been developed to combine the benefits of
both pre-departure and post-arrival training (Littrell et al., 2006). This model is not a method in
itself but constitutes a combination of different training methods applied at different times during
the training process. It is based on the notion that the capacity for learning varies over time; thus
the training methods applied should vary over time as well. Sequential training starts before
departure and 16 then progresses in steps through the post-arrival adjustment phases, during
which different types of CCT is applied, and can extend all the way to repatriation issues
(Selmer et al., 1998). It can start a long or short period before the move and continue for months
in the new country.
joint sessions for sequential CCT together with other organizations operating in the same
foreign culture can lead to synergistic effects; logistical problems will be reduced, and the
expatriates can share experiences and learn from each other. If the time for pre-departure
training is limited, didactic training about the cultural adjustment process should be in focus, to
get the expatriate to develop realistic expectations about the situation and become aware of the
phases that will emerge after the culture shock . A fact-based training method may also
teach tangible and understandable information about the certain characteristics and
behaviors of the new culture that is important to know before, or just after, arrival. This may be
delivered either before departure, after arrival in the host country, or both. If a cognitive-behavior
modification approach is to be used, it can also be applied either pre-departure, post-arrival, or in
both phases . Both attribution training and cultural awareness training are best used before
departure, but since attribution training is culture specific it is not applicable in a general training
program. The cultural awareness training is very general in nature and can therefore be an
effective part of a pre-departure training program that is directed at a group of expatriates that
are going to very different regions (Grove & Torbiörn, 1985). Interactional learning is best used
post-arrival, since the expatriate needs an authentic
cultural context. Not until then will the expatriate realize many of the challenges he or she will
be facing (Grove & Torbiörn, 1985). These personal experiences and realizations about the
cultural differences between home country and host country have two positive effects: they can be
used effectively in the CCT, and they further motivate the expatriate to participate in the training
(Selmer et al., 1998). 17 A certain level of language skills is necessary to have directly after arrival
in the new country, so that common courtesies and basic greetings are mastered (Forster, 2000;
Puck et al., 2008). The amount of language skills needed is not defined, but Puck et al. (2008)
state that the person’s previous language skills and ability to learn new languages should be taken
into account already during the selection process. The better the language skills are, the easier will
the adjustment process be, since language has a very strong effect on expatriate adjustment (Puck
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et al., 2008). The culture shock phase is the stage where the expatriate is the most susceptible to
CCT. Both didactic and experiential training can be used, as well as explanations of observed
behavior. The latter method is an effective way to develop appropriate behavior and learn how to
learn more about the host culture (Grove & Torbiörn, 1985; Selmer et al., 1998).
The adjustment phase is characterized by a growing consciousness with the expatriate, who at
this stage needs to learn how to behave as the host nationals do. CCT should include on-the-job
practice, both structured and unstructured situations, for expatriate-host national interactions
(Selmer et al., 1998).

Expatriate remuneration:

Designing and developing a better compensation package for HR professionals for the
international assignments requires knowledge of taxation, employment laws, and foreign
currency fluctuation by the HR professionals. Moreover, the socio-economic conditions of the
country have to be taken into consideration while developing a compensation package. It is easy
to develop the compensation package for the parent country national but difficult to manage the
host and third country nationals. When a firm develops international compensation policies, it
tries to fulfills some broad objectives:

The compensation policy should be in line with the structure, business needs and overall strategy
of the organization.
The policy should aim at attracting and retaining the best talent.
It should enhance employee satisfaction.
It should be clear in terms of understanding of the employees and also convenient to administer.
The employee also has a number of objectives that he wishes to achieve from the compensation
policy of the firm

He expects proper compensation against his competency and performance level.

He expects substantial financial gain for his own comfort and for his family also.
He expects his present and future needs to be taken care of including children’s education,
medical protection and housing facilities.
The policy should be progressive in nature.
Major Components in an International Compensation Package
International Compensation is an internal rate of return (monetary or non monetary rewards /
package) including base salary, benefits, perquisites and long term & short term incentives that
valued by employee’s in accordance with their relative contributions to performance towards
achieving the desired goal of an organization.

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The following are the major components of an international compensation package.

1. Base Salary
This term has a slightly different meaning in an international context than in a domestic one. In
the latter case, it denotes the amount of cash compensation that serves as a benchmark for other
compensation elements like bonus, social benefits. For the expatriate, it denotes the main
component of a package of allowances directly related to the base salary and the basis for in-
service benefits and pension contributions. Base salary actually forms the foundation block of the
international compensation.

2. Foreign Service Inducement Premium

This is a component of the total compensation package given to employees to encourage them to
take up foreign assignments. This is with the aim to compensate them for the possible hardships
they may face while being overseas. In this context, the definition of hardship, the eligibility
criteria for premium and the amount and timing of this payment are to be carefully considered.
Such payments are normally made in the form of a percentage of the salary and they vary
depending upon the tenure and content of the assignment. In addition, sometimes other
differentials may be considered. For instance: if a host country’s work week is longer that of the
home country, a differential payment may be made in lieu of overtime.

3. Allowances: One of the most common kinds of allowance internationally is the Cost of Living
Allowance (COLA). It typically involves a payment to compensate for the differences in the cost of
living between the two countries resulting in an eventual difference in the expenditure made. A
typical example is to compensate for the inflation differential. COLA also includes payments for
housing and other utilities, and also personal income tax. Other major allowances that are often
made are:

Home leave allowance

Education allowance
Relocation allowance
Spouse assistance (compensates for the loss of income due to spouse losing their job)
Thus, multinationals normally pay these allowances to encourage employees to take up
international assignments to make sure that they are comfortable in the host country in
comparison to the parent country.
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4. Benefits

The aspect of benefits is often very complicated to deal with. For instance, pension plans normally
differ from country to country due to difference in national practices. Thus all these and other
benefits (medical coverage, social security) are difficult to imitate across countries.
Thus, firms need to address a number of issues when considering what benefits to give and how to
give them. However, the crucial issue that remains to be dealt with is whether the expatriates
should be covered under the home country benefit programmes or the ones of the host country.
As a matter of fact, most US officials are covered by their home country benefit programmes.
Other kinds of benefits that are offered are:

Vacation and special leaves

Rest and rehabilitation leaves
Emergency provisions like death or illness in the family
These benefits, however, depend on the host country regulations.

5. Incentives

In recent years some MNC have been designing special incentives programmes for keeping
expatriate motivated. In the process a growing number of firms have dropped the ongoing
premium for overseas assignment and replaced it with on time lump-sum premium. The lump-
sum payment has at least three advantages. First expatriates realize that they are paid this only
once and that too when they accept an overseas assignment. So the payment tends to retain its
motivational value. Second, costs to the company are less because there is only one payment and
no future financial commitment. This is so because incentive is separate payment, distinguishable
for a regular pay and it is more readily for saving or spending.

6. Taxes

The final component of the expatriate’s compensation relates to taxes. MNCs generally select one
of the following approaches to handle international taxation.

Tax equalization: – Firm withhold an amount equal to the home country tax obligation of the
expatriate and pay all taxes in the host country.
Tax Protection :- The employee pays up to the amount of taxes he or she would pay on
remuneration in the home country. In such a situation, The employee is entitled to any windfall
received if total taxes are less in the foreign country then in the home country.

7. Long Term Benefits or Stock Benefits

The most common long term benefits offered to employees of MNCs are Employee Stock Option
Schemes (ESOS). Traditionally ESOS were used as means to reward top management or key
people of the MNCs. Some of the commonly used stock option schemes are:

Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and
issuance to key employees. Such shares serve as incentive for employees to build long term value
for the company.
Restricted Stock Unit (RSU) – This is a plan established by a company, wherein units of
stocks are provided with restrictions on when they can be exercised. It is usually issued as partial
compensation for employees. The restrictions generally lifts in 3-5 years when the stock vests.
Employee Stock Purchase Plan (ESPP) – This is a plan wherein the company sells shares to
its employees usually, at a discount. Importantly, the company deducts the purchase price of these
shares every month from the employee’s salary.
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Hence, the primary objective for providing stock options is to reward and improve employee’s
performance and /or attract / retain critical talent in the Organization.

Objectives of international compensation:

 Most expatriate compensation plans are designed to achieve the following objectives:

 Attract and retain employees who are qualified and interested in international assignments.

 Facilitate the movement of expatriates from one subsidiary to another, from home to
subsidiaries, and from subsidiaries back home.
 Provide a consistent and reasonable relationship between the pay levels of employees at
headquarters, domestic affiliates, and foreign subsidiaries.
 Align compensation administration with the strategy of the firm.
 Increase and maintain employee motivation. Compensation must motivate employees to join
the firm, be productive while members of the firm and stay with the firm.
 Must be perceived as fair by the employees. Fairness of equity are powerfull motivator of
human behaviour and it may be the most important objective of an international
compensation policy.
 Secure consistency between pay and performance & equity among employees of different
nationalities and categories.

 Assist the employee and family adapt to the host country culture.

 Reduce employee grievances and simplify collective bargaining procedures.

 To ensure that the package is both competitive and comparable. It must always better the
package available comparable.

3.1.6 Expat failures and ways of avoiding.

Expatriates fail due to following :

1. Culture Shock
Culture shock is often one of the most typical reasons for expatriate failure. It occurs where a
candidate is not fully prepared for the new culture their assignment requires them to be a part of,
whether there are language barriers, strict laws or customs or even just a totally unfamiliar
climate and daily routine. While an element of this can be down to a lack of preparation or
insufficient information, often the candidate is simply just not right for the role based on his or
her own personality and needs. Culture shock is most common on assignments based in the
Middle East, where, especially for women, laws and customs can be debilitating. Yet, for those
candidates who are culturally flexible, these assignments can be greatly rewarding.

2. Family Stress
International assignments are already difficult for the individual, and for a family they can often
be even harder. Relocating the entire family is difficult: there needs to be spousal support,
decisions made about schools, daycare, the partner’s career and even basic things like family
health care. Language barriers and housing needs can become more complicated and rather than
just one person’s ability to adapt to a new culture defining the success of the assignment, it’s an
entire family. There are still opportunities and fantastic experiences to be had by sharing in an
international assignment, but they are not without their risks.

3. The Global Mobility Team

A suitable and well-organized Global Mobility team are essential to the success of an international

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assignment. They are responsible for arranging all support for a candidate: information about the
local culture, transport, housing, school searches, spousal support and many other vital aspects of
daily life. If the team fail to supply adequate information or offer the right support, candidates can
often sign up an assignment very different from what they were expecting, costing companies
thousands in relocation fees.

4. Responsibility Overload
As well as dealing with the responsibilities of a new job, candidates have to adjust to a new culture
and new work environment and the challenges that brings. Trying to manage local staff can often
be difficult due to cultural differences, and often staff teams can be larger than a candidate may
have before been used to. Overload of responsibility can lead to increased stress, physical
exhaustion and emotion impacts such as anxiety, frustration and anger.

5. Poor Candidate Selection

More often than not, the assignment fails because the corporation has made a poor choice in
candidate. If a selection is based on headquarters criteria, rather than the assignment needs, or
even the candidates needs, the assignment is almost doomed to fail. While someone may appear
to be perfect for the role on paper, their own personal needs can often make them the worst
candidate overall.

There’s a lot to take into consideration when choosing candidates for assignments. Ultimately a
balance needs to be found between a candidates personal needs and their suitability for the
responsibilities of the job itself.

Effect of expatriate failures:

 Damage to the firms reputation in the international context
 Group Dynamics affected
 Relationships between host parent countries may also be affected
 Productivity of the foreign operations may go down.
 Failures have profound effects on the expatriates by causing loweringtheir self esteem and ego

Avoid Expat failure

Promoting interaction with the host country nationals: Interpersonal contacts with the
host country nationals teach the expatriate how to behave and act during the assignment

Helping hand from HR professionals: HR professionals having an intimate knowledge of

host countries, their customs, language, cost of living, education alternatives and spouse
employment opportunities, etc., can help the expatriates in overcoming the problems in the host
country.

Testing the personality of the expatriate: Expatriate agreeableness, indication of

collaboration, sincerity, respect and empathy for others, may promote showing tolerance and
patience as well as solving problems responsibly

Selection of the candidates: Screening candidates for expatriate assignments so as to “care

enough to send only the best qualified,” both in the job requirements, and in their being able to
adjust to the host culture

There is much talk of the qualities expats need to succeed, including social, cultural and business
skills. The importance of avoiding expat failure and selecting the right candidate inspired us to
explore some of the techniques used by global mobility professionals to ensure they make the
right choice.

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1. Establish formal criteria
The most basic step of the selection process is sometimes overlooked. List and prioritize the skills
required of the candidate. The more detailed you are, the greater your chances of finding the right
candidate. Consider two aspects:

Technical: what job skills are needed? Which qualifications and specific professional experience
is required for the assignment?
Management: what kind of leadership experience and/or capability is required?
Going through the list may also help you reflect on whether those skills are available locally, and
therefore removing the need for an expensive relocation.

2. Go for experience
You can never be quite sure whether a candidate will succeed, but the best guide by far is past
performance. Begin your search with candidates who have succeeded in similar assignments in
the same target country. Failing that, look for candidates who have performed well in culturally
similar countries, followed by those with a track-record of travel and mobility. Some people are
simply more adaptable and fit in more easily with different environments and working practices –
this is the most obvious way of finding them.

3. Do they speak the language?

If the assignee speaks the local language, they will be more effective professionally. They will
command more respect from clients, suppliers and colleagues. Equally, they are more likely to
thrive socially. Look also for general linguistic ability. If a candidate has two or three languages
under their belt, you can assume that they will find a basic grasp of a fourth language easier than
most.

4. Use intercultural assessment tools

There are various intercultural adaptability tools that will help you to assess the suitability of
candidates with regard to their ability to operate in different cultures. Such tools do not provide a
recommendation on their own but are useful in formalizing and ‘scoring’ the cultural adaptability
skills that are so important to a global assignment, but so hard to accurately measure in a
candidate selection process.

5. Work with talent management

Your task is made easier by coordinating with a talent manager. Many companies operate formal
pools of candidates, segmented by skill set, experience, salary level and risk factors. Before you
even start the selection process, you have ready access to a list of pre-qualified names.

The company’s talent management team will be as keen to nurture the best talent in the long run,
as you are to leverage it for the assignment. If the company’s long-term interests are best served
by giving certain candidates an opportunity to travel, this should be considered. Equally, if
assignments might be disruptive to the way in which talent is being nurtured (i.e. the experience
is unlikely to give that candidate useful additional skills, such as leadership experience) then they
should perhaps not be considered for the role.

6. Use a selection panel

You will have a more balanced perspective and make better decisions if you can use the expertise
of different people. Global mobility professionals should work alongside a manager from the
specific function being recruited (e.g. IT), as well as HR representatives with both international
experience and knowledge of the host country. In addition, include former expats who can share
their experiences.
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7. Use self-selection
While it is ultimately your job to choose the right candidate, many will put themselves forward (or
rule themselves out) provided you give them a realistic preview of the assignment. Resist the
temptation to talk it up too much. Be open and honest about conditions, expectations,
compensation policies and even career prospects upon their return. The more transparent you
are, the more likely you are that the assignment will match the candidate’s expectations and
therefore be successful.

A key part of this is ensuring the prospective candidate feels they can decline the opportunity
without damaging their career prospects (if indeed, that is true!). If a candidate does not relish the
idea of a global assignment, yet agrees to it because they think it is expected of them, they are far
more likely to fail than a candidate who genuinely wants to go.

8. Speak to the family

One of the major reasons for expat failure is the inability of the family to settle in the new
location. The issue of the “trailing spouse” is well documented but it remains a significant obstacle
to expat success. The candidates themselves may be so enthusiastic for the opportunity that they
make light of their spouse’s concerns. An interview with the partner, however, gives you the truth.
There is no betrayal here: GM professionals should make it very clear that it is in both the
company’s and the assignee’s interests to judge whether a family is likely to settle in a new
location. A failed assignment will probably be damaging to both sides.

9. Encourage a reconnaissance trip

Once the candidate is chosen, it may be worthwhile to encourage them to go and check out their
new host country. Despite your efforts to create realistic expectations, the candidate (or the
candidate’s family) may think differently once they go there in person. It will be disappointing if,
following the reconnaissance trip, the candidate decides not to take up the assignment, but this is
far less expensive and damaging to the company than a failed or aborted assignment. Better to
know now than in six months’ time.

10. Don’t forget the medical

There is also a medical dimension to the decision. Not only do you want to ensure that the
candidate is fit to do the job, it is also in the assignee’s interests to have clean bill of health before
embarking on a long-term assignment. The key is to perform any necessary medical checks before
a final decision is made.

MANAGING EXPATRIATE FAILURE

 Design a job that maximize role clarity,
 Minimize role conflict with proper selection of candidate.
 Provide opportunity for languages lessons.
 Provide all information & equipment pertinent to the role/work of the employee.
 Provide proper organisational support systems from supervisors & co-workers in the host
country.
 Include spouse in any trainning & support programmes

3.1.7 Repatriation.
Meaning of repatriation: Repatriation Repatriation generally refers to the termination of the
overseas assignment and coming back to the home country or to the country where the HQ is
located or to the home subsidiary from where he/she was expatriated

So, Expatriation process also includes repatriation:

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The activity of bringing the expatriate back to the home country.

Therefore, Repatriation may be defined as the activity of bringing an expatriate back to the home
country and Repatriation is the final step in the expatriation process (recruitment & selection pre
departure training foreign assignment repatriation or reassignment) .

• Reasons of Repatriation
1. Most common Reason: the period of posting got over
2. Second com. Reason: The expats want their children study in a home country school.
3. Third com. Reason: the need for the expats to move on to another global assignment of a
similar kind – where he/she would have the opportunity to use the skills and expertise
acquired.
4.Forth com. Reason: the assignees are not happy in their overseas assignment. Un-happiness
can be result of:
- inability to adjust to host country environment
- spouse’s or children’s unwillingness to stay
- lack of moral support from HQ at the time of crisis.
5. Fifth Com. Reason: Expats return because of failure to do the assigned job

• Repatriation process Repatriation process has a sequence of four phases:

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• Challenges of effective Repatriation :Phases of Repatriation Process (1)
1. Preparation – Approx. 5-3 month before the expat. returns to the home country, he or she
should be taken through a re-entry phase, followed by actual repatriation . This involves
developing plans for the future and collecting information about the new position the expat is
likely to occupy after returning home. During the pre re-entry phase, the mentor can play an
advisory role in finding the expat a suitable position within the organization. The company may
provide a checklist of items to be considered while leaving the host country.

2. Physical Relocation – This stage involves removal of personal belongings, breaking ties with
colleagues and friends and traveling to the next posting, usually the home country.

Professional re-entry training should also be given to expat and his or her family that
covers social cultural contrast orientation, an updated political and social issues and changes in
the home country, job opportunities for the partner, an evaluation of the experiences in the host
culture and the psychological aspects of repatriation.

3. Transition – Phase in which the expatriate and his or her family readjust to their return to
the home country. Some companies hire relocation consults to assist in this phase also. Typical
activities include acquiring temporary accommodation, making arrangements for housing and
schooling, performing necessary administrative tasks (e.g. renewing driver’s license, applying for
medical insurance, opening bank accounts)
4. Readjustment – This phase involves coping with reverse culture shock and the expatriate’s
career demands on the organization. Generally, the more the host country culture differs from the
home country culture, the more difficult the re integration process will be. Likewise, the more
successful the expat was in the host culture, the more difficult it is to adjust to the work
environment at the home base.

Challenges of effective Repatriation? Based on three factors:

• Organizational Factors:
• Individual Factors:
• Social- cultural Factors:

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1. Organizational Factors:
 Recent research indicates that the majority of organizations have no formal repatriation
programme to help expatriates readjust on return to the home country
 Only a small proportion of the repatriation programmes have consideration for
the spouse.
 Typical reasons given by organizations for not having a repatriation
programme include:
 Lack of the requisite expertise
 Programme cost
 Lack of a perceived need by top management

 Some organizations provide a form of repatriation assistance in the form of a

“mentor”
 The mentor is usually a superior to the expatriate and provides assistance in
the form of information, by maintaining regular contact with the expatriate,
and by taking the expatriates interests regarding promotion and job placement
on return etc. into account.

 Research indicates that the likelihood of an organization using mentors depends on the size of
the expatriate workforce, the organizational unit responsible for handling expatriates and the
nationality of the organization.
2. Individual relations – Job Related factors
 Career anxiety
- No post-assignment guarantee of employment
– Loss of visibility and isolation
– Changes in the home workplace
 Work adjustment – The employment relationship and career expectation – Re-entry position
– Devaluing of the international experience
 Coping with new role demands – Role behavior – Role clarity – Role discretion – Role
conflict
 Loss of status and pay – Autonomy – Responsibility – Lower pay in absolute terms – Drop in
housing conditions

3.Social – cultural factors

• If an expatriate served in a foreign assignment in a high-profile position where he or she enjoyed
considerable and sustained interaction with the social, economic and political elites of the host
country, a feeling of disappointment may emerge after return to the home country.
• In addition to the expatriate’s social readjustment problems, the social readjustment problems
of his or her accompanying family members must also be taken into consideration as well.
• Reestablishment of social networks in the home country may be difficult if, for e.g., the
expatriate and family are repatriated to another locality in the home country. It may be that
friends have moved away while the expatriate was on assignment and that other friends may have
joined the workforce and have no time for social activities.
• Children may encounter social readjustment problems in school because they are not update on
latest trends, and may have problems adjusting to their home country educational system.

• Re-expatriation:
Re expatriation:
As we already observed, a returnee is likely to be posted to another host country unit. Re
expatriation is, therefore, a common phenomenon and the international HR Professional should
handle it effectively. When an expatriate succeeds on an overseas assignment, the individual’s
competitiveness has been established and he/she proves to be the ideal choice for re-expatriation.
Re expatriation offers several benefits to MNC:

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1. Contributes to Skill of expatriates whose skill and abilities can be used as and
when the need arises.
2. Relocation of competent people in international assignment
3. The normal difficulties and challenges of managing expatriation and repatriation are few as the
MNC has a pool of international managers who are ready to fly to any part of the globe at any
time.

MNCs need to have mentoring programme under the care of mentor. Alternatively designated as
company contact, sponsor or godfather, the mentor is usually a senior person and knows the
expatriate personally. The mentoring duties include:

1. Maintaining contact with the expatriate throughout the assignment.

2. Ensuring that the expatriates are kept up-to-date with the development in the home country.
3. Ensuring that the expatriates are retained in existing management development programmes
4. Assisting expatriates with the repatriation process, including helping them with a repatriation
position.
5. Parallel to having mentors, MNCs also will have a repatriation programme in place, a typical
repatriation programme is given below:

• Preparation, physical relocation and transition information (that the company will help with).
• Financial and tax assistance, e.g., benefit and tax changes, loss of overseas allowances, etc.
• Re-entry position and career-path assistance
• Reverse cultural shock, including family disorientation
• School systems and children’s education and adaptation
• Workplace changes, e.g., corporate culture, structure, decentralization, etc.
• Stress management and communication-related training
• Establishing networking opportunities
• Help in forming new social contracts

• Repatriation Strategy:

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 Stage strategy
Pre expatriation • Agreement outlining the type of
position expatriates will be placed in
upon repatriation
• Agreement about the duration of
stay overseas
• Keeping the post back at home
vacant till the assignee comes back
During the assignment • Continuous communication with
expatriate
• Visit to headquarter when on
vacation to maintain visibility
Preceding Repatriation • Career guidance between 6-12
months before the end of assignment.
Ensure that all elements of the
repatriation process are transparent.
Such elements to include company
policies with regard to travel
reimbursement leave period, shipping
of household goods, and contact
information about the mentor.
After repatriation • Training seminars to help returnees
cope with reverse culture shock
• Financial counselling and
financial / tax assistance
• Reorientation programme about the
changes in the company policies,
practices, personnel and strategies.
• Reassurance that the company
values international experience

3.1.8 Employee relations.

3.2 International operations Management.

International Production
Operations management is continually evolving. Operations management is the set of activities
that create value in the form of goods and services by transforming inputs into outputs. Market
globalization, technological development, the overcoming of international trade barriers and the
boom in some undeveloped economies are modifying the economic structure of many countries
and pushing companies to change their strategies and way of doing business. Fast change of
corporate modus operandi involves the rethinking of operations management strategies.
Innovative approaches to international new product development, sourcing, manufacturing and
logistics are required to maintain and increase competitive advantage. These changes contribute
to the operations management discipline new research topics that take into account the new order
and the new economies that are shifting the world's economic equilibrium. The dynamics are even
more enunciated if the actors involved belong to different economics scenarios. Paradoxically,
internationalization processes are not limiting country-specific aspects but rather emphasising
them. There are many country-specific cultural, legislative and infrastructural aspects that can
influence future choices.

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3.2.1 Nature operations management :International operations management is
myriad of actions used by an international business to alter different kinds of resource inputs
(material, labour, and so forth) into final goods and services. A suitably designed and managed
operating system plays a key role in determining product and service quality, and productivity.
Additionally, operations management contributes a lot in determining how quickly a firm can
respond to changes or new developments in technology, consumer tastes and preferences, pricing
levels, competitive threats, and so forth.

The Strategic Context of International Operations Management: International operations

management must be closely associated with a firm's strategy. In fact, the way in which a firm
structures and manages its operations function is influenced by its strategy. A firm's strategy
drives several operations management activities including location, facility design, and how
logistics are managed.

International operations management is a difficult task as compared to domestic operations

management. At global scale, managers must contend with suppliers from different countries,
different government regulations wherever the firm does business, a heterogeneous market,
disparate transportation facilities and networks, and relatively long distances. Several types of
decisions must be made regarding where and how to produce goods and services. For example, a
firm must decide where and how it will obtain needed resources for the operations management
function. Additionally, the firm must make a number of location-related decisions such as where
to build a plant or sales office. In addition, a firm must make decisions regarding transportation
choices and inventory levels.

International operations management decisions, processes, and issues involving the creation of
intangible services is referred to as service operations management.

3.2.2 Strategic issues –

sourcing v/s vertical integration: Adoption of efficient operations structures enhances the
competitive profile of your business. Vertical integration and outsourcing are some of the viable
approaches for advancing your competitive edge. Vertical integration expands the presence and
influence of your business, while outsourcing involves contracting some of your business
operations to external service providers. The suitability of vertical integration and outsourcing
depends on the nature of your activities and industry of specialization.

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Structure of Vertical Integration
Vertical integration allows you to perform additional functions in the chain of production. This
eliminates middle men in your supply chain by expanding your activities in the supply chain.
Backward vertical integration prevails when you extend the scope of your production activities
toward the sources of your raw materials. For example, you may opt to process dog food for your
dog breeding business instead of buying processed foods from veterinary suppliers. Forward
integration occurs when you take up roles that are closer to the final consumers in the supply
chain. For instance, you may choose to incorporate dog training in your dog breeding business.
This way, you get to supply your dogs directly to customers seeking trained dogs, rather than
supplying the dogs to dog trainers.

Example of Vertical Integration Industry

The viability of vertical integration is not limited to any specific industry. You can apply it in any
industry depending on the goals you want to achieve. However, logistics and supply chain
management stands out as one industry where you can effectively adopt vertical integration,
because vertical integration elevates your operation to different levels of your supply chain. For
instance, backward vertical integration makes you a supplier of your raw materials, while forward
integration grants you greater roles in the production and distribution activities of your industry’s
supply chain. Nonetheless, the strategy is viable across many other industries for as long as it fits
with your overall business strategy.ties location, strategic role of foreign plants, international
logistics, managing service operations, managing technology transfers.

Fundamentals of Outsourcing
Outsourcing entails giving out noncore, process-intensive or capital-demanding operations to
companies that specialize in providing these services. You can outsource functions such as payroll,
information technology, research and development and customer care services. Outsourcing
spares you the burden of acquiring costly equipment, machinery or license rights to expensive
software products. This allows you to concentrate on the core aspects of your business, enhance
efficiency and cut operational costs.

Example of Outsourcing Industry

You cannot tie down outsourcing to any particular industry because it is applicable across
different sectors. However, it mostly applied in industries that incur huge costs of labor and
capital resources. For example, it may be more appropriate to outsource the storage and
warehousing functions of your cargo haulage business than to maintain a network of your own
stores and warehouses. When it comes to labor costs, outsourcing helps you streamline your work
force, as contracting firms remain responsible for the welfare of their own employees.
Outsourcing is ideal for industries, such as manufacturing, that require huge work force and
capital resources.

Facilities location:
A facility is a place where men, materials, money, machinery and equipment, etc., are brought
together for manufacturing a product .According to Bethel Smith & Alwater location.“Plant
location stands for that spot where in consideration of business as a whole, the total cost of
production and delivering goods to all the consumers is the lowest”

Problems due to improper facility location planning

Sell off the facility to other companies (disinvestment).
Finding buyer companies for a facility at wrong location is difficult.
The prices received are less than actual investment.
Disinvestment is time consuming process.
Relocate facility to new.
Only machines & equipments can be relocated.
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Capital expenditure like land, building, etc have to be sold & is time consuming.
More investment required for purchasing land, construction, train new workers form scratch.
Close down the operations completely & liquidate the assets.
Liquidation of assests is most painful for any organisation.
finding the buyers & negotiation is tedious & time consuming.
The prices received are less than actual investment.
Facility set up without proper location planning.
Continue operations at the existing location.
Inherent problems lead to low profits.
Competitors have plants at better locations.
In long run company have plan again better location for competing competitors.

OPERATIONAL STRATEGIES FOR MULTIPLE FACILITIES

1. Separate facilities for different products/Services
2. Separate facilities to serve different geographical areas
3. Separate facilities for different processes

Factors Affecting Location Decision:

(i) Availability of Raw Materials:
One of the most important considerations involved in selection of industrial
location has been the availability of raw materials required. The biggest advantage
of availability of raw material at the location of industry is that it involves less cost
in terms of ‘transportation cost.

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If the raw materials are perishable and to be consumed as such, then the industries
always tend to locate nearer to raw material source. Steel and cement industries can
be such examples. In the case of small- scale industries, these could be food and
fruit processing, meat and fish canning, jams, juices and ketchups, etc.

(ii) Proximity to Market:

If the proof of pudding lies in eating, the proof of production lies in consumption.
Production has no value without consumption. Consumption involves market that
is, selling goods and products to the consumers. Thus, an industry cannot be
thought of without market.

Therefore, while considering the market an entrepreneur has not only to assess the
existing segment and the region but also the potential growth, newer regions and
the location of competitors. For example, if one’s products are fragile and
susceptible to spoilage, then the proximity to market condition assumes added
importance in selecting the location of the enterprise.

Similarly if the transportation costs add substantially to one’s product costs, then
also a location close to the market becomes all the more essential. If the market is
widely scattered over a vast territory, then entrepreneur needs to find out a central
location that provides the lowest distribution cost. In case of goods for export,
availability of processing facilities gains importance in deciding the location of one’s
industry. Export Promotion Zones (EPZ) are such examples.

(iii) Infrastructural Facilities:

Of course, the degree of dependency upon infrastructural facilities may vary from
industry to industry, yet there is no denying of the fact that availability of
infrastructural facilities plays a deciding role in the location selection of an industry.
The infrastructural facilities include power, transport and communication, water,
banking, etc.

Yes, depending upon the types of industry these could assume disproportionate
priorities. Power situation should be studied with reference to its reliability,
adequacy, rates (concessional, if any), own requirements, subsidy for standby
arrangements etc. If power contributes substantially to your inputs costs and it is
difficult to break even partly using your own standby source, entrepreneur may
essentially have to locate his/her enterprise in lower surplus areas such as
Maharashtra or Rajasthan.

Similarly adequate water supply at low cost may become a dominant decisional
factor in case of selection of industrial location for leather, chemical, rayon, food
processing, chemical and alike. Just to give you an idea what gigantic proportions
can water as a resource assumes. Note that a tone of synthetic rubber requires 60
thousand gallons, a tone of aluminum takes 3 lakhs gallons, and a tone of rayon
consumes 2 lakh gallons of water.

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Similarly, location of jute industry on river Hoogly presents an example where
transportation media becomes a dominant decisional factor for plant location.
Establishing sea food industry next to port of embarkation is yet another example
where transportation becomes the deciding criteria for industrial location.

(iv) Government Policy:

In order to promote the balanced regional development, the Government also offers
several incentives, concessions, tax holidays for number of years, cheaper power
supply, factory shed, etc., to attract the entrepreneurs to set up industries in less
developed and backward areas. Then, other factors being comparative, these factors
become the most significant in deciding the location of an industry.

(v) Availability of Manpower:

Availability of required manpower skilled in specific trades may be yet another
deciding factor for the location of skill- intensive industries. As regards the
availability of skilled labour, the existence of technical training institutes in the area
proves useful. Besides, an entrepreneur should also study labour relations through
turnover rates, absenteeism and liveliness of trade unionism in the particular area.

Such information can be obtained from existing industries working in the area.
Whether the labour should be rural or urban; also assumes significance in selecting
the location for one’s industry. Similarly, the wage rates prevalent in the area also
have an important bearing on selection of location decision.

While one can get cheaper labour in industrially backward areas, higher cost of their
training and fall in quality of production may not allow the entrepreneur to employ
the cheap manpower and, thus, establish his/her enterprise in such areas.

(vi) Local Laws, Regulations and Taxes:

Laws prohibit the setting up of polluting industries in prone areas particularly
which are environmentally sensitive. Air (Prevention and Control of Pollution) Act,
1981 is a classical example of such laws prohibiting putting up polluting industries
in prone areas. Therefore, in order to control industrial growth, laws are enforced to
decongest some areas while simultaneously encourage certain other areas.

For example, while taxation on a higher rate may discourage some industries from
setting up in an area, the same in terms of tax holidays for some years may become
the dominant decisional factor for establishing some other industries in other areas.
Taxation is a Centre as well as State Subject. In some highly competitive consumer
products, its high quantum may turn out to be the negative factor while its relief
may become the final deciding factor for some other industry.

(vii) Ecological and Environmental Factors:

In case of certain industries, the ecological and environmental factors like water and
air pollution may turn out to be negative factor in deciding enterprise location. For
example, manufacturing plants apart from producing solid waste can also pollute
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water and air. Moreover, stringent waste disposal laws, in case of such industries,
add to the manufacturing cost to exorbitant limits.

In view of this, the industries which are likely to damage the ecology and
environment of an area will not be established in such areas. The Government will
not grant permission to the entrepreneurs to establish such industries in such
ecologically and environmentally sensitive areas.

(viii) Competition:
In case of some enterprises like retail stores where the revenue of a particular site
depends on the degree of competition from other competitors’ location nearby plays
a crucial role in selecting the location of an enterprise. The areas where there is
more competition among industries, the new units will not be established in these
areas. On the other hand, the areas where there is either no or very less
competition, new enterprises will tend to be established in such areas.

(ix) Incentives, Land Costs, Subsidies for Backward Areas:

With an objective to foster balanced economic development in the country, the
Government decentralizes industries to less developed and backward areas in the
country. This is because the progress made in islands only cannot sustain for long.
The reason is not difficult to seek.

“Poverty anywhere is dangerous for prosperity everywhere.” That many have-not’s

will not tolerate a few haves is evidently clear from ongoing protests leading to
problems like terrorism. Therefore, the Government offers several incentives,
concessions, tax holidays, cheaper lands, assured and cheaper power supply, price
concessions for departmental (state) purchases, etc. to make the backward areas
also conducive for setting up industries.

It is seen that good number of entrepreneurs considers these facilities as decisive

factor to establish industries in these locations. However, it has also been observed
that these facilities can attract entrepreneurs to establish industries in backward
areas provided other required facilities do also exist there.

For example, incentives and concessions cannot duly compensate for lack of
infrastructural facilities like communication and transportation facilities. This is
precisely one of the major reasons why people in-spite of so many incentives and
concessions on offer by the Government, are not coming forward to establish
industries in some backward areas.

(x) Climatic Conditions:

Climatic conditions vary from place to place in any country including India. And,
climatic conditions affect both people and manufacturing activity. It affects human
efficiency and behaviour to a great extent. Wild and cold climate is conducive to
higher productivity. Likewise, certain industries require specific type of climatic
conditions to produce their goods. For example, jute and textiles manufacturing
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industries require high humidity.

As such, these can be established in Kashmir experiencing humidity-less climate.

On the other hand, industrial units manufacturing precision goods like watches
require cold climate and hence, will be established in the locations having cold
climate like Kashmir and Himachal Pradesh.

(xi) Political Conditions:

Political stability is essential for industrial growth. That political stability fosters
industrial activity and political upheaval derails industrial initiates is duly
confirmed by political situations across the countries and regions within the same
country. The reason is not difficult to seek.

The political stability builds confidence and political instability causes lack of
confidence among the prospective and present entrepreneurs to venture into
industry which is filled with risks. Community attitudes such as the “Sons of the Soil
Feeling” also affect entrepreneurial spirits and may not be viable in every case.

Besides, an entrepreneur will have also to look into the availability of community
services such as housing, schools and colleges, recreational facilities and municipal
services. Lack of these facilities makes people hesitant and disinterested to move to
such locations for work.

Very closer to political conditions is law and order situation prevalent in an area
also influences selection of industrial location. Hardly any entrepreneur will be
interested to establish his / her industry in an area trouble-torn by nexalites and
terrorists like Jharkhand, Nagaland and Jammu & Kashmir.

People will be interested to move to areas having no law and order problem to
establish their industries like Maharashtra and Gujarat. It is due to this law and
order problem the Nano car manufacturing unit shifted from Nandigram in West
Bengal to Gujarat.

There are many qualitative and quantitative techniques adopted to interpolate the
above factors to arrive at a logical decision. The simplest and most commonly
adopted is weight rating method illustrated in Figure below.

Besides above factors, the location of certain industries also depends upon the
delivery of emergency services like fire, police, hospital, etc. (Buffa 1983).

It seems in the fitness of the context to present the real cases of locational
considerations of the entrepreneurs of small-scale industries in India. Based on
extensive research study, one researcher (Khanka 2010: 45-46) has found the
following most important considerations that entrepreneurs consider for selecting
the location of their enterprises.

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Objectives of location Decision:

1.To expand an existing facility

2.Add new locations while retaining existing ones
3.To shut down at one location and move to another
4.Organizations have the option of doing nothing

Making Location Decisions :

1. Decide on the criteria
2. Identify the important ones
3. Develop location alternatives
4. Evaluate the alternatives
5. Make selection

Issues in global locations

Trading Blocs
Political Risk
Foreign Government
-Policies on foreign ownership of production facilities
-Import restrictions
-Currency restrictions
-Local product standards
-Environmental Regulations
Cultural differences
Resources
Labour
-Possible regulation limiting no. of foreign employees
-Language differences

REASONS FOR A GLOBAL/FOREIGN LOCATION

A. Tangible Reasons
The trangible reasons for setting up an operations facility abroad could be as
follows:
Reaching the customer: One obvious reason for locating a facility abroad is that
of capturing a share of the market expanding worldwide. The phenomenal growth of
the GDP of India is a big reason for the multinationals to have their operations
facilities in our country. An important reason is that of providing service to the
customer promptly and economically which is logistics-dependent. Therefore, cost
and case of logistics is a reason for setting up manufacturing facilities abroad. By
logistics set of activities closes the gap between production of goods/services and
reaching of these intended goods/services to the customer to his satisfaction.
Reaching the customer is thus the main objective. The tangible and intangible gains
and costs depend upon the company defining for itself as to what that ‘reaching’
means. The tangible costs could be the logistics related costs; the intangible costs
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may be the risk of operating is a foreign country. The tangible gains are the
immediate gains; the intangible gains are an outcome of what the company defines
the concepts of reaching and customer for itself.

The other tangible reasons could be as follows:

(a) The host country may offer substantial tax advantages compared to the home
country.
(b) The costs of manufacturing and running operations may be substantially less in
that foreign country. This may be due to lower labour costs, lower raw material cost,
better availability of the inputs like materials, energy, water, ores, metals, key
personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing
plant in a foreign country rather than exporting the items to that country.

B. Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could
be as
follows:
1. Customer-related Reasons
(a) With an operations facility in the foreign country, the firm’s customers may feel
secure that the firm is more accessible. Accessibility is an important ‘service quality’
determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus
understand their requirements better.
(d) It may also discover other potential customers in the foreign location.

2. Organisational Learning-related Reasons

(a) The firm can learn advanced technology. For example, it is possible that
cutting-edge technologies can be learn by having operations in an technologically
more advanced country. The firm can learn from advanced research
laboratories/universities in that
country. Such learning may help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there
may be essential towards this goal.
(c) It can also learn from its competitors operating in that country. For
this reason, it may have to be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a
manufacturing plant there, it will have intensive interaction with the suppliers in
that country from whom there may be much to learn in terms of modern and
appropriate technology, modern management methods, and new trends in business
worldwide.

3. Other Strategic Reasons

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(a) The firm by being physically present in the host country may gain some ‘local
boy’ kind of psychological advantage. The firm is no more a ‘foreign’ company just
sending its products across international borders. This may help the firm in
lobbying with the government of that country and with the business associations in
that country.
(b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply.
The firm could, thus, reduce its supply risks.
(d) The firm could hunt for human capital in different countries by having
operations in those countries. Thus, the firm can gather the best of people from
across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market
risks for the firm. If one market goes slow the other may be doing well, thus
lowering the overall risk.

strategic role of foreign plants:

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Why Make?

Vertical integration - making component parts in-house.

1.Lowers costs - if a firm is more efficient at that production activity than any other enterprise,
manufacturing in-house makes sense.
2.Facilitates investments in highly specialized assets - internal production makes sense
when substantial investments in specialized assets are required
3.Protects proprietary technology – in-house production makes sense when component
parts contain proprietary technology
4.Facilitates the scheduling of adjacent processes - planning, coordination, and
scheduling of adjacent processes can be easier with in-house production

Why Buy?

Buying component parts from independent suppliers

1.Gives the firm greater flexibility

-Important when changes in exchange rates and trade barriers alter the attractiveness of various
supply sources over time
2.Helps drive down the firm's cost structure
 avoids challenges of coordination and control of additional subunits
 avoids the lack of incentive associated with internal suppliers
 avoids the difficulties with setting appropriate transfer prices
3.Helps the firm capture orders from international customers.
 can help firms gain orders from suppliers’ countries

International logistics:
DEFINITION OF INTERNATIONAL LOGISTICS

According to The Council of Logistics Management, “International Logistics is the process of

Planning, Implementing and Controlling the flow and Storage of Goods, Services and related
information from a point of origin to a point of Consumption located in a different Country.”,
managing service operations, managing technology transfers.

Meaning of International Logistics:

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It includes planning and actions related to the utilization logistic policies, systems, and/or
procedures to meet requirements of one or more foreign governments, international
organizations, or forces.

The negotiating, planning, and implementation of supporting logistic arrangements between

nations, their forces, and agencies.

DECISIONS IN LOGISTICS MANAGEMENT

The various decisions in Logistics management that need examination for an integrated systems
are:

1. Product Design:Product design is the process of defining the characteristics of the product; at
times identify the core features and the outlook of the end product.
2. Plant Location:Plant location refers to the choice of the region where men, materials, money,
machinery and equipment are brought together for setting up a business or factory. 
3. Choice of Markets/ Sources:
4. Productions Structure
5. Distribution/Dealer Net works Design
6. Location of Ware Houses
7.Plant Layout and Logistics
8. Allocation Decision
9. Production Planning
10. Inventory Management-stocking level
11. Transportation-mode choice
12. Shipment Size and Routing design
13. Transport Contracting
14. packaging
15. Materials handling
16. Warehouse Operations

ROLE OF GOVERNMENT

1. The Government plays a significant role in logistics. Some of the important Legislation that
affect Logistics are,
2. Central sales tax and Local Sales tax
3. Consignment tax
4. Excise Duties
5. Octroi and Entry Tax
6. Use of Packaging materials
7. Motor Vehicles Act and similar Acts for other modes
8. Distribution Policies

Logistics activities:
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Logistics Key Activities

Customer Service

Customer satisfaction is paramount importance in any logistics activities. The marketing concept
assumes that the sure way to maximize profits in the long run is through maximizing the
satisfying the customer through an efficient management of physical distribution. During the
course of action one has to concentrate the activities like offering goods in right time and right
frequency, improving the level of customer service by developing an effective system of
warehousing, quick and economic transportation, and maintaining optimum level of inventory.

Traffic, Inward and Outward Transportation

Traffic actually moves materials from suppliers to the organization’s receiving area. This has to
choose the type of transport (road, rail, air and so on), find the best transport

operator, design a route, make sure that all safety and legal requirements are met, get deliveries
on time and at reasonable cost and so on. Outward transport takes materials from the departure
area and delivers them to customer with concerns that are similar to inward transport.

Inventory Control

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Inventory control set the policies for inventory. It considers the materials to store, overall
investment, customer service, stock levels, order sizes, order timing and so on.

Order Processing

Order processing makes sure that materials delivered correspond to the order, acknowledges
receipt, unloads delivery vehicles, inspects materials for damage, and sorts them.

Distribution Communication

The physical flow of materials is the associated flow of information. This links all parts of the
supply chain, passing information about products, customer demand, materials to be moved
timing, stocks levels, availability, problems, costs, service levels and so on. Co- coordinating the
flow of information can be very difficulty, and logistics managers often describe themselves as
processing information rather than moving goods.

Logistics Support Activities

Warehousing and Storage

Warehousing moves material into storage, and takes care of them until they are needed. Many
materials need special care, such as frozen food, drugs, alcohol in bond, chemicals that emit
fumes, animals and dangerous goods. As well as making sure that materials can be available
quickly when needed, warehousing also make sure that materials can be available quickly when
needed, warehousing also makes sure that they have the right conditions, treatment and
packaging to keep them in good condition.

Material Handling

Material handling moves materials through the operations within an organization. It moves
materials from one operation to the next, and also moves materials picked from

stores to the point where they are needed. The aim of materials handling is to give efficient
movements, with short journeys, using appropriate equipment, with little damage, and using
special packaging and handling where needed.

Purchasing

The flow of material though an organization is usually initiated when procurement send a
purchase order to a supplier. This means that procurement finds suitable suppliers, negotiates
terms and conditions, organizes delivery, arranges insurance payment, and does not everything
needed to get materials into the organization. In the past, this has been seen as a largely clerical
job centered on order processing. Now it is recognized as an important link with upstream
activities, and is being given more attention.

Packaging

Packaging finds and removes materials from stores. Typically materials for a customer order
located, identified, checked, removed from racks, consolidated into single load or multiple load,
wrapped and moved to a departure are for loading onto delivery vehicle

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Plant and Warehouse Side Selection

Logistic activities can be done in different locations. Stocks of finished goods, for example, can be
held at the end of production, moved to nearby warehouse, put into stores nearer to customers,
passed on to be managed by other organization, or a range of alternatives. Logistics has to find the
best location for these activities. It also considers related question about the size and number of
facilities. These are important decisions that affect the overall design of the supply chain.

Return Goods Handling, Salvage and Scrap Disposal

Even when products have been delivered to customers, the work of logistics may not be finished.
There might, for example, be problems with delivered materials, perhaps there were faulty, or too
many were delivered, or they were the wrong type and they have to be collected and brought back.

There are materials that cannot be used again, but are brought back for safe disposal, such as
dangerous chemicals. Activities that return material back to an organization are called reverse
logistics or reverse distribution.

Information Maintenance

Finally, information maintenance especially the collection, storage, data analysis and control
procedures of information supports all other logistics activities in that it provided the need
information for planning and control.

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 Logistic Management

Physical Supply of Materials Physical Distribution of Finished Goods

Sources of Supply Plants Operation Reaching to ultimate

consumers

1. Transportation Transportation
2. Inventory Management Inventory Management
3. Order processing Order processing
4. Acquisition Acquisition
5. Packaging Packaging
6. Warehousing Warehousing
7. Material handling Material handling
8. Information management Information management
9. Supply scheduling Distribution scheduling

Objectives and Scope of Logistics:

This implies that a firm will aim at having a logistics system which maximizes the
customer service and minimizes the distribution cost. However, one can
approximate the reality by defining the objective of logistics system as achieving a
desired level of customer service i.e., the degree of delivery support given by the
seller to the buyer. Thus, logistics management starts with as curtaining customer
need till its fulfillment through product supplies and, during this process of
supplies, it considers all aspects of performance which include arranging the
inputs, manufacturing the goods and the physical distribution of the products.
However, there are some definite objectives to be achieved through a proper
logistics system. These can be described as follows:

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 Objectives of Logistics

1. Improving Customer Service

As we know, the marketing concept assumes that the sure way to maximize
profits in the long run is through maximizing the customer satisfaction. As such, an
important objective of all marketing efforts, including the physical distribution
activities, is to improve the customer service. An efficient management of physical
distribution can help in improving the level of customer service by developing an
effective system of warehousing, quick and economic transportation, all maintaining
optimum level of inventory. But, as discussed earlier, the level of service directly
affects the cost of physical distribution.

Therefore, while deciding the level of service, a careful analysis of the

customers’ wants and the policies of the competitors is necessary. The customers
may be interested in several things like timely delivery, careful handling of
merchandise, reliability of inventory, economy in operations, and so on. However,
the relative importance of these factors in the
minds of customers may vary. Hence, an effort should be made to ascertain whether
they value timely delivery or economy in transportation, and so on. One the relative
weights are known, an analysis of what the competitors are offering in this regard
should also be made. This, together with an estimate about the cost of providing a
particular level of customer service, would help in deciding the level of customer
service.
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2. Rapid Response
Rapid response is concerned with a firm’s ability to satisfy customer service
requirements in a timely manner. Information technology has increased the
capability to postpone logistical operations to the latest possible time and then
accomplish rapid delivery of required inventory.

The result is elimination of excessive inventories traditionally stocked in

anticipation of customer requirements. Rapid response capability shifts
operational emphasis from an anticipatory posture based on forecasting and
inventory stocking to responding to customer requirements on a shipment-to-
shipment basis. Because inventory is typically not moved in a time-based system
until customer requirements are known and performance is committed, little
tolerance exists for operational deficiencies
3. Reduce Total Distribution Costs
Another most commonly stated objective is to minimize the cost of physical
distribution of the products. As explained earlier, the cost of physical distribution
consists of various elements such as transportation, warehousing and inventory
maintenance, and any reduction in the cost of one element may result in an increase
in the cost of the other elements. Thus, the objective of the firm should be to reduce
the total cost of distribution and not just the cost incurred on any one element. For
this purpose, the total cost of alternative distribution systems should be analyzed
and the one which has the minimum total distribution cost should be selected.
4. Generating Additional Sales
Another important objective of the physical distribution/logistics system in a
firm is to generate additional sales. A firm can attract additional customers by
offering better services at lowest prices. For example, by decentralizing its
warehousing operations or by using economic and efficient modes of transportation,
a firm can achieve larger market share. Also by avoiding the out-of-stock situation,
the loss of loyal customers can be arrested.
5. Creating Time and Place Utilities
The logistical system also aims at creating time and place utilities to the
products. Unless the products are physically moved from the place of their origin to
the place where they are required for consumption, they do not serve any purpose
to the users. Similarly, the products have to be made available at the time they are
needed for consumption. Both these purposes can be achieved by increasing the
number of warehouses located at places from where the goods can be delivered
quickly and where sufficient stocks are maintained so as to meet the emergency
demands of the customers. Moreover, a quicker mode of transport should be
selected to move the products from one place to another in the shortest possible
time. Thus, time and place utilities can be created in the products through an
efficient system of physical distribution.
6. Price Stabilization
Logistics also aim at achieving stabilization in the prices of the products. It
can be achieved by regulating the flow of the products to the market through a
judicious use of available transport facilities and compatible warehouse operations.
For example, in the case of industries such as cotton textile, there are heavy
fluctuations in the supply of raw materials. In such cases if the market forces are
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allowed to operate freely, the raw material would be very cheap during harvesting
season and very dear during off season. By stocking the raw material during the
period of excess supply (harvest season) and made available during the periods of
short supply, the prices can be stabilized.
7. Quality Improvement
The long-term objective of the logistical system is to seek continuous quality
improvement. Total quality management (TQM) has become a major commitment
throughout all facets of industry. Overall commitment to TQM is one of the major
forces contributing to the logistical renaissance. If a product becomes defective or if
service promises are not kept, little, if any, value is added by the logistics. Logistical
costs, once expended, cannot be reversed. In fact, when quality fails, the logistical
performance typically needs to be reversed and then repeated.

Logistics itself must perform to demanding quality standards. The

management challenge of achieving zero defect logistical performance is magnified
by the fact that logistical operations typically must be performed across a vast
geographical area at all times of the day and night. The quality challenge is
magnified by the fact that most logistical work is performed out of a supervisor’s
vision. Reworking a customer’s order as a result

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of incorrect shipment or in-transit damage is far more costly than performing it
right the first time. Logistics is a prime part of developing and maintaining
continuous TQM improvement.
8. Life-Cycle Support
A good logistical system helps to support the life cycle. Few items are sold
without some guarantee that the product will perform as advertised over a specified
period. In some situations. the normal value-added inventory flow toward
customers must be reversed. Product recall is a critical competency resulting from
increasingly rigid quality standards, product expiration dating and responsibility
for hazardous consequences. Return logistics requirements also result from the
increasing number of laws prohibiting disposal and encouraging recycling of
beverage containers and packaging materials. The most significant aspect of reverse
logistical operations is the need for maximum control when a potential health
liability exists (i.e.. a contaminated product). In this sense, a recall program is
similar to a strategy of maximum customer service that must be executed regardless
of cost. Firestone classical response to the tyre crisis is an example of turning
adversity into advantage. The operational requirements of reverse logistics range
from lowest total cost, such as returning bottles for recycling, to maximum
performance solutions for critical recalls. The important point is that sound
logistical strategy cannot be formulated without careful review of reverse logistical
requirements.
9. Movement Consolidation
As the logistical system aims at cost reduction through integration,
consolidation One of the most significant logistical costs is transportation.
Transportation cost is directly related to. the type of product, size of shipment, and
distance. Many Logistical systems that feature premium service depend on high-
speed, small shipment transportation. Premium transportation is typically high-
cost. To reduce transportation cost, it is desirable to achieve movement
consolidation. As a general rule, the larger the overall shipment and the longer the
distance it is transported, the lower the transportation cost per unit. This requires
innovative programs to group small shipments for consolidated movement. Such
programs must be facilitated by working arrangements that transcend the overall
supply chain.

The Scope of Logistics

The basic nature of business is that it procures or buys something, whether

goods or information; changes its form in some way which adds value and then sells a
product or service onto someone else. In manufacturing industries in particular, the
following sequence may occur a number of times

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Scope of Logistics

System Elements of Logistics

According to CLM, the components of a typical logistics

system are “customer service, demand forecasting, distribution
communication, inventory control, material handling, order
processing, parts and service support, plant and warehouse site
selection (location analysis), purchasing, packaging, return goods
handling, salvage and scrap disposal, traffic and transportation
and warehousing and storage”. The logistics activities to be
managed that make up business vary from company to company,
depending on a company’s particular organizational structure.

Elements of Logistics

The following are the main elements of logistics

1.Transportation
2.Warehousing
3.Inventory management
4.Packaging and utilization and
5.Information and communication

Significance of Logistic

Logistics is about creating value, value for customers and suppliers of the firm,
and value for the firm’s stakeholders. Value in logistics is primarily expressed
in terms of time and place. Products and services have no value unless they
are in the possession of the customers who are looking for the same in a
particular place at a particular time. In the globalised economy for many
organizations logistics has become an increasingly important value –adding
process for the following reasons

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Logistics Consumes Cost

Transportation costs have been drastically raised over the period due to rise in
oil prices

Impact of Globalization, Liberalization and Privatization

Organizations can become global in outlook, buying, storing, manufacturing,

moving and distributing materials in a single, worldwide market. As a result
international trade and competition are continuing to rise. Organizations used
to look for competitors in the same town, but now they are just as likely to
come from another continent.

Customer Expectation

Customers are more knowledgeable, and demand higher quality, lower costs
and better services. The internet, just –in-time operating procedures, and
continuous replenishment of inventories have all contributed to customers
expecting rapid processing of their requests, quick delivery, and a high degree
of product availability.

Competition

Competition is getting fiercer, and organizations must look at every

opportunity to remain competitive.

Organizational Changes

Organizations are introducing new type of operation, such as just-in-time,

lean operations, time compression, flexible manufacturing, mass
customization, virtual opera- tions, and so on.

Information Technology Impact

There have been considerable improvements in communication. These allow

elec- tronic data interchange (EDI), item coding, electronic fund transfer, e-
commerce, shared knowledge systems and other new practices

Transportation

Attitudes towards transport are changing, because of increased congestion on

roads, concerns about air quality and pollution, broader environmental issues,
government policies for the real cost of road transport, privatization of rail
services, deregulations of transport and a host of other changes.

Alliance & Partnership of Companies

Organizations are increasing co-operation through alliances, partnerships,

and other arrangements. This integration is important for logistics, which is
usually the main link between organizations in a supply chain.

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Organization Focuses on Core Business Activities

Organizations are outsourcing peripheral activities and concentrating on their

core operations. Logistics is a useful area for third-party operators, with
specialized companies offering a range of services.

International Trade

International trade continues to grow. This is encouraged by free trade areas

such as European Union and North American Free Trade Area.

Organized Retail Formats

The growth of 24 X7 hour opening, home deliveries, out-of town malls, retail
parks, telephone and on-line shopping

Increasing Environmental Concerns

There is growing concerns about air pollution, water pollution, energy

consumption, urban development and waste disposal. Logistics does not have
a good reputation for environmental protection. Demonstrated by the
emissions from heavy lorries, use of green field sites for warehouses, call for
new road building, use of extensive packaging, ships illegally flushing their
fuel tanks, oil spillages from tanker accidents and so on.

Direct Delivery to Customers

These days’ customers are placing order through mobile, web or finding some
other means of ways to secure the product from the company directly. This
helps to reduce lead time, reducing costs to customers, having manufacturing
talking directly to their final customers, allowing customer to access to a wider
range of products and so on. It also means that logistics has to move small
deliveries quickly to find customers. This has encouraged the growth of
courier and expresses parcel delivery services such as FedEx, UPS and DHL.

To Avoid Accumulation of Stocks

Traditionally, producer move the finished goods out of production and store
them in the distribution system until they are needed. When there are many
variations on a basic product, this can give high stocks of similar products.
Postponement moves almost finished products into the distribution system
and delays final modification or customization until the last possible moment.

Use of Specialized Logistic Companies

Now a day’s organizations realize that they can benefit from using specialized
companies to take over part, or all, of their logistics. Using a third party for
materials movement leaves an organization free to concentrate on its core
activities.

1.Large scale production of the factories forced to distribute the goods

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2.Fundamental changes in inventory management

3.Proliferation of product and product lines
4.Economic regulation reduction

Problem with International Logistics

The following are the major issues faced by logistic companies when they are
involved in international trade. These might appear at every border, and
circumstances can change within a very short distance

Difference in Logistics

International logistics are different from national logistics, and it is not just a
case of moving the same activities to another location in terms of types of
transport used, large variation in the demand for the service, more
intermediaries involved, communication become more difficult distance and
culture and documentation is more complicated.

Problem with Trade

The administrative difficulties are one type of problem for international

logistics are physical barrier, such as border control and customer formalities,
technical barriers, such as differing and health and safety standards and fiscal
barriers such as different rates of value added tax, excise and customs duties.

Political and Legal System

The type of government and laws in different countries give significantly

different conditions. Practices that are accepted on one country may be
unacceptable in a neighbor. So the logistics company should take into
consideration of the expectation of the country’s political and legal system
with regard to logistics.

Economic Conditions

Political system directly affects the economy, and there are significant
differences in prosperity, disposable income and spending habits. Sometimes
there are very rapid changes between borders of the two countries.

Competition

This competition varies between very tense, the market driven competition in
some countries, to state run monopolies in others. Logistics in say China is
particularly well developed and companies compete for business over a wide
area.

Availability of Technology

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Many logistics companies use sophisticated technologies for e-commerce,

efficient customer response, satellite location, in-cub navigation, real-time
routing, total communication, and a whole range of other developments.

Although such technology feasible, it does not mean that everybody uses it.
Most of the world does not have access to, does not need, or cannot afford the
latest technological development.

Geography

Transport is generally easier in straight lines over flat terrain. Physical

barriers that hinder transport include seas, mountain ranges, desserts,
jungles, rivers, cities, national parks, and so on.

Financial Issues

There are many financial factors to consider. Some countries do not allow
their currency to be taken out of the country, the value of some currencies
fluctuates wildly or falls quickly, some banking system are inefficient,
sometimes exchanging money is difficult and so on. A different type of
problem comes with customs duties and tariffs for material entering the
country.

Customs Barriers

Conventionally, customs duty is payable whenever materials enter a country.

In practice, there is more than just customs duty, and it can be quite difficult
to add all the taxes and duties to calculate the amount payable. For example
goods entering the European Union one might have to pay customs duty,
countervailing duties, anti dumping duties etc., these are not only costs of
crossing a border, as companies have to pay the cost of compliance with
export/import regulations, such as compulsory documentation and
information requirements.

Basic Means of Transportation

The mode of transport describes the type of transport used. There are
basically five different options – rail, road, water, air and pipeline. Each mode
has different characteristics, and the best in any particular circumstances
depends on the type of goods to be moved, locations, distance, value and a
whole range of other things. Sometimes there is a choice of mode, such as rail
or ferry across etc., many distribution networks consist of a combination of
these means of transportation.
For example, oil may be pumped through a pipeline to a waiting ship for
transport to a refinery, and from there transferred to trucks that transport
gasoline to retailers or heating oil to consumers. All of these transportation
choices contain advantages and drawbacks.

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managing service operations:

Management of Service Operations

In high paced business climate, manufacturing and other industries focus
their attention to offer good services to customers. Manufacturing, service and
agriculture are the major economic activities in any nation. Statistical figure
indicated that in India, manufacturing and services together constitute nearly
75% of the GDP. Service industries effectively responded to global competition
by identifying that existence in the business field is dependent upon
reconstructing their operations to deliver better, faster and cheaper (Knod and
Schonberger, 2001). Theorists like Johnston & Clark (2001) stated that
product and service design involves satisfying customer needs into product
and service requirements, formulating quality goals and cost target,
documenting specifications, refining existing products and services, and
developing new ones as well. With these, product and service design can
influence a large proportion of an organization's functional area, especially the
marketing and operations area.
Services are defined as all activities associated with operational services
regardless of whether they are executed by the service provider, a third party
supplier or by users and customers. Sasser et al coined the term "service
concept", in which they defined as "the total bundle of goods and services sold
to the customer and the relative importance of each component to the
customer" (1978). Its value lies in bringing together the various elements of
the service such as the operational elements, marketing emphasis and
customer requirements to produce a meaningful overarching service
definition in sufficient detail to provide a working service specification.
Originally, the total service package included three elements such as
facilitating goods, the explicit services and implicit services. After that this
concept is modified many times.

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Services operations management is related with delivering service to the

customers of the service. It involves understanding the service needs of the
target customers, managing the processes that deliver the services, ensuring
objectives are met, while also paying attention to the constant improvement of
the services. As such operations management is a central organizational
function and one that is critical to organizational triumph. Service
organisations react to the wants of customers and leave certain experiences in
the minds of the customer through a service delivery system.
There is service desk that made up dedicated number of staff responsible
for dealing with variety of services events, often made via telephone call, web
interface or automatically reported infrastructure events. Therefore, service
quality must identify what sensual benefits, physical items, and psychological
benefits the customer is to receive from the service (Watt, 2007).
Key objectives of service operation are to synchronize and perform the
activities and processes required to deliver and manage services at agreed
levels to business users and customers. Service operation is also responsible
for on-going management of the technology that is used to deliver and support
services. Management scholars sated that highly designed and well
implemented processes will be worthless if day to day operation of those
processes is not suitably conducted, controlled and managed, nor will service
improvements be possible if day to day activities to monitor performance
assess metrics and gathering data are not systematically conducted during
service operation.

Other objectives of service organizations are, 

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o Approachable stable services

o Robust end to end operational practices
o Business as usual - day to day
o Implementation of processes and services
o Responsive and operational validation
o Realising value
o Accomplishing service excellence

There are numerous factors in implementing service operation. Service

Organizations must perform a feasibility study first.

o Use technique that is already good in the organization

o Take it slowly and concentrate on small steps and quick wins
o Appoint a strong project manager with end to end focus to drive the
implementation program
o Keep in mind organization change management issues
o Keep communicating WHY organization needs this
o Measure successes continuously

Service operations are mainly associated with efficiency, effectiveness, Quality

and Cost. Dimensions of service quality are Reliability, Responsiveness,
Assurance, Empathy and Tangibles.

There are five Service operation processes:

1. Request fulfilment: Request fulfilment is the process to deal with

service requests via the Service Desk, using a process similar but
separate to that of incident management. Request fulfilment
records/tables are linked, where necessary, to the incident or problem
records that initiated the need for the request. Major aims of the
request fulfilment process to provide a channel for users to request and
receive standard services for which a predefined approval qualification
process exists, to give information to users and customers about the
availability of services and the procedure for obtaining them, to source
and deliver the components of requested standard services and help
with general information, complaints or comments. It effectively
decreases the bureaucracy involved in requesting and receiving access
to existing or new services, thereby reducing the cost of providing these
services.
2. Incident management: Incident management is highly noticeable to
companies and it is easier to demonstrate its value than in most areas
of service operation. Incident management is often one of the first
processes to be implemented in service management projects. The
major benefit of doing this is that incident management can be used to

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high spot other areas that need attention, thus providing a reason for
implementing processes. The purpose of incident management is to
reinstate normal service operation as quickly as possible and diminish
the adverse impact of the Incident on business operations, thus
ensuring that the best possible levels of service quality and availability
are maintained.

1. Problem management: This is vital for companies. Problem

management comprises of the activities required to identify the root
cause of incidents and to determine the resolution to the problems. It is
also responsible for ensuring that the resolution is implemented
through the appropriate control procedures. Effective problem
management stops the recurrence of incidents and has benefits to the
individual and the organization as it improves availability and user
productivity. Major aim of this service process is to lessen the adverse
impact of incidents and problems on the business that are caused by
errors within the information technology infrastructure, and to prevent
recurrence of incidents related to these errors.
2. Access management: Access management is the procedure to grant
authorized users the right to use a service, while preventing access to
non-authorised users. It is, therefore, the execution of policies and
actions are defined in information security and availability
management. The objectives of access management are Protecting
Confidentiality, Integrity and Availability (CIA), sometimes knowing as
Rights Management or Identity, Management, Security incidents and
problems related to access management is discreetly recorded. Access
management ensures that users are given the right to use a service, but
it does not ensure that this access is available at all agreed times. This is
provided by availability management.
3. Event management: In this process, effective service operation is
dependent on knowing the status of the infrastructure and detecting
any deviation from normal or expected operation. The objectives of
event management to provide the entry point for the execution of many
service operation processes and activities. Additionally, it provides a
way of comparing actual performance and behaviour against design
standards and Service Level Agreements.
Other aims include the ability to detect, interpret and initiate
appropriate action for events, basis for operational monitoring and
control and the entry point for many service operation activities, offer
operational information as well as warnings and exceptions to aid
automation and supports continual service improvement activities of
service assurance and reporting.

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Event management can be applied to any aspect of service management

that needs to be controlled and which can be automated such as
configuration Items, environmental conditions, software licence
monitoring for usage to ensure optimum/legal licence utilisation and
allocation, security and normal activity.

Major advantages within service operation are as under:

1. Scalability: Service organization can be adapted for any size of

organization.
2. Reduction in costs: Service organization has established its value in
reducing the overall cost of managing services.
3. Improved quality: Service organization helps improve the quality of IT
services through sound management practices.
4. Alignment to standards: Service organization may well align to the
ISO/IEC 20000 Standard for Service Management.
5. Return on Investment (ROI): Service organization helps IT
organizations demonstrate their return on investment and measurable
value to the business. This helps establish a business case for new or
continuing investment in IT.
6. Seamless sourcing partnerships: Outsourcing, often with multiple
service providers, is increasingly common today and service
organization offers a common practice base for improved service chain
management.

There are numerous issues in service operation management:

1. New service development

2. Managing service experiences
3. Front-office/Back-office
4. Analysing processes
5. Service quality
6. Yield management
7. Inventory management
8. Waiting time management

To summarize, business companies are continually involved to enhance

their performances in order to compete actively in the market. Service
industries manage and market their operations and services differently
from manufacturing products. It is established that providing excellent
and quality customer service is a crucial factor in an intrinsic capable
market environment between the product and service industries.
Service operations can be grouped into many industries, such as

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banking, hospitality. Most services industries which provide clients

what they need and are satisfied. This helps the company to enhance its
market share, and generate more profit. Service operations provide
certain intangible services that may not be easily recognisable.

Managing technology transfers:

TECHNOLOGY TRANSFER

Technology is a new variable in the equation of economic relations.

Traditional theory assumes that all nations have equal access to technology
and, therefore, that there is no need to transfer technology from one county to
another. Recent research findings have invalidated this assumption. In
addition, they point to technology differences as primary cause of
international inequalities in economic achievements. To reduce the
inequalities, technology capabilities of the backward nations must be
strengthened. The quickest way to do so is to transfer technology from the
developed to the developing nations.

Definition

Technology is any device or process used for productive purposes. In its

broadest sense, it is the sum of the ways in which a given group provides itself
with good and services, the group being a nation, an industry, or a single firm.

There is a fundamental characteristic of technology that demands clear

recognition. Q unites unlike commodities and capital, technology is not
depleted or its supply diminished when it is transferred or used. It is usable
but not consumable. Once created, technology is inexhaustible until it
becomes obsolete. Therefore; export of technology need not cause the source
country to reduce its use of the technology. Indirectly, a decline may result if
the recipient country creates an industry large to change the global supply and
demand equilibrium of the goods produced by the technology involved. For
most technology sought by the developing nations this is not the case.

Sources of Technology

Contrary to the classical assumption, technology is not a free good but a

valuable property, nor is it evenly distributed around the globe. The supply
schedules differ widely from country to country. To obtain new technology, a
nation has three alternatives:

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1.Produce the technology capability at home

2.Import it from abroad

3.Import goods containing the desired technology

For most LDCs, home production of technology is often uneconomic. Since

much of what they are seeking already exists in the industrially advanced
areas, they can fill their needs by importation. Normally, the importation can
be effected at savings over the domestic cost of research and development
(R&D). R&D expenditures devoted to projects duplicating existing know-how
are obviously wasteful. Thus, economic rationale requires that LDCs
concentrate their home production of new technology on any unusual
requirements that cannot be met from import sources.

The access to technology depends on its ownership. Nonproprietary

technology belongs to the public. It is there for the taking, but it is not free.
The taker must have the ability to gather it from libraries, public research
institutions, or wherever it may be found. To locate the sources and to sort out
what is usable and unsuitable from any given application may involve
considerable cost, which might be called the assembling and packaging of
technology. Consulting firms specialize in this type of service. They very
sources and consumers of technology but instead act as intermediaries
between the sources and consumers of technology.

Proprietary technology is privately owned. It consists, trademarks, and secret

processes. The most efficient and profitable technology, often also the newest,
belong in this category. Access to proprietary technology is at the owner’s
discretion. It may or may not be for sale. If the sale creates potential
competitors, the owners’ interest is served by not selling it unless the expected
loss from new competition is less than the price for which the technology can
be sold.

Much proprietary technology is not for sale. It can move only with
investments of owner firm. This is embodied technology, as distinguished
from disembodied technology, which can be transferred without the original
owner’s investments. All nonproprietary technology is disembodied.

At the macro and micro levels, nations people, and Organizations increasingly
depend on technology for prosperity and quality of life.

The competitive edge of an individual firm vastly depends on technology. One

of the means of acquiring technology is through its transfer.

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Technology transfer coves various activities, including the internal transfer of

technology from the R&D or engineering department to the manufacturing

department of a firm based in a country. It also includes the same transfer of
technology from a laboratory or operations of a MNCs in one country to its
laboratory or operations in another country. Finally, It includes the transfer of
technology from a research consortium supported by many firms to one of the
members. Simply told, technology transfer is a process that permits the flow
of technology from of technology from a source to a receiver .The source is the
owner or the holder of the knowledge and it can be individual, a company, or a
country. The source is the owner or the or holder of the knowledge and it can
be individual, a company .or a country. The receiver is the beneficiary of the
transfer technology. Technology is transferred through published material
(such as journals, books): purchase and sale of machinery, equipment and
intermediate goods, transfer of data and personal: and interpersonal
communication.

Technology transfer comprises six categories:

1.International Technology Transfer: In which the transfer is across

national boundaries. Generally, such transfers take place between developed
and developing countries.

2.Regional Technology Transfer:In which technology is transferred from

one another .

3.Cross-industry or Cross-sector Technology Transfer:In which

technology is transferred from one industrial sector to another .

4.Interfirm Technology Transfer:In which technology is transferred

from one company to another.

5.Intra-firm Technology Transfer:In which technology is transferred

within a firm ,from one location to another. Intrafirm transfers can also be
made from one department to another within the same facility.

6. Pirating or Reverse-Engineering: whereby access to technology is

obtained at the expense of the property rights of the owners of technology.

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Modes of Transfer

Since technology defies delineation as a discrete variable, the analysis of its

transfer is encumbered by such other factors as capital investments, economic
organization, labor resources, entrepreneurship, and even en sociocultural

systems. Lacking disaggregated data, different analysts have used different

composites as poxies for data on technology flows. Many economists treat
direct foreign investments and licensing agreements as synonymous with
international technology transfers. Others tabulate scientific and professional
conferences, technical assistance programs, exchanges of educators and
students, plus many other kinds of information flows. Obviously, all of these
have some technology content, but few are pure technology.

Importing Nonproprietary Technology

Non proprietary technology can be transferred from one country to another in

any number of ways. Technology in pure from can be imported if the
transferee possesses the capacities to collect and employ it. LDCs many rely on
indigenous enterprises or on foreign firms to do the importing. Since LDCs
often lack indigenous firms who can affect the transfer, they rely heavily on
foreign consultants.

Another way for an LDC to obtain non proprietary is by importing the

hardware required and then either implementing a training program for its
use or dispatching managerial personnel to study how to use the hardware.
Experience tends to favor home-based training programs, initially with
expatriate instructors from developed countries and later with indigenous
instructors, over the alternative of sending people from LDCs to learn abroad.

The advantage is two fold:

1.The home-based program ensures better adaptation of the technology to

local conditions.

2.Fallout from the program is minimized by reducing the risk of “brain drain,”
which has ravaged many foreign-based programs.

Importing technology intensive goods is the third method of obtaining new

technology.

Importing Proprietary Technology

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An LDC’s access to proprietary technology is far more complicated. To acquire

embodied technology it must attract direct investments by the desired
industry.

The direct cost of such acquisition is any special incentives that the
country is required to offer to interest the potential investor, who may have
more profitable investment alternatives elsewhere. If the incentives offered
exceed the investor’s opportunity cost of forgoing its other alternative, parties,
the LDC and the multinational corporation (MNC), benefit. The LDC has no
concrete way of assessing data and the MNC’s opportunity cost: it lack both
the necessary data and the expertise. This gives the MNC a strategic
bargaining advantage and wide latitude for its demands for incentives.

Proprietary technology that are readily for sale can be transferred by exporting
turnkey projects, licensing patents or trademarks, selling formulas or
blueprints, organizing training programs, Orr dispatching experts. The choice
depends again on the seller’s preference-which serves the MNC’s objectives
best. Owner willingness to sell proprietary technologies varies widely. Some
technologies, such as that of the latest IBM computers or coca-cola syrup, are
absolutely nonnegotiable. At the other extreme are the so-called sheleved
technologies, for which their owners are anxious to find any takers at all.

The shelved technologies are mainly by-products of corporate R & D activities.

For example, in the process of seeking improvements in aircraft and
spacecraft technologies, Boeing researchers have discovered numerous
patent-able techniques and compounds for which the company has no
anticipated use.

The Market Model

LDCs’ comparative technology deficiencies require access to technologies that

belong to private firms. The governments of developed nations can facilitate
the international transactional transfer process. But they cannot force the
transfer to take place without expropriating private property. LDCs’ requests
for treaty obligations or other official commitments by industrial national to
guarantee an expeditious and an expeditious and inexpensive transfer of
technology is, therefore, largely a misdirected rhetoric.

Right and Wrong Technology

Any manufacturing process can usually set up using alternative

configurations of equipment. In selecting the optimal equipment
configuration, we must look beyond the general goals of low cost and high

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productivity and consider each configuration’s demands for labor skills and
attitudes, supervision, industrial engineering for tools and manufacturing
techniques, materials and supplies, maintenance, product scheduling,
inventory controls, and quality control procedures. Each of these ingredients
is directly affected by the environment. The economic environment affects
costs and availability of workers; the political environment establishes what is
acceptable for a plant to make and how. Thus, it is imperative that a technical
strategy be derived in part from a realistic assessment of the total
environment in which it is to operate.

Nationalism

The technology supply of LDCs is powerfully influenced by the policies of

public authorities. Some groups in developing countries oppose technology
imports and insist on indigenous production of new technology. They argue
that since technology and growth are closely linked, those nations who are
behind in the production of technology are destined to perpetual
backwardness. This is false reasoning.

As high technology applications—automation, computerization, and robotics—

are replacing many traditional factory systems in industrial countries, much
old equipment is surpluses as economically obsolete, though physically intact.
Many LDCs’ needs for industrial systems can be met by utilizing this
technological slack. Indeed, a number of multinationals have already affected
transfers of entire factories to their affiliates in LDCs. Automobiles, trucks,
refrigerators, shoes, pharmaceuticals, and metal fabrication head the list, but
there are more and more others. Such they benefit the multinationals by
extending the productive life of their capital assets.

PARTIES IN THE TRANSFER PROCESS

International technology transfer has both horizontal and a vertical

dimension, each with its own elements. From the horizontal perspective, the
three basic elements in technology transfer are the home country, the host
country and the transaction The vertical dimension of technology transfer
refers to the issues specific to the nation state, or to the industries or firms
within the home and host countries.

In general, the various elements may be categorized as (i) home country,

(ii)host country ,and (iii)the transaction.

Home Country’s Reactions to Technology Transfers

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Home countries express apprehensions about the export of their

technology

.they have reasons to oppose the export of technology .They argue that the
established of production facilitates by MNCs in subsidiaries abroad decreases
their export potential .Additionally, they claim, because some of the MNCs
imports stem from their subsidiaries, the volume of imports of the home
country tends to increase. Given the decrease in exports and increase in
imports, the balance of trade tends to be adverse to be adverse to the home
country. Besides technology transfer tends to affect adversely comparative
advantages of the country .Labour unions in the home country too oppose
technology transfer on the ground that the jobs generated from the new
technology will benefit the country citizens.

Host Country’s Reactions to technology Transfers

More serious are the reactions of the host country to transfer. The subject of
technology transfers is highly sensitive, often evoking strong reservations
against it from the country citizens. The criticisms against technology transfer
are based on economic and social factory.

Economic Implications Economic implications include payment of fee,

royalty,

dividends, interest and salaries to technicians and tax concessions resulting in

loss to the national exchequer. All these are payable to the transferring
country and might prove very expensive to the host country. In addition to the
payments just stated, the technology supplier often succeeds in extracting
payments through various other techniques like over-pricing and buying
intermediates at high prices. There are malpractices too, for example, tie-up
purchase, and restriction on exports, and charging excessive prices.

Many times, the type of technology transferred by international business is

not appropriate to developing countries. The technology that is developed is
inevitably the one most suitable for industrial countries which are appropriate
to resources endowment of developed nations. Such technology are not in the
interest of developing countries.

Social Implications The social and cultural implications of technology transfer

are more serious than the economic significance. Along with the transfer of
technology, there is the transmission of culture from the exporting countries.
The Indians who work in firms using such imported technology get influenced
and accustomed to the skills, concepts, policies, practices, thoughts, and

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beliefs..Then there are social problems like pollution, urbanisation,

congestion, depleted natural resources, and similar other evils.

Transaction

This element focuses on the nitty-gritties of the transfer. The issues here relate
to the terms and conditions of technology transfer.

INTERNATIONAL TECHNOLOGY ISSUES

The more important International technology issues are ways of technology

acquisition, choice of technology, terms of technology transfer, and creating
local capability.

Barriers

Foreign Choice of
Technology Technology
Acquisition

International
Technology
issues

Creating Terms of
Local Technology
Capability Transfer

Globalisation

1.Foreign Technology Acquisition

One of the major issues in technology relates to the mode of acquisition.

Developing new technology may conjure up visions of scientists and product
developers working in R&D laboratories. In reality, new technology comes
from many different sources, including suppliers, manufactures, users, other
industries, universities, government, and MNCs . While every source needs to
be explored, each firm has specific sources for most of the new technologies.
For example, because of the limited size of most farming operations,
innovations in farming mainly come from manufacturers, suppliers, and

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government agencies. In many industries, however, the primary sources of

new technologies are the organizations that use the technology.

Broadly the acquisition routes are three: (i)internal, (ii)external, and

(iii)combination.

(i)Internal Technology Acquisition This is result of technology development

efforts that are initiated and controlled by the firm itself. Internal acquisition
requires the existence of a technology capability in the company .This
capability could vary from one expert who understands the technology
application well enough to manage a project conducted by an outside research
and development (R&D) group to full blown R&D department. Internal
technology acquisition options have the advantages that any innovation
becomes the exclusive property of the firm.

(ii)External Acquisition External technology acquisition is the process of

acquiring developed by others for use in the company .External technology
acquisition generally has the advantage of reduced cost and time implement
and lower and risks. However, technology available from outside sources was
generally developed for different applications.

(iii)Combined Sources Many of technology acquisition are combinations of

external and internet activities. Combined acquisition seek to limitations and
external sources, taking advantages of both the actions at the same time.

Making Decision

The technology manager must weigh the advantages and limitations of each
specific route of technology acquisition and then make a decision about its
choice.

Seizing Tacit Knowledge Taking advantage of knowledge available in- house is

least expensive and has no risks. It will not leave when the knowledgeable
person leaves the firm. Every firm will have employees who are knowledgeable
and it is up to the company to identify and make use of the know-how.

Internal R&D Technology acquisition via internal R&D consists of having a

research and development group within the firm. The group is responsible for
creating the technology that the firm uses. This source of technology
acquisition enables the firm to become stronger, has the advantage to
exclusivity, and may entail tax or other government incentives. Long time
required, high cost and risk of failure are the demerits of this internal route of
technology acquisition.

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Internal R&D with Networking Internal R&D networking has all the same
advantages and disadvantages discussed under internal R&D. the main
difference is the fact that the R&D staff make a fairly concerted effort to keep
abreast of the state of development of the technologies affecting their
products. They network with technology creators at conferences and trade
shows.

Reverse Engineering Reverse Engineering is the determining of the

technology embedded in a product through rigorous study of its attributes. It
entails the acquisition of a product that the firm believes would be an asset,
disassembling it, and subjecting its components to a series of tests and
engineering analysis to ascertain how it works and studying the engineering
design criteria used in the product’s creations.

Reverse Brain Drain This involves attracting expatriate entrepreneurs and

experts who have gained adequate experience abroad to set up or develop
enterprises in their countries of origin. Taiwan and China are known for this
type of technology transfer.

Covert Acquisition with Internal R&D It entails finding out the technology
developments being conducted by a competitor that are not open to the
public. Most businesses do this to some extent by questioning suppliers about
components being sold to the competitors or by socializing with the
competitor’s employees. The less scrupulous firms even become involved in
industrial espionage using cameras, binoculars, and break-and-enter
techniques to learn about the happening inside the competitor’s plant.

Covert Acquisition This without internal R&D, guarantees that the product
will be a copy (generally a poor one) of the competitor’s product. The firm can
introduce it at a lower price because there are no development costs to
recover. However, with the exception of the price, the product will have no
other competitive advantage.

Technology Transfer and Absorption This route is similar to internal R&D

with networking. The difference is that there is much more effort put into
searching for, learning about, and translating, no-cost technology to the firm’s
applications. Internal technical ability is necessary to understand the
technologies found and to develop them into solutions for the firm’s
application. Contract R&D Firms resort to contract R&D for more than one
reason. This is the ideal option for those that lack the necessary facilities and
expertise to conduct the required work but still want to maintain control over
the development and own the results exclusively. It is also a good choice for
those that need a specialized set of equipment or expertise for occasional short

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term projects. This avoids the investment in these facilities and the on-going
commitment to staff that would be underutilized. It allows short-term access
to world class personnel and facilities for specialized projects that would
otherwise be completely beyond the company’s means. The advantages of this
route are no investment in facilities, and low investment in staff. The
disadvantages are: no hands –on-knowledge in house and difficulty in keeping
information confidential.

R&D Strategic Partnership R&D strategic partnerships are almost the same as
contracting R&D. They generally consist of a group of companies with a
common need that collectively contract a research institution to conduct the
work for them. This allows the firms to share the risk and costs. It also creates
a situation where they can learn from each other as well as from the experts
conducting the research.

The advantages of this route of technology acquisition are : shared risks,

reduced cost, and possibility of learning from others. Need to share knowledge
with others and the necessity of adopting research results to own application
are the drawbacks of this route.

Licensing Another route of technology acquisition is licensing. Its major

benefit is a significant reduction in time to market relative to other forms of
technology acquisition that require development. It also enables the acquiring
firm to share the financials risks of acquiring the technology with the provider
because the bulk of the payments are generally in the form of royalty-a
percentage of sales of product made using the new technology.

The circumstances under which licensing may be a preferred strategy are the
following :

Where host countries restrict imports and/ or direct investment. Where a

specific foreign market is small.

Where prospects of technology feedback are high.

Where licensing is a way of testing and developing a market that can be later
exploited by direct investment.

Where the pace of technology change is sufficiently. Rapid that the seller can
remain technologically superior.

Where opportunities exist for licensing auxiliary processes without having a

licenses of basic product technologies.

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Where small companies have limited resources and expertise for direct foreign
expansion.

Among the advantages of licensing technologies are costs and risks are less
than internal R&D and time required to commercialise is less. The
disadvantages are exclusivity may be lost and internal capability may not be
developed.

Purchasing A common and effective external technology acquisition method is

purchasing. This is normally done in the form of buying a piece of production
machinery with embedded technology. This is the quickest form of technology
transfer because the technology is already packaged and is ready for use. It is
low risk because the equipment has been proven to be technically competent
and there are already users to evidence the machine’s capability.

Joint Venture Entering into a joint venture agreement with a technology

provider is another form of external acquisition that can be very effective.
Typically, this is a partnership between two firms, one with a technology and
another with market access. It can take the form of the creation of a new firm
with each of the partners owning shares in the new firm in proportion to the
value of their contribution to the new firm. In this case production facilities
are installed in the new firm with the partners bringing technology and
market know

– how along with capital investment into the new firm. The distribution and
marketing of the product may use the system that the firm with market access
has in place, or that firm’s know-how may be used to create a dedicated
system for the new firm. The advantages are the technology can be
implemented immediately, as it is already proven. Risk involved is less and
there are possibilities of learning from the provider of technology. The
disadvantages are market risks are high and there are no chances of
developing technical strengths. Acquisition of a Technology Rich Firm The
final form of external technology acquisition is the acquisition of a firm that
has the know how which the acquiring firm desires. This can happen when
one firm has a technological innovation that is impacting another company’s
innovation the second company negotiates to purchase the entire company.
This can result from a defensive action or it can be deliberate strategy to
acquire technology.

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The outright purchase has advantages and disadvantages. On the positive side
are: short time to market, low risk, and probability of buying good image. The
problems are: possibility of acquiring negative baggage and merger problems.

Choice of Technology

The second major issue relating to technology transfer is its choice. It is

argued that it is the industrialized countries that develop technology, and the
know-how thus developed will be mainly useful to them. This means that the
rich countries become monopolists in developing, using and managing
technology. This also means that the technologies tend to be designed for the
production of high quality sophisticated goods on a large scale, using as much
as possible capital and higher-level professional skills in place of sheer labour,
and replacing natural resources by synthetics.

Terms and Conditions of Technology Transfer

The issue relating to terms and conditions of technology transfer and the
question of the suitability of the transferred technology are related to each
other. Some of the restrictive conditions, for example, make technology less
suitable than it would otherwise be. This clearly applies to such restrictions as
prohibitions on the adaptation of the imported technology, preventing the use
of imported technology as a basis for local R&D development, and clauses
stipulating that the results of local technological research and development
based on the imported technology must be transferred to the owner or
supplier of the technology.

Creating Local Capability

Creating local technological capability is essential to absorb imported

technology. This stems from several reasons. Technology, it may be stated, is
not simply a matter of blueprints, which can be transferred without any local
effort, to any part of the world, Each time some technology is installed, some

local adoption to required, which demands local technological capability. The

greater the capacity, the more efficient the resulting operations. The need for
local adaptation arises from the fact that the environment in which any
technology operates is unique in any situation when it is installed and may
even differ radically from the environment for which the know-how was
developed in the first place. This is especially true when technology is
transferred from MNCs to developing countries.

Globalisation :

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The world economy is passing through structural changes. These changes are
driven by globalization business as well as by the revolution in information,
communication, and transportation technology, Non now have powerful
technology in their hands, fundamentally transforming the way in which
business conducted around the globe.

The World Trade Organization (WTO) is contributing to globalization by

removing trade barriers between countries and evolving mechanisms to
manage technology better. The main provisions of we WTO that influence
technology transfer are included under the following sections:

Trade Related Aspects of Intellectual Property Rights (TRIPs)

Trade Related Investment Measures (TRIMs)
Subsidies and Countervailing Measures (SCMs)
The Information Technology Agreements

Barriers to Technology Transfers

The final international technology issue relates to barriers. The problems

encountered in transfer of technology are :

A limited general understanding of the concept of technology, and the lack

of a consistent framework for its study.

Lack of systematic planning for technology transfer in developing countries

or misunderstanding of its underlying philosophy.

Lack of bilateral scientific/ technology advantages in the process of

technology transfer (mutual benefits).

Lack of systematic and integrated engineering and socio-economic

approach to the technology transfer process.

Lack of a relevant quantitative framework/approach to the analysis and

evaluation of technology transfer to developing countries.

3.3 International Financial Management –

Meaning of International Financial Management:

It means financial management in an international business environment. It

is different because of the different currency of different countries, dissimilar
political situations, imperfect markets, diversified opportunity sets.

International Financial Management came into being when the countries of

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the world started opening their doors for each other. This phenomenon is well
known by the name of “liberalization”. Due to the open environment and
freedom to conduct business in any corner of the world, entrepreneurs started
looking for opportunities even outside their country boundaries. The spark of
liberalization was further aired by swift progression in telecommunications
and transportation technologies that too with increased accessibility and daily
dropping prices. Apart from everything else, we cannot forget the contribution
of financial innovations such as currency derivatives; cross-border stock
listings, multi-currency bonds and international mutual funds.

Definition of International Financial Management:

The term International Finance is defined as the economic interaction among
different nations involving the monetary payments and the exchange of
currency. The basis of international finance is foreign exchange, including
foreign exchange markets and exchange rates.

3.3.1 Nature and Scope of IFM:

International financial management may be defined as management of
financial operations of different international activities of an organization.

A. International Institutions:There are various global bodies regulating

different aspects of international finance.
INTERNATIONAL FINANCE CORPORATION

Supporting sustainable investments in the private sector of

developing countries.
• Source of multilateral loans and equity financing for projects undertaken by
the private sector in developing countries.
• Technical assistance to businesses and governments ofdeveloping countries.

INTERNATIONAL MONETARY FUND

 Monitors the balance of payments of its member countries.
 Lender of last resort for countries facing a financial crisis.

WORLD BANK
• It funds the development of projects, mainly in developing countries
WORLD TRADE ORGANIZATION
• Resolves multilateral and bilateral trade disputes
• Negotiation of different trade agreements

B. Balance of Payments:
Balance of payments (BOP) accounts are an accounting record of all monetary
transactions betweena country and the rest of the world.

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C. International Financial Markets: International financial market is

a broad term describing any global marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and
derivatives.

D. FOREX Markets:The foreign exchange market (Forex, FX, or currency

market) is a global, worldwide decentralized financial market for trading
currencies.
FEATURES OF FOREX MARKETS

Its huge trading volume, leading to high liquidity;

Its geographical dispersion;
Its continuous operation: 24 hours a day
The variety of factors that affect exchange rates;
The low margins of relative profit compared with other markets of fixed
income; and
The use of leverage to enhance profit margins with respect to account size

E. International financial services:International Financial services

can be defined as the products and services offered by institutions for the
facilitation of various financial transactions and other related activities.

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A. ASSET/FUND BASED SERVICES:

Here funds are arranged and interest is charged.

 Equipment leasing/Lease financing

 Hire purchase and consumer credit
 Bill discounting
 Venture capital
 Insurance services
 Factoring
 Forfaiting
 Mutual fund
 Dealing in foreign exchange

B. FEE BASED FINANCIAL SERVICES:

Advisory services for which bank charges fee and & renders service:
 Merchant banking
 Project advisory
 Custodian services
 M&A services
 Credit rating services
 Capital restructuring services
 Hedging of risks
 Loan syndication
 Securitization of debt

F. International Taxation:

 International taxation refers to tax levied on the cross –border

transaction.
 The transaction may take place between two or more persons
or entity in two or more countries or tax jurisdiction.
 Such a transaction may involve a person in one country with property
and income
flows in another.

TYPES OF INTERNATIONAL TAXATION

•Residence based taxation:

•Residents of the country are taxed on their worldwide (local and foreign)
income.
•Source Based Taxation:
•Only local income from a source inside the country is taxed. Usually non-
residents are taxed only on their local income.

G. International Accounting:INTERNATIONAL ACCOUNTING is the

international aspects of accounting, including such matters as accounting
principles and reporting practices in different countries and their
classification; patterns of accounting development; international and

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regional harmonization, foreign currency translation; foreign exchange

risk; international comparisons of consolidation accounting and inflation
accounting; accounting in developing countries; accounting in communist
countries; performance evaluation of foreign subsidiaries.

Domestic Financial Management International Financial management.

1. Domestic finance is not exposed to 1. International finance is exposed to

foreign exchange risk and political foreign exchange risk and political
risks of trading partner’s countries. risks of trading partner’s countries as
they tend to cross border for
transactions.
2. It is not subject to market 2. It is subject to market
imperfections. imperfections. The reason is MNC’s
have to operate in different
economies such as capitalist,socialist
and mixed economy.
3.The portfolios available for 3.The portfolios available for
investment are limited. investments as large across the
nations in the world.
4.Access to global market not 4.Access to global market is possible
possible. and there by expanding the business
opportunities.
5.The scope is limited. 5.The scope is wider.

3.3.2 Scope –

current assets management:

The term current assets represents all the assets of a company that are
expected to be conveniently sold, consumed, utilized or exhausted through the
standard business operations which can lead to their conversion to a cash
value over the next one year. Since current assets is a standard item appearing
in the balance sheet, the time horizon represents one year from the date
shown in the heading of the company's balance sheet. Current assets include
cash, cash equivalents, accounts receivable, stock inventory, marketable
securities, pre-paid liabilities and other liquid assets. In a few jurisdictions,
the term is also known as current accounts.

The term contrasts with long-term assets, which represent the assets that
cannot be feasibly turned into cash in the space of a year. They generally
include land, facilities, equipment, copyrights, and other illiquid investments.

Key Components of Current Assets

While cash, cash equivalents and liquid investments in marketable securities
(like interest bearing short term Treasury bills or bonds) remain the obvious
inclusion in current assets, the following are also included in current assets:

Accounts receivable, which represents the money due to a company for goods
or services delivered or used but not yet paid for by customers, are considered

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current assets as long as they can be expected to be paid within a year. If a

business is making sales by offering longer terms of credit to its customers, a
portion of its accounts receivables may not qualify for inclusion in current
assets. It is also possible that some accounts may never be paid in full. This
consideration is reflected in an allowance for doubtful accounts, which is
subtracted from accounts receivable. If an account is never collected, it is
written down as a bad debt expense, and such entries are not considered for
current assets.

Inventory, which represents raw materials, components and finished

products, is included as current assets, but the consideration for this item may
need some careful thought. Different accounting methods can be used to
inflate inventory, and at times it may not be as liquid as other current assets
depending on the product and the industry sector. For example, there is little
or no guarantee that a dozen units of a high-cost heavy earth moving
equipment may be sold for sure over the next year, but there is a relatively
higher chance of successful sale of a thousand umbrellas in the coming rainy
season. Inventory may not be as liquid as accounts receivable, and it blocks
the working capital. If the demand shifts unexpectedly, which is more
common in some industries than others, inventory can become backlogged.

Prepaid expenses, which represent advance payments made by a company for

goods and services to be received in the future, are considered current assets.
Though they cannot be converted into cash, they are the payments which are
already taken care of. Such components free up the capital for other uses.
Prepaid expenses could include payments to insurance companies or
contractors.

On the balance sheet, current assets will normally be displayed in order of

liquidity, that is, the items which have higher chance and convenience of
getting converted into cash will be ranked higher. The typical order in which
the constituents of current assets may appear is cash (including currency,
checking accounts, and petty cash), short term investments (like liquid
marketable securities), accounts receivable, inventory, supplies and prepaid
expenses.

Current Assets Formula :

The current assets formula is a simple summation of all the assets that can be
converted to cash within one year:

Current Assets = Cash + Cash Equivalents + Inventory + Accounts Receivables

+ Marketable Securities + Prepaid Expenses + Other Liquid Assets

Managing foreign exchange risks:

Foreign exchange is the exchange of one currency for another or

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the conversion of one currency into another currency. Foreign

exchange also refers to the global market where currencies are
traded virtually around the clock.

What is the Foreign Exchange Market

The foreign exchange market is the market in which participants
are able to buy, sell, exchange and speculate on currencies. Foreign
exchange markets are made up of banks, commercial companies,
central banks, investment management firms, hedge funds, and
retail forex brokers and investors.
The foreign exchange market – also called forex, FX, or currency
market – trades currencies. It is considered to be the largest
financial market in the world. Aside from providing a floor for the
buying, selling, exchanging and speculation of currencies, the forex
market also enables currency conversion for international trade
and investments.

The forex market has unique characteristics and properties that

make it an attractive market for investors who want to optimize
their profits.

The structure of the foreign exchange market constitutes central

banks, commercial banks, brokers, exporters and importers,
immigrants, investors, tourists. These are the main players of the
foreign market, their position and place are shown in the figure
below.

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At the bottom of a pyramid are the actual buyers and sellers of the foreign
currencies- exporters, importers, tourist, investors, and immigrants. They are
actual users of the currencies and approach commercial banks to buy it.

The commercial banks are the second most important organ of the foreign
exchange market. The banks dealing in foreign exchange play a role of
“market makers”, in the sense that they quote on a daily basis the foreign
exchange rates for buying and selling of the foreign currencies. Also, they
function as clearing houses, thereby helping in wiping out the difference
between the demand for and the supply of currencies. These banks buy the
currencies from the brokers and sell it to the buyers.

The third layer of a pyramid constitutes the foreign exchange brokers. These
brokers function as a link between the central bank and the commercial banks
and also between the actual buyers and commercial banks. They are the major
source of market information. These are the persons who do not themselves
buy the foreign currency, but rather strike a deal between the buyer and the
seller on a commission basis.

The central bank of any country is the apex body in the organization of the
exchange market. They work as the lender of the last resort and the custodian
of foreign exchange of the country. The central bank has the power to regulate
and control the foreign exchange market so as to assure that it works in the
orderly fashion. One of the major functions of the central bank is to prevent
the aggressive fluctuations in the foreign exchange market, if necessary, by
direct intervention. Intervention in the form of selling the currency when it is
overvalued and buying it when it tends to be undervalued.

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Transfer Function: The basic and the most visible function of

foreign exchange market is the transfer of funds (foreign currency)
from one country to another for the settlement of payments. It
basically includes the conversion of one currency to another,
wherein the role of FOREX is to transfer the purchasing power
from one country to another.
For example, If the exporter of India import goods from the USA
and the payment is to be made in dollars, then the conversion of
the rupee to the dollar will be facilitated by FOREX. The transfer
function is performed through a use of credit instruments, such as
bank drafts, bills of foreign exchange, and telephone transfers.

Credit Function: FOREX provides a short-term credit to the

importers so as to facilitate the smooth flow of goods and services
from country to country. An importer can use credit to finance the
foreign purchases. Such as an Indian company wants to purchase
the machinery from the USA, can pay for the purchase by issuing a
bill of exchange in the foreign exchange market, essentially with a
three-month maturity.
Hedging Function: The third function of a foreign exchange
market is to hedge foreign exchange risks. The parties to the
foreign exchange are often afraid of the fluctuations in the
exchange rates, i.e., the price of one currency in terms of another.
The change in the exchange rate may result in a gain or loss to the
party concerned.
Thus, due to this reason the FOREX provides the services for
hedging the anticipated or actual claims/liabilities in exchange for
the forward contracts. A forward contract is usually a three month
contract to buy or sell the foreign exchange for another currency at
a fixed date in the future at a price agreed upon today. Thus, no
money is exchanged at the time of the contract.

There are several dealers in the foreign exchange markets, the

most important amongst them are the banks. The banks have their
branches in different countries through which the foreign exchange
is facilitated, such service of a bank are called as Exchange Banks.

Types of Foreign Exchange Market

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Spot Market: A spot market is the immediate delivery market, representing

that segment of the foreign exchange market wherein the transactions (sale
and purchase) of currency are settled within two days of the deal. That is,
when the seller and buyer close their deal for currency within two days of the
deal, is called as Spot Transaction.
Thus, a spot market constitutes the spot sale and purchase of foreign
exchange. The rate at which the transaction is settled is called a Spot
Exchange Rate. It is the prevailing exchange rate in the market.

Forward Market: The forward exchange market refers to the transactions –

sale and purchase of foreign exchange at some specified date in the future,
usually after 90 days of the deal. That is, when the buyer and seller enter into
a contract for the sale and purchase of foreign currency after 90 days of the
deal at a fixed exchange rate agreed upon now, is called a Forward
Transaction.
Thus, the forward market constitutes the forward transactions in foreign
exchange. The exchange rate at which the buyers or sellers settle the
transactions in the forward market is called a Forward Exchange Rate.

Thus, the spot and forward markets are the important kinds of foreign
exchange market that often helps in stabilizing the foreign exchange rate.

Meaning of foreign exchange risks:

Foreign exchange risk describes the risk that an investment’s value
may change due to changes in the value of two different currencies.
It is also known as currency risk, FX risk and exchange-rate risk.

Foreign exchange risk sometimes also refers to risk an investor

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faces when they need to close out a long or short position in a

foreign currency and do so at a loss due to fluctuations in exchange
rates.

Some types of exposure associated with foreign exchange risk

include economic exposure, translation exposure and contingent
exposure.

Economic exposure, or forecast risk, refers to when a company’s

market value is impacted by currency volatility. Translation
exposure refers to when foreign exchange rates change, affecting
the figures that a multinational company reports to its
shareholders. Contingent exposure refers to the risk that firms face
when they bid on projects in foreign currencies.

Types of Foreign Exchange Transactions

Definition: The Foreign Exchange Transactions refers to the sale and
purchase of foreign currencies. Simply, the foreign exchange transaction is an
agreement of exchange of currencies of one country for another at an agreed
exchange rate on a definite date.

Types of Foreign Exchange Transactions

1. Spot Transaction: The spot transaction is when the buyer and seller of

different currencies settle their payments within the two days of the deal. It is

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the fastest way to exchange the currencies. Here, the currencies are exchanged
over a two-day period, which means no contract is signed between the
countries. The exchange rate at which the currencies are exchanged is called
the Spot Exchange Rate. This rate is often the prevailing exchange rate.
The market in which the spot sale and purchase of currencies is facilitated is
called as a Spot Market.
2. Forward Transaction: A forward transaction is a future transaction where
the buyer and seller enter into an agreement of sale and purchase of
currency after 90 days of the deal at a fixed exchange rate on a definite
date in the future. The rate at which the currency is exchanged is called
a Forward Exchange Rate. The market in which the deals for the sale and
purchase of currency at some future date is made is called a Forward
Market.
3. Future Transaction: The future transactions are also the forward
transactions and deals with the contracts in the same manner as that of
normal forward transactions. But however, the transactions made in a future
contract differs from the transaction made in the forward contract on the
following grounds:

 The forward contracts can be customized on the client’s request, while

the future contracts are standardized such as the features, date, and the
size of the contracts is standardized.
 The future contracts can only be traded on the organized
exchanges, while the forward contracts can be traded anywhere
depending on the client’s convenience.
 No margin is required in case of the forward contracts, while
the margins are required of all the participants and an initial margin is
kept as collateral so as to establish the future position.

1. Swap Transactions: The Swap Transactions involve a simultaneous

borrowing and lending of two different currencies between two investors.
Here one investor borrows the currency and lends another currency to the
second investor. The obligation to repay the currencies is used as collateral,
and the amount is repaid at a forward rate. The swap contracts allow the
investors to utilize the funds in the currency held by him/her to pay off the
obligations denominated in a different currency without suffering a foreign
exchange risk.
2. Option Transactions: The foreign exchange option gives an investor
the right, but not the obligation to exchange the currency in one
denomination to another at an agreed exchange rate on a pre-defined date. An
option to buy the currency is called as a Call Option, while the option to sell
the currency is called as a Put Option.

Thus, the Foreign exchange transaction involves the conversion of a currency

of one country into the currency of another country for the settlement of
payments.

International taxation:

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International Tax is best regarded as the body of legal provisions of different

countries that covers the tax aspects of cross – border transactions. It is
concerned with Direct Taxes and Indirect Taxes – Kevin Holmes
INTRODUCTION:
International taxation in a simple language means the study of Taxation
beyond the National Level. Though we all are very much aware about our
Indian Taxation Laws but as time is demanding something more so, there is a
need to study the taxation at another level.
Here, my main motive of writing this article is to make CA students feel
comfortable with the international taxation laws as it is not a new thing but an
old thing which is going to be present in a new shape in the form of syllabus. I
am using a word old thing because India is not new in the scope of
International Taxation as Already, our country is having taxpayers in the form
of big MNC’s, big business tycoons who are regularly doing international
transactions and the main thing is that some of them are situated outside
India but due to Indian taxability criteria, their income is assessed by Indian
taxation department. The CA students who are pursuing their articleship from
the big companies may already get aware of this concept but still that students
covers only approx. 10% of total CA students who are in their articleship
period. So, there is a strong need to convey the importance, means & methods,
policies of international taxation to them.
 Basics:
International taxation is the study or determination of tax on a person or
business subject to the tax laws of different countries or
the international aspects of an individual country’s tax laws as the case may
be.
For detailed study of this topic we have to understand the tax provisions
already prevailing in India:
1) Indian income tax provisions related to Non Residents:
Residential status of a person describes the taxability of that person in a
county but in the case of Non-resident only that Income which is received or
deemed to have been received in India by or on his behalf and income that
accrues or arises or is deemed to accrue or arising in India is Taxable in India.
Section 9 of the Income Tax Act, 1961 also envisages certain deeming
provisions.
As per the deeming provisions following Incomes will be deemed to accrue or
arise in India, even though they may actually accrue or arise out of India :-

1. Income from Business Connection in India.

2. Income from any Property, Asset or Source of Income in India.
3. Capital Gains from transfer of any Capital Asset situated in India.
4. Income from Salary earned in India – i.e. if Service is rendered in
India. Where a rest period which is preceded or succeeded by services
rendered in India forms part of the service contract of employment, the
same shall be considered to be income earned in India.

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5. Income from salary (other than perquisite &/or allowance ) paid by

Government of India to an Indian Citizen of India even though the
service is rendered out of India.
6. Dividend paid by Indian Company outside India.
7. Income by way of Interest in some situations.
8. Income by way of Royalty in some situations.
9. Income by way of Fees for Technical Services in some situations.

2) NRI Tax Exemption

NRI’s are taxed as per income tax slabs applicable to resident Indians below
the age of 60 years irrespective of the age criteria of non resident indian.
Simply means that if the NRI is above the age of 60 years still he will be taxed
a per tax rate applicable to resident indian who is below the age of 60 years.
But, in the following two cases NRIs need not to file tax return:
 If taxable income consists of only investment income or long term capital
gains.
 When the tax has already been deducted at source, on such income.
Besides the above benefits, NRI’s are also granted with some tax free incomes
which are notified by Income Tax department as follows:
 Interest earned on Saving Certificates etc.
 Interest earned on Non Resident (Non Repatriable) [NRNR] Deposit.
** Note – w.e.f. 1st April,2002 banks cannot accept fresh nor renew NRNR
deposits. Upon maturity Interest on NRNR deposits and principal amount can
be transferred to Non Resident (External) [ NRE] account at the option of
account holder.
 Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit
which technically is exempt under Section 10(4)(ii) too being covered by the
definition of an NRE deposit under the FERA 1973 in case of a ” Non Resident
” or “Resident but Not Ordinarily Resident” as per the provisions of Income
Tax Act, 1961.
 Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit
continued until maturity by a Non Resident Indian (NRI) who has returned to
India for taking up employment , business, vocation i.e. for permanent
settlement provided he is a ” Non Resident ” or “Resident but Not Ordinarily
Resident” as per the provisions of Income Tax Act, 1961. Overseas income of
NRIs.
 Dividend income from Indian Public/Private Company, Indian Mutual Fund
and from Unit Trust of India is exempt from tax in India at par with residents.
 Long-term capital gains arising on transfer of equity shares traded on
recognized Stock Exchange and units of equity schemes of Mutual Fund is
exempt from tax at par with residents, provided Security transaction tax is
paid.
 Remuneration or fee received by non-resident / non-citizen / citizen but not
ordinarily resident ‘consultants’, for rending technical consultancy in India
under approved programme including remuneration of their employees, and
income of their family members which accrue or arise outside India.
 Interest on notified bonds.

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                    TAX DEDUCT AT SOURCE (TDS) provisions related to NRI’s:

3) TDS provisions
Finance Act, 2008 inserted a new sub section (6) to section 195 effective from
April 1, 2008, which requires the person responsible for making payment to a
non-resident to furnish information relating to such payments in forms to be
prescribed.
The Central Board of Direct Taxes (“CBDT”) has now, by notification No
30/2009 dated March 25, 2009, prescribed a new rule 37BB in the
Income Tax Rules, 1962 (“the rules”) prescribing Form 15CA and Form
15CB to be filed in relation to remittances to non-residents under section
195(6) of the Income Tax Act, 1961 (“the Act”). This new rule is effective from
July 1, 2009 and shall apply to all remittances being made after July 1, 2009.
The process that will have to be followed, before any remittance can be made,
is as under:
Step 1 : Obtain a certificate from a Chartered Accountant in Form No 15CB
 Certificate in Form 15CB is not required when remittance does not exceed Rs
50,000 (single transaction) and Rs 2,50,000 (in total in a financial year).
Step 2 : Furnish the information in Form No15CA
Step 3 : Electronically upload Form 15CA on the designated website
Step 4 : Take Print out of Form 15CA and file a signed copy
Step 5 : Remit money to the Non Resident
There is a very common doubt which generally strike the minds of students
that is Double Taxation of money. Generally people thinks that if a NRI is
paying a tax in the country in which he is a non resident then the country of
his residence will also demands tax from that person for that income. But if
this happens this will leads to double taxation. The thinking of students or
other people is absolutely right as the law interprets the same but Law is
always a step ahead from our minds. Law already found a way so as to avoid
double taxation of income in case of NRI’s and that amazing thing
is DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA)
4) What is DTAA?                   
 DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) is an
agreement signed between two countries/nations for resolving the issues of
taxability of income and increased transparency to avoid tax evasion.
5) Why DTAA?
Every country has its own taxation structure according to which they
determines the taxability of people residing there and also taxability of the
people who does not belongs to their country but with some means they are
related to their nation in their form of assessee or deemed assessee.

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So, for recoverability of tax from the income generated in other nations by
NRI’s DTAA was formed and secondly, to ensure that this taxability of income
does not lead to double taxation of Same income in both the countries.
6) Objectives of DTAA:
 Tax Credit / Relief
 Avoid Double Taxation
 Prevent Tax Discrimination
 Certainty of Tax Treatment to Investors
 Exchange of Information
 Ease in Recovery of Tax Dues
 Promote Investment & Mutual Relation
 Prevent Fiscal Evasion
Presently, India has the DTAA with more than 85 countries.
This states that if a NRI is a resident in any of those 85 countries and he/she is
paying taxes on income earned then he will be eligible for a tax benefit in
either of the following two ways:
 Exemption method: under this method, any one country will tax the income of
NRI. Means if the income is taxed in India then the same income will not be
taxed in his own country.
 Credit method: under this method, both the countries will tax the income of
that person but the country where he is a resident will allow him deduction or
give credit to the foreign tax.
                                             NRI’s Taxability
7) Computation Of Income Of NRI’s (Section 115D):
Section 115D deals with the Special provision for computation of total income
of non- residents, this section states that:
(1) No deduction in respect of any expenditure or allowance shall be allowed
under any provision of this Act in computing the investment income of a non-
resident Indian.
(2) Where in the case of an assessee, being a non- resident Indian,-
(a) the gross total income consists only of investment income or income by
way of long- term capital gains or both, no deduction shall be allowed to the
assessee under Chapter VIA and nothing contained in the provisions of the
second proviso to section 48 shall apply to income chargeable under the head
“Capital gains”
(b) the gross total income includes any income referred to in clause (a), the
gross total income shall be reduced by the amount of such income and the
deductions under Chapter VIA shall be allowed as if the gross total income as
so reduced were the gross total income of the assessee.
8) Tax on investment income and long-term capital gains (Section
115E)
Where the total income of an assessee, being a non-resident Indian, includes—

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(a) any income from investment or income from long-term capital gains of an
asset other than a specified asset;
(b) income by way of long-term capital gains,
The tax payable by him shall be the aggregate of—
 the amount of income-tax calculated on the income in respect of investment
income referred to in clause (a), if any, included in the total income, at the rate
of 20%;
 the amount of income-tax calculated on the income by way of long-term
capital gains referred to in clause (b), if any, included in the total income, at
the rate of 10%; and
 the amount of income-tax with which he would have been chargeable had his
total income been reduced by the amount of income referred to in clauses (a)
and (b).
9) Capital gains on transfer of foreign exchange assets not to be
charged in certain cases (section 115F):
Where, in the case of an assessee being a non-resident Indian, any long-term
capital gains arise from the transfer of a foreign exchange asset and the
assessee has, within a period of six months after the date of such transfer,
invested the whole or any part of the net consideration in any specified
asset, or in any savings certificates referred to in clause (4B) of section
10, the capital gain shall be dealt with in accordance with the following
provisions of this section, that is to say,—
(a) If the cost of the new asset is not less than the net consideration in respect
of the original asset, the whole of such capital gain shall not be charged under
section 45;
(b) If the cost of the new asset is less than the net consideration in respect of
the original asset, so much of the capital gain as bears to the whole of the
capital gain the same proportion as the cost of acquisition of the new asset
bears to the net consideration shall not be charged under section 45.
Foreign Exchange Asset:
Section 115C defined “foreign exchange asset” to be any specified asset, which
was acquired by the assessee using convertible foreign exchange and the said
specified asset as per sub-section (f) of the same Section included shares with
an Indian company.
Specified assets are:
 Shares of an Indian company
 Debentures or deposits with an Indian company, not being a private company
 Any security of the Central Government.
 Other notified assets (no such asset has yet been notified.)
10) Benefit available in certain cases even after the assessee
becomes resident (Section 115H):
Where a person, who is a non-resident Indian in any previous year, becomes
assessable as resident in India in respect of the total income of any subsequent
year, he may furnish to the Assessing Officer a declaration in writing along
with his return of income under section 139 for the assessment year for which

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he is so assessable. Some conditions are required to be fulfilled for availing

this benefit.

International financing decision:

Definition: The Financing Decision is yet another crucial decision made

by the financial manager relating to the financing-mix of an organization. It is
concerned with the borrowing and allocation of funds required for the
investment decisions.

The financing decision involves two sources from where the funds can be
raised: using a company’s own money, such as share capital, retained earnings
or borrowing funds from the outside in the form debenture, loan, bond, etc.
The objective of financial decision is to maintain an optimum capital
structure, i.e. a proper mix of debt and equity, to ensure the trade-off
between the risk and return to the shareholders.

The Debt-Equity Ratio helps in determining the effectiveness of the

financing decision made by the company. While taking the financial decisions,
the finance manager has to take the following points into consideration:

 The Risk involved in raising the funds. The risk is higher in the case of

debt as compared to the equity.
 The Cost involved in raising the funds. The manager chose the source with
minimum cost.
 The Level of Control, the shareholders, want in the organization also
determines the composition of capital structure. They usually prefer the
borrowed funds since it does not dilute the ownership.
 The Cash Flow from the operations of the business also determines the
source from where the funds shall be raised. High cash flow enables to
borrow debt as interest can be easily paid.
 The Floatation Cost such as broker’s commission, underwriters fee,
involved in raising the securities also determines the source of fund. Thus,
securities with minimum cost must be chosen.
Thus, a company should make a judicious decision regarding from where,
when, how the funds shall be raised, since, more use of equity will result in the
dilution of ownership and whereas, higher debt results in higher risk, as fixed
cost in the form of interest is to be paid on the borrowed funds.

International financial markets:

The following international financial markets:

¤ foreign exchange market:The foreign exchange market allows
currencies to be exchanged in order to facilitate international trade or
financial transactions.
• The system for establishing exchange rates has evolved over time.
¤ From 1876 to 1913, each currency was convertible into gold at a specified
rate, asThis was followed by a period of instability, as World War I began and
the Great Depression followed.

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¤ The 1944 Bretton Woods Agreement called for fixed currency exchange
rates.
¤ By 1971, the U.S. dollar appeared to be overvalued. The Smithsonian
Agreement devalued the U.S. dollar and widened the boundaries for exchange
rate fluctuations from ±1% to ±2%. dictated by the gold standard.

Even then, governments still had difficulties maintaining exchange rates

within the stated boundaries. In 1973, the official boundaries for the more
widely traded currencies were eliminated and the floating exchange rate
system came into effect.

¤ Eurocurrency market:U.S. dollar deposits placed in banks in Europe and

other continents are called Eurodollars.
• In the 1960s and 70s, the Eurodollar market, or what is now referred to as
the Eurocurrency market, grew to accommodate increasing international
business and to bypass stricter U.S. regulations on banks in the U.S.
• The Eurocurrency market is made up of several large banks called
Eurobanks that accept deposits and provide loans in various currencies.
• For example, the Eurocurrency market has historically recycled the oil
revenues (petrodollars) from oil-exporting (OPEC) countries to other
countries.
• Although the Eurocurrency market focuses on large-volume transactions,
there are times when no single bank is willing to lend the needed amount.
• A syndicate of Eurobanks may then be composed to underwrite the loans.
Frontend management and commitment fees are usually charged for such
syndicated Eurocurrency loans.

Eurocurrency Market $
• The recent standardization of regulations around the world has promoted
the globalization of the banking industry. • In particular, the Single European
Act has opened up the European banking industry. • The 1988 Basel Accord
signed by G-10 central banks outlined common capital standards, such as the
structure of risk weights, for their banking industries.

¤ Eurocredit market:Eurocredit Market • Loans of one year or longer are

extended by Eurobanks to MNCs or government agencies in the Eurocredit
market. These loans are known as Eurocredit loans.
• Floating rates are commonly used, since the banks’ asset and liability
maturities may not match - Eurobanks accept shortterm deposits but
sometimes provide longer term loans.

¤ Eurobond market:Eurobond Market There are two types of international

bonds. Bonds denominated in the currency of the country where they are
placed but issued by borrowers foreign to the country are called foreign bonds
or parallel bonds. Bonds that are sold in countries other than the country
represented by the currency deno
• The emergence of the Eurobond market is partially due to the 1963 Interest
Equalization Tax imposed in the U.S. • The tax discouraged U.S. investors
from investing in foreign securities, so non-U.S. borrowers looked elsewhere

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for funds.
• Then in 1984, U.S. corporations were allowed to issue bearer bonds directly
to non-U.S. investors, and the withholding tax on bond purchases was
abolished.Eurobond Market • Eurobonds are underwritten by a multinational
syndicate of investment banks and simultaneously placed in many countries
through second-stage, and in many cases, third-stage, underwriters.
• Eurobonds are usually issued in bearer form, pay annual coupons, may be
convertible, may have variable rates, and typically have few protective
covenants.
BONDS
• Interest rates for each currency and credit conditions in the Eurobond
market change constantly, causing the popularity of the market to vary among
currencies. • About 70% of the Eurobonds are denominated in the U.S. dollar.
• In the secondary market, the market makers are often the same underwriters
who sell the primary issues.
¤ international stock markets:In addition to issuing stock locally, MNCs can
also obtain funds by issuing stock in international markets. • This will enhance
the firm’s image and name recognition, and diversify the shareholder base.
The stocks may also be more easily digested.
• Note that market competition should increase the efficiency of new issues.
• Stock issued in the U.S. by non-U.S. firms or governments are called Yankee
stock offerings. Many of such recent stock offerings resulted from
privatization programs in Latin America and Europe.
• Non-U.S. firms may also issue American depository receipts (ADRs), which
are certificates representing bundles of stock. ADRs are less strictly regulated.

The locations of the MNC’s operations can influence the decision about where
toplace stock, in view of the cash flows needed to cover dividend payments.
• Market characteristics are important too.
Stock markets may differ in size, trading activity level, regulatory
requirements, taxation rate, and proportion of individual versus institutional
share ownership.

Electronic communications networks (ECNs) have been created to match

orders between buyers and sellers in recent years.
• As ECNs become more popular over time, they may ultimately be merged
with one another or with other exchanges to create a single global stock
exchange.

International financial investment decisions:

1. Meaning of Investment Decisions
2. Categories of Investment Decisions
3. Need
4. Factors.

1.Meaning of Investment Decisions:

In the terminology of financial management, the investment decision means
capital budgeting. Investment decision and capital budgeting are not
considered different acts in business world. In investment decision, the word
‘Capital’ is exclusively understood to refer to real assets which may assume

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any shape viz. building, plant and machinery, raw material and so on and so
forth, whereas investment refers to any such real assets.

In other words, investment decisions are concerned with the question whether
adding to capital assets today will increase the revenues of tomorrow to cover
costs. Thus investment decisions are commitment of money resources at
different time in expectation of economic returns in future dates.

Choice is required to be made amongst available alternative revenues for

investments. As such investment decisions are concerned with the choice of
acquiring real assets over the time period in a productive process.

2.Categories of Investment Decisions:

There are several categories of investment decisions.

The common categories are as follows:

(i) Inventory Investment:Holding of stocks of materials is unavoidable for

smooth running of a business. The expenditure on stocks comes in the
category of investments.

(ii) Strategic Investment Expenditure:

In this case, the firm makes investment decisions in order to strengthen its
market power. The return on such investment will not be immediate.

(iii) Modernisation Investment Expenditure:

In this case, the firm decides to adopt a new and better technology in place of
the old one for the sake of cost reduction. It is also known as capital deepening
process.

(iv) Expansion Investment on a New Business:

In this case, the firm decides to start a new business or diversify into new lines
of production for which a new set of machines are to be purchased.

(v) Replacement Investment:

In this category, the firm takes decisions about the replacement of worn out
and obsolete assets by new ones.

(vi) Expansion Investment:

In this case, the firm decides to expand the productive capacity for existing
products and thus grows further in a uni-direction. This type of investment is
also called capital widening.

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3.Need for Investment Decisions:

The need for investment decisions arrives for attaining the long term objective
of the firm viz. survival or growth, preserving share of a particular market and
retain leadership in a particular aspect of economic activity.

The firm may like to make investment decision to avail of the

economic opportunities which may arise due to the following
reasons:

(i) Expansion of the productive process to meet the existing excessive demand
in local market to exploit the international markets and to avail the benefits of
economies of scale.

(ii) Replacement of an existing asset, plant, machinery or building may

income necessary for reaping advantages of technological innovations,
minimising cost of products and increasing the efficiency of labour.

(iii) Buy or hire on rent or lease a particular asset is another important

consideration which establishes the need for making investment decisions.

4. Factors affecting Investment Decisions:

According to Prof. Ezra Solomon, for making optimum investment
decisions, the following three types of information is required:

(i) Estimate of capital outlays and the future earnings of the proposed project
focusing on the task of value engineering and market forecasting,

(ii) Availability of capital and consideration of cost-focusing attention as

financial analysis, and

(iii) A correct set of standards by which to select projects for execution to

maximise return-focusing attention on logic and arithmetic.

1. Estimate of Capital Outlays and Future Earnings of the Proposed

Project:

The management of a firm is guided by various considerations in forecasting

the future revenue proceeds arising out of present investment decisions. In
current managerial practice if the time horizon over which benefits accrue is
longer than one year, then the resources committed are called investment and
the money spent is termed capital expenditures. The fixed capital outlay
shows the outlay or expenditure made by the firm for creating the capacity of
production.

The important times of such costs would be as follows:

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(i) Advance Expenditure:

The expenditure on technical and economic feasibility reports, plant design,

licence fee and associated costs, expenditure on the search for finances, and
other similar items would be included in this category.

(ii) Land and Site Development Expenditure:

This includes the cost of land acquired or leasing of land, expenditures on

making the land usable, laying of roads, fencing, etc.

(iii) Construction Costs:

The expenditures on factory buildings, residential houses, roads, electricity

supply lines, drainage disposal system, water supply, etc.

(iv) Machines and Tools:

The cost of machinery should include purchase price of machines, duty, tax,
freight insurance, transport charges, etc. Different types of tools will be
required for operation, the value of such sets at the plant will be the cost of
tools.

(v) Erection of Equipment:

The whole plant constituting different types of machines has to be assembled

at the plant site. The payment made for installation will be accounted in this
category.

(vi) Training Expenditure:

A firm before purchasing such machines has to get its personnel trained to
handle them. The cost incurred on such training will have to be accounted.

(vii) Franchise Cost:

The cost incurred in getting the franchise from the government or any other
institution is also included in this category.

(viii) Cost of Mobilising Finance:

The firms raise funds partly in the form of shares, bonds, debentures and fixed
deposit from the public at large. A well-diversified portfolio carefully chosen
from the numerous securities available in the market will help the investor in
achieving his objectives.

(ix) Inventory Cost:

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The decision to hold inventories to meet demand is quite important for a firm
and in certain situations the level of inventories serves as a guide to plan
production. The value of such safety inventories would be included in the
establishment cost.

The above costs are concerned with the establishment of a plant. If the plant is
ready for operation, it requires certain amount of money to meet the operating
costs.

The broad categories of such costs are as follows:

(i) Labour cost,

(ii) Repairing charges and maintenance cost,

(iii) Rent and royalty payments,

(iv) Insurance charges,

(v) Stationery cost,

(vi) Payment of tax and duties, and

(vii) Fuel and power costs.

In addition to the above categories of costs, two other categories of annual

costs are the depreciation provision and interest charges. The investment
decisions are directly related to financing decisions. The acceptance of
investment proposal shall depend upon how they are going to be financed.

2. Sources of Capital:

Sources of capital can be divided into the following four categories:

(i) Internal Capital:

It is generated by the firm itself. It includes retained profit, depreciation

provision, taxation provision and other reserves.

(ii) Short-term Capital:

It is needed to meet day to day expenses (working capital).

(iii) Medium-term Capital:

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It may be sought for investment in plant and equipment or semi-permanent or

permanent addition to current assets. It can be of any use between one to ten
years.

(iv) Long-term Capital:

It is needed to meet the requirements of fixed capital formation.

Cost of Capital:

The cost of capital plays a very important role in appraising investment

decisions. Whenever a firm mobilises capital from different sources, it has to
consider the cost of capital very carefully for making the final choice.

Interest can be explained as an amount which is paid by a borrower for using

funds belonging to some- one else. Therefore, it is a transaction between
surplus and deficit units.

The investor should know that he has to cope with the different kinds of
interest rates called by different names and to be a successful investor, he
should be able to recognise the kinds of interest rates and by whom these rates
are fixed. The investor should also carefully analyse the different kinds of
interest rates available in the economy before he makes his investments.

Different kinds of interest rates existing in the markets are listed

below:

(i) Ceiling Rate of Interest:

It is the maximum rate of interest usually fixed by the Government of India

and the RBI. It depends on the face value of a financial instrument.

(ii) Coupon Rate of Interest:

It is the rate of interest which is paid on the face value of a bond or debenture.
A person who purchases a long-term bond or debenture expects an interest in
the form of coupon.

(iii) Market Rate of Interest:

It indicates the present value of the future cash flows which is generated by an
investment with the cost incurred on making such investment.

(iv) Long-term Interest:

It comprises of a period usually above five years or above ten years.

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(v) Medium-term Interest:

It may vary from a period of one year to five years.

(vi) Short-term Interest:

It varies per day, per week, per month, per year and the maximum number of
years for which it may be considered can be of one year.

Methods for Calculating Cost of Capital:

The rate of interest is an indication of the real productivity of capital goods.

The different methods for calculating cost of capital for each

source of financing investment decisions are as follows:

(i) Cost of Debt:

The cost of debt (Cd) is the contracted rate of interest payable on the
borrowed capital after adjusting tax liability of the company.

Cd = (1-TR) R1

Where Cd = Cost of debt capital

TR = Marginal tax rate

R1 = Contracted rate of interest

(ii) Cost of Equity Capital:

It is the minimum return which investors wish to get on their equity stocks.

Ce = D1 + GR/P0

Where Ce = Cost of equity capital.

D1 = Dividend paid in period 1

P0 = Market value of the share

Gr = Growth rate of dividends

(iii) Cost of Preference Capital:

Preferred stock has an investment value.

The cost of preference share may be calculated as:

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CP = D/R

Where Cp = Cost of preference capital

D = fixed amount of dividend obligation owned by the firm.

R = Net returns received as sale of preference stock.

(iv) Cost of Term Loans:

The term loan is generally repayable in more than one year and less than ten
years. The cost of the term loan is equal to the interest rate multiplied by (1-
tax rate). The interest rate refers to the interest rate of the new term loan.

(v) Cost of Retained Earnings:

The cost of retained earnings is generally taken to be the same as the cost of
equity.

The formula for cost of retained earnings in this case is as follows:

CR = D(1 – T1)/P(1 – TC)

Where CR = Cost of retained earnings

D = Dividend per share

T1 = Marginal Income Tax

P = Market price per share

Tc = Capital gains tax.

3. Selection of Projects to Maximise Returns:

For successful operation of any business, it is imperative that such investment

of funds should be made so as to bring in benefits or best possible returns or
maximum returns. A most decisive factor in taking decision on investment
expenditure is its profitability.

3.4.International financial accounting –

3.4.1 national differences in accounting: 10 DIFFERENCES BETWEEN SOME
NATIONAL STANDARDS AND IFRS

You’ve probably heard the phrase ‘it wouldn’t do for us all to be the same’ –
well that’s as true for the world of accountancy as it is in real life. Many
countries around the globe still use their own accounting standards (referred

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to as generally accepted accounting practice (GAAP)). There are attempts

being made by the International Accounting Standards Board (IASB) to get
countries around the world to adopt International Financial Reporting
Standards (IFRS), in the hope that eventually everyone around the world will
report under IFRS to achieve consistency in accounting methodologies which
will then improve comparability of financial statements. However, that’s some
way off at the minute.

Because many countries use their own GAAP, there are some notable
differences between what some countries do and what IFRS does. Here are ten
notable differences between what some countries do with their own national
GAAP and what IFRS does so you can appreciate the differences between the
two.

PENSION PLANS
Many companies operate what are known as Defined Benefit Pension Plans
which is where an employee participates in the scheme, retires, and then
receives a pension based on his or her final salary (you’ve probably heard
them referred to as final salary schemes). They’re becoming less common
these days and are not to be confused with Defined Contribution Schemes.

Some GAAPs do not require the defined benefit pension plan’s surplus or
deficit to be recognised on the balance sheet. However, under IAS 19
Employee Benefits a company must recognise such a defined benefit pension
plan’s surplus or deficit, and this surplus or deficit is calculated by the pension
plan’s actuary.

DEFERRED TAX
Deferred tax is the method of smoothing out the differences between the
accounting treatment of certain items in the financial statements against the
way the same items have been treated for tax purposes and the deferred tax
consequences can either be a liability (future tax charges will increase in the
future as a result of the difference) or they can be an asset (future tax charges
will decrease as a result of the difference).

Some GAAP do not require deferred tax assets or liabilities to be recognised

due to the ‘timing difference’ approach (which focuses on when items are
eventually recognised in profit or loss). Under IAS 12 Income Taxes this
focuses on the ‘temporary difference’ approach (which focuses on the balance
sheet and the tax that would be payable if assets were sold and liabilities
settled at book value). IAS 12 requires that a company recognises deferred tax
assets and liabilities in respect of all temporary differences.

INTANGIBLE NON-CURRENT ASSETS

An intangible non-current asset is a long-term asset the company will use in
the business for more than one year and is shown on the balance sheet. An
intangible non-current asset does not have a physical form – in other words
you can’t kick it. Check out Chapter 7 for a more in-depth lowdown on these
types of assets.

Some GAAP require certain costs relating to intangible non-current assets to

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be written off to profit or loss as and when they’re incurred. Under IAS 38
Intangible Assets a company must recognise such costs on the balance sheet if
they meet the recognition criteria (which are that the costs are capable of
generating revenue for the business and the costs can be measured reliably).

SHARE-BASED PAYMENT
A share-based payment is an agreement between a company and a third party
that entitles the third party to receive shares or share options of the company,
or cash (or other assets) for amounts based on the price or value of the shares
of the company at a future point in time provided certain conditions are met.

Some GAAP do not recognise any expense arising on a share-based payment

transaction. IFRS 2 Share-based Payment requires the expense of a share-
based payment to be reflected in a company’s income statement.

PROVISIONS FOR LIABILITIES

A provision is a liability of uncertain timing or amount and can arise because
of either a legal, or constructive, obligation. A constructive obligation arises
because of a history of past practice by the company (for example paying
profit-related bonuses year on year).

Some GAAP do not recognise provisions because of a constructive obligation.

However, IAS 37 Provisions, Contingent Liabilities and Contingent Assets
requires a provision to be recognised due to a constructive obligation if it can
be demonstrated such an obligation exists, there’s going to be cash changing
hands to settle the obligation and the amount required to settle the obligation
can be measured reliably.

FINANCE LEASES
A finance lease is a lease which transfers all the risks and rewards of
ownership of the leased asset to the lessee (the party leasing the asset).

Some GAAP do not require assets subject to finance leases to be recognised on

a balance sheet. IAS 17 Leases specifically requires such leases to be
recognised on the balance of companies entering into these types of lease
(note IAS 17 is due to be replaced by another standard in the next couple of
years).

BORROWING COSTS
Borrowing costs are interest charges levied by banks and finance houses for
loans taken out by companies. Some companies take out loans to construct
their own assets (for example a new building).

Some GAAPs permit a company to choose whether, or not, to capitalise these

borrowing costs as part of the cost of constructing the asset. However, IAS 23
Borrowing Costs requires companies to recognise all such costs as part of the
cost of the asset — there is no option under IAS 23 to write them off to profit
or loss when they are incurred.

BUYING ANOTHER COMPANY

Lots of additional costs (such as legal fees, accountancy fees and due diligence

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fees) are incurred when a company buys another company.

Some GAAP allows these types of costs (called incremental costs) to be

included in the cost of the acquisition. IFRS 3 Business Combinations requires
such incremental costs to be written off to the income statement as and when
they are incurred. They cannot form part of the cost of the acquisition under
IFRS.

STATEMENT OF CASH FLOWS

Certain companies reporting under their own national GAAP do not have to
produce a statement of cash flows in addition to the statement of profit or loss
(sometimes called the income statement or profit and loss account) and
statement of financial position (known as the balance sheet).

IAS 1 Presentation of Financial Statements specifically requires a company to

produce a statement of cash flows as part of the company’s annual financial
statements.

INVENTORY VALUATIONS
Some GAAP allow the use of the last-in first-out method of valuing
inventories.

IAS 2 Inventories specifically prohibits this method of inventory valuation. It

only allows the first-in first-out method or average cost method of valuation.

3.4.2 Attempts to harmonize differences.

What is harmonization?

Harmonization -- the process of increasing the level of agreement in

accounting standards and practices between countries.

Harmonization is not the same as standardization

whereas standardization implies the elimination of alternatives in accounting
for economic transaction and other events , Harmonization refers to reduction
of alternatives while retaining a high degree of flexibility in accounting
practices, so harmonization allows different countries to have different
standards as long as the standards do not conflict.

The two “levels” of Harmonization

Harmonization in accounting standards, which is increased agreement in
accounting rules.
Harmonization in practice, which is increased agreement in actual
accounting practices.
Harmonization in standards may or may not result in harmonization in
practice.

Arguments for Harmonization :-

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Proponents of accounting harmonization argue that :-

Harmonization expedite the integration of global capital markets and make

easier the cross-listing of securities because of the comparability of Financial
statements.

Harmonization facilitate international mergers and acquisitions.

Harmonization reduce investor uncertainty and the cost of capital.

Harmonization reduce financial reporting costs.

Harmonization allow for easy adoption of high-quality standards by

developing countries.

Proponents of accounting harmonization argue that its not necessary to force

all companies world wide to follow comment set of standards.
Significant differences in standards currently exist .
The political cost of eliminating differences.
Overcoming “Nationalism” and traditions.
Perhaps it will not provide significant benefits.
Will cause “Standards Overload” for some firms.
Diverse standards for diverse places is acceptable.

Harmonization Efforts
Organizations involved
Association of South East Asian Nations (ASEAN).
United Nations (UN) / European Union (EU).
International Organization of Securities Commissions (IOSCO).
International Federation of Accountants (IFAC).
IASB and FASB.

International Organization of Securities Commissions (IOSCO).

See web site http://www.iosco.org
Established in 1974, International Organization of Securities Commissions
IOSCO today IOSCO is the leading organization for securities regulators
around the world , with about 135 ordinary, associate, and affiliate members
from about 100 countries , and aims among other things to :
Achieve improved market regulation internationally.
Facilitate cross-border listings.
Advocates for the development and adoption of a single-set of high quality
accounting standards.

International Federation of Accountants (IFAC).

See web site http://ifac.org
Formed in 1977, International Federation of Accountants (IFAC) aims to
develop international standards of auditing, ethics, education, and training ,
In pursuing these goals IFAC has contributed to the harmonization process in
many ways as :
Began International Forum on Accountancy Development (IFAD) to
enhance the accounting profession in emerging countries. That was in

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response to criticism from the world bank after the Asian financial crises that
the accounting profession was not doing enough to enhance the accounting
capacity capabilities in emerging countries .
Started the Forum of Firms to raise global standards of accounting and
auditing (Details at www.ifad.org).

EU European Union :
See web site http://europa.eu/index_en.htm
The European Union EU was the EU was established by the Treaty of
Maastricht on November 1993 upon the foundations of the pre-existing
European Economic Community, founded in March 1957 with the signing of
the Treaty of Rome by sex European nations (Belgium, France, Germany,
Italy, Luxemburg, and the Netherlands), and now EU Comprising 27 member
states .
The European Union EU Has worked to harmonize accounting standards
within the EU, primarily by way of two directives, EU directives possess the
force of law .
Fourth Directive 1978
a set of comprehensive accounting rules covering the content of annual
financial statements, their methods of presentation and measurement and
disclosure. The Fourth Directive built on the principle of a “true and fair
view.”
Seventh Directive 1983
requires consolidated financial statements for company groups of a certain
size.

3.5 Financing foreign trade

DEFINITION:
Foreign trade is nothing but trade between the different countries of
the world. It is also called as International trade, External trade or Inter-
Regional trade. It consists of imports, exports and entrepot. The inflow of
goods in a country is called import trade whereas outflow of goods from a
country is called export trade. Many times goods are imported for the purpose
of re-export after some processing operations. This is called entrepot trade.
Foreign trade basically takes place for mutual satisfaction of wants and
utilities of resources.
According to Wasserman and Haltman, “International trade consists of
transaction between residents of different countries”.

According to Anatol Marad, “International trade is a trade between nations”.

According to Eugeworth, “International trade means trade between nations”.

Meaning:
Foreign trade, also referred to as International Trade, is the exchange of
capital, goods, and services between two or more countries.

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Foreign trade arises from the fact that no country is self-sufficient in term of
producing all the goods and services that it requires. Countries have to buy
from other countries what they cannot produce or can produce less than the
requirements. Similarly, a country sells to other countries the goods and
services which it has in surplus.

Types of Foreign Trade:

Foreign Trade can be divided into following three groups :-
Import Trade : Import trade refers to purchase of goods by one country
from another country or inflow of goods and services from foreign country to
home country.
Export Trade : Export trade refers to the sale of goods by one country to
another country or outflow of goods from home country to foreign country.
Entrepot Trade : Entrepot trade is also known as Re-export. It refers to
purchase of goods from one country and then selling them to another country
after some processing operations.

Main Features of India’s Foreign Trade:

1) Increasing Share of Gross National Income:

India’s foreign trade plays an important role in the Gross National
Income.
In 1990-91, share of India’s foreign trade (import export) in net national
income was 17 per cent which in 2006-07 rose to 25 per cent. In 2006-07
exports and imports as percentage of GDP were 14.0 per cent and 21 per cent
respectively.
2)Less Percentage of World Trade:
Share of India’s foreign trade in world trade has been declining. In 1950-
51, India’s share in total import trade of the world was 1.8 per cent and in
export trade it was 2 per cent. According to World Trade Statistics, India’s
share in world trade has gone-up from 1.4 per cent in 2004 to 1.5 per cent in
2006 and estimated to be 2 per cent in 2009.
3)Oceanic Trade:
Most of India’s trade is by sea, India has very little trade relations with
its neighing countries like Nepal, Afghanistan, Myanmar, Sri Lanka, etc. Thus,
68 per cent of India’s trade is oceanic trade: Share of these neighing countries
in our export trade was 21.8 per cent and in import trade 19.1 per cent.

4) Dependence on a Few Ports:

For its foreign trade, India depends mostly on Mumbai, Kolkata,
and Chennai ports. These ports are therefore, over-crowded. Recently, India
has developed Kandla, Cochin, and Visakhapatnam ports to lessen the burden
on former ports.
5)Increase in Volume and Value of Trade:
Since 1990-91, volume and value of India’s foreign trade has gone
up. India now exports and imports goods which are several times more in
value and volume. In 1990-91, total value of India’s foreign trade was Rs
75,751 and in 2008-09, it rose to Rs 22, 15,191 crore. Of it, value of exports
was Rs 8, 40,755 crore and that of imports was Rs 13, 74,436 crore.
6) Change in the Composition of Exports:
Since independence, composition of export trade of India has

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undergone a change. Prior to independence, India used to export agricultural

products and raw materials, like jute, cotton, tea, oil seeds, leather, food
grains, cashew nuts, and mineral products. It also exported manufactured
goods. But now in its export kitty are included mostly manufactured items
like, machines, ready-made garments, gems and jewellery, tea, jute
manufactures, Cashew Kernels, electronic goods, especially hardware’s and
software’s which occupy prime place in exports.
7) Change in the Composition of Imports:
Since Independence, composition of India’s import trade has also
witnessed a sea change. Prior to Independence, India used to import mostly
consumption goods like medicines, cloth, motor vehicles, electrical goods,
iron, steel, etc. Now it has been importing mostly petrol and petroleum
products, machines, chemicals-, fertilizers, oil seeds, raw materials, steel,
edible oils, etc.
8) Direction of Foreign Trade:
It refers to the countries with whom a country trades. Main changes in
the direction of foreign trade are as under:
In the year 1990, in exports the maximum share, i.e., 17.9 per cent was
that of Eastern Europe, i.e., Romania, East Germany, and U.S.S.R., etc. In
import trade, maximum share, i.e., 16.5 per cent was that of OPEC, i.e., Iran,
Iraq, Saudi Arabia, Kuwait, etc. In 2008-09, the largest share in India’s
foreign trade (both imports and exports) was that of European Union (EU),
i.e., Germany, Belgium, France, U.K., etc., and developing countries. Now,
U.A.E., China and U.S.A. have occupied important place in India’s foreign
trade. The importance of England, Russia, etc., has declined.
9) Mounting Deficit in Balance of Trade:
Since 1950-51, India’s balance of trade has been continuously adverse
except for two years, viz., 1972-73 and 1976-77, besides it has been mounting
year after year. In 1950-51 balance of trade was adverse to the tune of Rs 2
crore and by 1990-1991 it rose to Rs 16,933 crore. After the policy of
liberalization, the country has witnessed a rapid increase in it. In 1999- 2000
it rose to Rs 77,359crorc and in 2008-09 it amounted to 5, 33,680 crore. Fast
rise in the value of imports and slow rise in the value of exports accounted for
this tremendous rise in balance of trade deficit.
10) Trend towards Globalization:
Globalization and diversification mark the latest trend of India’s
foreign trade. India’s foreign trade is no longer confined or a few goods or a
few countries. Presently, India exports 7,500 items to about 190 countries and
in its import- kitty there are 6,000 items from 140 countries. It unveiled the
changing pattern of India’s foreign trade.
11) Changing Role of Public Sector:
Since 1991 the role of public sector in India’s foreign trade has
undergone a change. Prior to it, State Trading Corporation (STC), Minerals
and Metals Trading Corporation (MMTC), Handicraft and Handloom
Corporation, Steel Authority of India Ltd. (SAIL), Hindustan Machine Tools
(HMT), Bharat Heavy Electrical Limited (BHEL), etc., used to play significant
role in India’s foreign trade. As a result of implementation of the policy of
liberalization, the importance of all these public sector enterprises has
diminished.
3.5.1 India‘s foreign trade:

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The foreign Trade of India is guided by the Export-Import (EXIM ) policy of

the Government of India and is regulated by the Foreign Trade (Development
and Regulation ) Act,1992.
The Foreign Trade Policy contains various decisions taken by the government
in the sphere of Foreign Trade, i.e., with respect to imports and exports from
the country and more especially export promotion measures, policies and
procedures related thereto.
It is the set of guidelines and instructions established by DGFT (Directorate
General of Foreign Trade ) in matters related to the import and export of
goods in India. The present foreign trade policy is for the period of 5 years i.e.
from 2015 to 2020.

FTP 2015-20 provides a framework for increasing exports of goods and

services as well as generation of employment and increasing value addition in
the country, in line with the ‘Make in India’ programme.
• The Policy aims to enable India to respond to the challenges of the external
environment, keeping in step with a rapidly evolving international trading
architecture and make trade a major contributor to the country’s economic
growth and development.
• To arrest and reverse declining trend of exports is the main aim of the policy.
This aim will be reviewed after two and halfyears.
• Simplification of the 8/17/2015 32
• To set in motion the strategies and policy measures which catalyze the
growth of exports.
• To encourage exports through a mix of measures including fiscal incentives,
institutional changes, procedural rationalization and efforts for enhance
market access across the world and diversification of export markets. Increase
exports to $900 billion by 2019-20, from $466 billion in 2013-14.
Raise India's share in world exports from 2% to 3.5%.
Merchandise Export from India Scheme (MEIS) and Service Exports from
India Scheme (SEIS) launched.

Served From India Scheme (SFIS) will be replaced with Service Export from
India Scheme (SEIS).

For grant of rewards under MEIS, the countries have been categorized into
3 Groups, whereas the rates of rewards under MEIS range from 2 per cent to 5
per cent. Under SEIS the selected Services would be rewarded at the rates of 3
per cent and 5 per cent.

FTP to be aligned to Make in India, Digital India and Skills India initiatives.
Duty credit scrips made freely transferable and usable For payment of
custom duty, excise duty and service tax.

Export promotion mission to take on board state Governments Unlike
annual reviews, FTP will be reviewed after two-andHalf years.
Higher level of support for export of defence, farm Produce and eco-friendly
products.

Nomenclature of Export House, Star Export House, Trading House, Premier
Trading House certificate changed to 1,2,3,4,5 Star Export House. The criteria

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for export performance for recognition of status holder have been changed
from Rupees to US dollar earnings.

Online procedure to upload digitally signed document by Chartered

Accountant/Company Secretary/Cost Accountant to be developed.

Validity period of SCOMET export authorisation extended from present 12

months to 24 months.

Chapter-3 incentives extended to units located in SEZs. Export obligation

under EPCG scheme reduced to 75% to Promote domestic capital goods
manufacturing.

E-Commerce exports of handloom products, books/periodicals, leather

footwear, toys and customised fashion garments through courier or foreign
post office would also be able to get benefit of MEIS (for values up to INR
25,000).

Inter-ministerial consultations to be held online for issue of various licences.

8/17/2015 .

No need to repeatedly submit physical copies of documents available on

Exporter Importer Profile.
 108 MSME clusters have been identified for focused interventions to boost
exports. Accordingly, ‘Niryat Bandhu Scheme’ has been galvanised and
repositioned to achieve the objectives of ‘Skill India’.
 Trade facilitation and enhancing the ease of doing business are the other
major focus areas in this new FTP. One of the major objective of new FTP is to
move towards paperless working in 24x7 environment.
 Manufacturers, who are also status holders, will now be able to self-certify
their manufactured goods in phases, as originating from India with a view to
qualifying for preferential treatment under various forms of bilateral and
regional trade agreements. This ‘Approved Exporter System’ will help
manufacturer exporters considerably in getting fast access to international
markets.

3.5.2 balance of trade and balance of payments:

Balance of Trade:

The balance of trade is the difference between the value of a

country's imports and exports for a given period. The balance of
trade is the largest component of a country's balance of payments.
Economists use the BOT to measure the relative strength of a
country's economy. The balance of trade is also referred to as the
trade balance or the international trade balance.

A country that imports more goods and services than it exports in terms of
value has a trade deficit. Conversely, a country that exports more goods and
services than it imports has a trade surplus. The formula for calculating the

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BOT can be simplified as the total value of imports minus the total value of
exports.

value of exports – value of imports = balance of trade

Calculating a Country's BOT

For example, if the United States imported $1.5 trillion in goods and services
in 2017, but exported only $1 trillion in goods and services to other countries,
then the United States had a trade balance of -$500 billion, or a $500 billion
trade deficit.

$1.5 trillion in imports - $1 trillion in exports = $500 billion trade deficit

In effect, a country with a large trade deficit borrows money to pay for its
goods and services, while a country with a large trade surplus lends money to
deficit countries. In some cases, the trade balance may correlate to a country's
political and economic stability because it reflects the amount of foreign
investment in that country.

Debit items include imports, foreign aid, domestic spending abroad and
domestic investments abroad. Credit items include exports, foreign spending
in the domestic economy and foreign investments in the domestic economy.
By subtracting the credit items from the debit items, economists arrive at a
trade deficit or trade surplus for a given country over the period of a month,
quarter or year.

Examples of Balance of Trade

There are countries where it is almost certain that a trade deficit will occur.
For example, the United States has had a trade deficit since 1976 because of its
dependency on oil imports and consumer products. Conversely, China, a
country that produces and exports many of the world's consumable goods, has
recorded a trade surplus since 1995.

A trade surplus or deficit is not always a viable indicator of an economy's

health, and it must be considered in the context of the business cycle and
other economic indicators. For example, in a recession, countries prefer to
export more to create jobs and demand in the economy. In times of economic
expansion, countries prefer to import more to promote price competition,
which limits inflation.

In 2017, Germany, Japan, China and South Korea had the largest trade
surpluses by current account balance. The United States, the United Kingdom,
Canada and Turkey had the largest trade deficits

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BASIS FOR
BALANCE OF TRADE BALANCE OF PAYMENT
COMPARISON

Meaning Balance of Trade is a statement Balance of Payment is a statement

that captures the country's export that keeps track of all economic
and import of goods with the transactions done by the country
remaining world. with the remaining world.

Records Transactions related to goods Transactions related to both goods

only. and services are recorded.

Capital Transfers Are not included in the Balance of Are included in Balance of Payment.
Trade.

Which is better? It gives a partial view of the It gives a clear view of the economic
country's economic status. position of the country.

Result It can be Favorable, Unfavorable Both the receipts and payment sides
or balanced. tallies.

Component It is a component of Current Current Account and Capital

Account of Balance of Payment. Account.

Balance of Payment:

The balance of payments is a statement of all transactions made

between entities in one country and the rest of the world over a
defined period of time, such as a quarter or a year.

The Balance of Payments is a set of accounts that recognises all the

commercial transactions performed by the country in a particular period with
the remaining countries of the world. It keeps the record of all the monetary
transactions done globally by the country on commodities, services and
income during the year.

It combines all the public-private investments to know the inflow and outflow
of money in the economy over a period. If the BOP is equal to zero, then it
means that both the debits and credits are equal, but if the debit is more than
credit, then it is a sign of deficit while if the credit exceeds debit, then it shows
a surplus. The Balance of Payment has been divided into the following sets of
accounts:

 Current Account: The account that keeps the record of both tangible
and intangible items. Tangible items include goods while the intangible
items are services and income.
 Capital Account: The account keeps a record of all the capital
expenditure made and income generated collectively by the public and
private sector. Foreign Direct Investment, External Commercial

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Borrowing, Government loan to Foreign Government, etc. are included

in Capital Account.
 Errors and Omissions: If in case the receipts and payments do not
match with each other then balance amount will be shown as errors
and omissions.

Key Differences Between Balance of Trade and Balance of Payments

The following are the major differences between the balance of trade and
balance of payments:

1. A statement recording the imports and exports done in goods by/from the
country with the other countries, during a particular period is known as
the Balance of Trade. The Balance of Payment captures all the monetary
transaction performed internationally by the country during a course of
time.
2. The Balance of Trade accounts for, only physical items, whereas Balance
of Payment keeps track of physical as well as non-physical items.
3. The Balance of Payments records capital receipts or payments, but
Balance of Trade does not include it.
4. The Balance of Trade can show a surplus, deficit or it can be balanced too.
On the other hand, Balance of Payments is always balanced.
5. The Balance of Trade is a major segment of Balance of Payment.
6. The Balance of Trade provides the only half picture of the country’s
economic position. Conversely, Balance of Payment gives a complete view
of the country’s economic position.

3.5.3 financing export trade and import trade.

Meaning of Export Finance:
In order to be competitive in markets, exporters are often expected to offer
attractive credit terms to their overseas buyers. Extending such credits to
foreign buyers put considerable strain on the liquidity of the exporting firms.
Therefore, it is extremely important to make adequate trade finances available
to the exporters from external sources at competitive terms during the post-
shipment stage.

Export finance is short-term working capital finance allowed to an exporter.

Finance and credit are available not only to help export production but also to
sell to overseas customers on credit.
• An exporter may avail financial assistance from any bank, which considers
the ensuing factors:
• Availability of the funds at the required time to the exporter.
• Affordability of the cost of funds.

Export and import finance methods

Accounts Receivable Financing:

An exporter that needs funds immediately may obtain a bank loan that is

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secured by an assignment of the account receivable

Factoring (Cross-Border Factoring)

The accounts receivable are sold to a third party (the factor), that then
assumes all the responsibilities and exposure associated with collecting from
the buyer.

Letters of Credit (L/C):

These are issued by a bank on behalf of the importer promising to pay the
exporter upon presentation of the shipping documents.
The importer pays the issuing bank the amount of the L/C plus associated
fees. Commercial or import/export L/Cs are usually irrevocable. 
The required documents typically include a draft (sight or time), a
commercial invoice, and a bill of lading (receipt for shipment).
Sometimes, the exporter may request that a local bank confirm (guarantee)
the L/C. 
Variations include :
standby L/Cs : funded only if the buyer does not pay the seller as agreed
upon 
transferable L/Cs : the first beneficiary can transfer all or part of the
original L/C to a third party 
assignments of proceeds under an L/C : the original beneficiary assigns
the proceeds to the end supplier.

Banker’s Acceptance (BA) :

This is a time draft that is drawn on and accepted by a bank (the importer’s
bank). The accepting bank is obliged to pay the holder of the draft at maturity.
 If the exporter does not want to wait for payment, it can request that the BA
be sold in the money market.
Trade financing is provided by the holder of the BA. 
The bank accepting the drafts charges an all-in-rate (interest rate) that
consists of the discount rate plus the acceptance commission.  In general,
all-in-rates are lower than bank loan rates. They usually fall between the rates
of short-term Treasury bills and commercial papers.

Working Capital Financing :

Banks may provide short-term loans that finance the working capital cycle,
from the purchase of inventory until the eventual conversion to cash.

Medium-Term Capital Goods Financing (Forfaiting)  The importer

issues a promissory note to the exporter to pay for its imported capital goods
over a period that generally ranges from three to seven years. 
The exporter then sells the note, without recourse, to a bank (the forfaiting
bank)

Counter trade : These are foreign trade transactions in which the sale of
goods to one country is linked to the purchase or exchange of goods from that
same country.  Common counter trade types include barter, compensation
(product buy-back), and counter purchase.  The primary participants are

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governments and multinationals.

CASH IN ADVANCE / PREPAYMENTS With cash-in-advance payment

terms, the exporter can avoid credit risk because payment is received before
the ownership of the goods is transferred. Mrs. Charu Rastogi, Asst. Prof.
Wire transfers and credit cards are the most commonly used cash-in-advance
options available to exporters. However, requiring payment in advance is
the least attractive option for the buyer, because it creates cash- flow
problems. Foreign buyers are also concerned that the goods may not be sent if
payment is made in advance. Thus, exporters who insist on this payment
method as their sole manner of doing business may lose to competitors who
offer more attractive payment terms.

METHODS OF PAYMENT IN INTERNATIONAL TRADE:LETTERS

OF CREDIT Letters of credit (LCs) are one of the most secure instruments
available to international traders. An LC is a commitment by a bank on
behalf of the buyer Mrs. Charu Rastogi, Asst. Prof. that payment will be made
to the exporter, provided that the terms and conditions stated in the LC have
been met, as verified through the presentation of all required documents.
The buyer pays his or her bank to render this service. An LC is useful when
reliable credit information about a foreign buyer is difficult to obtain, but the
exporter is satisfied with the creditworthiness of the buyer’s foreign bank.
An LC also protects the buyer because no payment obligation arises until the
goods have been shipped or delivered as promised.

METHODS OF PAYMENT IN INTERNATIONAL

TRADE:DOCUMENTARY COLLECTIONS/DRAFTS/BILLS
OFEXCHANGE) A documentary collection (D/C) is a transaction whereby
the exporter entrusts the collection of a payment to the remitting bank
(exporter’s bank), which sends documents to a collecting bank (importer’s
bank), along with instructions for payment. Mrs. Charu Rastogi, Asst. Prof.
Funds are received from the importer and remitted to the exporter through
the banks involved in the collection in exchange for those documents. D/Cs
involve using a draft that requires the importer to pay the face amount either
at sight (document against payment) or on a specified date (document against
acceptance). The draft gives instructions that specify the documents
required for the transfer of title to the goods. Although banks do act as
facilitators for their clients, D/Cs offer no verification process and limited
recourse in the event of non-payment. Drafts are generally less expensive
than LCs.

METHODS OF PAYMENT IN INTERNATIONAL TRADE:OPEN

ACCOUNT An open account transaction is a sale where the goods are
shipped and delivered before payment is due, which is usually in 30 to 90
days. Obviously, this option is the most advantageous option to the importer
in terms of cash flow and cost, but it is consequently the highest risk option
for an exporter. Because of intense competition in export markets, foreign
buyers often press exporters for open account terms since the extension of
credit by the seller to the buyer is more common abroad. Therefore, exporters
who are reluctant to extend credit may lose a sale to their competitors.
However, the exporter can offer competitive open account terms while

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substantially mitigating the risk of non-payment by using of one or more of

the appropriate trade finance techniques, such as export credit insurance.

COMPARISON
  COMPARISON Cash in Letter of Credit DC/BoE Open Account AdvanceTime
of Before When shipment is On presentation of As agreed Payment Shipment
made draft uponGoods After payment After payment Beforeavailable to After
payment paymentbuyers Relies on buyerRisk to Disposal of None Very little -
None to pay asexporter unpaid goods agreed upon Assured shipment but
Relies on Relies on exporter relies on exporter toRisk to exporter to to ship
goods as ship goods as Noneimporter ship goods as described in the described
in the ordered documents documents

LETTER OF CREDIT: PROCEDURE 1. Sale Contract Buyer (Importer)

Seller (Exporter) 5. Deliver Goods 2. Request 8. Documents 6. Present 4.
Deliver Letterfor Credit and claim for Documents of Credit payments 7.
Present Documents Importer’s bank Exporter’s bank (Issuing Bank) (Advising
Bank) 3. Send Credit

TYPES OF LETTER OF CREDIT Irrevocable and revocable letters of

credit  A revocable letter of credit can be changed or cancelled by the bank
that issued it at any time and for any reason.  An irrevocable letter of credit
cannot be changed or cancelled unless everyone involved agrees. Irrevocable
letters of credit provide more security than revocable ones. Confirmed and
unconfirmed/Advised letters of credit  When a buyer arranges a letter of
credit they usually do so with their own bank, known as the issuing bank. The
seller will usually want a bank in their country to check that the letter of credit
is valid.  For extra security, the seller may require the letter of credit to be
confirmed by the bank that checks it. By confirming the letter of credit, the
second bank agrees to guarantee payment even if the issuing bank fails to
make it. So a confirmed letter of credit provides more security than an
unconfirmed one.  In case of unconfirmed LC, the advising bank forwards
an unconfirmed letter of credit directly to the exporter without adding its own
undertaking to make payment or accept responsibility for payment at a future
date, but confirming its authenticity.

TYPES OF LETTER OF CREDIT Transferable letters of credit  A

transferable letter of credit can be passed from one beneficiary (person
receiving payment) to others. Theyre commonly used when intermediaries are
involved in a transaction. Stand-by LC  A standby letter of credit is like a
guarantee that is used as support where an alternative, less secure, method of
payment has been agreed.  It is an assurance from a bank that a buyer is
able to pay a seller. The seller doesnt expect to have to draw on the letter of
credit to get paid.

TYPES OF LETTER OF CREDIT Revolving LC  The revolving credit

is used for regular shipments of the same commodity to the same importer. It
can revolve in relation to time or value. If the credit is Mrs. Charu Rastogi,
Asst. Prof. time revolving once utilised it is re-instated for further regular
shipments until the credit is fully drawn. If the credit revolves in relation to
value once utilised and paid the value can be reinstated for further drawings.

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 Revolving letters of credit are useful to avoid the need for repetitious
arrangements for opening or amending letters of credit. Back to Back LC 
A back-to-back letter of credit can be used as an alternative to the transferable
letter of credit. Rather than transferring the original letter of credit to the
supplier, once the letter of credit is received by the exporter from the opening
bank, that letter of credit is used as security to establish a second letter of
credit drawn on the exporter in favour of his importer.  Many banks are
reluctant to issue back-to-back letters of credit due to the level of risk to which
they are exposed, whereas a transferable credit will not expose them to higher
risk than under the original credit.

OBIECTIVES OF EXPORT FINANCE

• To cover commercial & Non-commercial or political risks attendant on
granting credit to a foreign buyer.
• To cover natural risks like an earthquake, floods etc.
• The exporter may also require “term finance”. The term finance or term
loans, which is required for medium and long term financial needs such as
purchase of fixed assets and long term working capital.

APPRAISAL
• Appraisal means an approval of an export credit proposal of an exporter.
While appraising an export credit proposal as a commercial banker, obligation
to the following institutions or regulations needs to be adhered to.
• Obligations to the RBI under the Exchange

Control Regulations are:

• Appraise to be the bank’s customer.
• Appraise should have the Exim code number allotted by the Director General
of Foreign Trade.
• Party’s name should not appear under the caution list of the RBI.
• Obligations to the Trade Control Authority under the EXIM policy are:
• Appraise should have IEC number allotted by the DGFT.
• Goods must be freely exportable i.e. not falling under the negative list. If it
falls under the negative list, then a valid license should be there which allows
the goods to be exported.
• Country with whom the Appraise wants to trade should not be

The export finance is being classified into two types viz.

 Pre-shipment finance.
 Post-shipment finance
PRE-SHIPMENT FINANCE: • Pre-shipment is also referred as “packing
credit”. It is working capital finance provided by commercial banks to the
exporter prior to shipment of goods. The finance required to meet various
expenses before shipment of goods is given.

Financial assistance extended to the exporter from the date of receipt of the
export order till the date of shipment is known as preshipment credit. Such
finance is extended to an exporter for the purpose of procuring raw materials,

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processing, packing, transporting, warehousing of goods meant for exports.

IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE:

• To purchase raw material, and other inputs to manufacture goods.

• To assemble the goods in the case of merchant exporters.
• To store the goods in suitable warehouses till the goods are shipped.
• To pay for packing, marking and labelling of goods.
• To pay for pre-shipment inspection charges.
• To import or purchase from the domestic market heavy machinery and other
capital goods to produce export goods.
• To pay for consultancy services.
• To pay for export documentation expenses.

FORMS OR METHODS OF PRE-SHIPMENT FINANCE:

• Cash Packing Credit Loan:

• In this type of credit, the bank normally grants packing credit advantage
initially on unsecured basis. Subsequently, the bank may ask for security.

• Advance Against Hypothecation:

• Packing credit is given to process the goods for export. The advance is given
against security and the security remains in the possession of the exporter.
The exporter is required to execute the hypothecation deed.

• Advance Against Pledge:

• The bank provides packing credit against security. The security remains in
the possession of the bank. On collection of export proceeds, the bank makes
necessary entries in the packing credit account of the exporter.

• Advance Against Red L/C:

• The Red L/C received from the importer authorizes the local bank to grant
advances to exporter to meet working capital requirements relating to
processing of goods for exports. The issuing bank stands as a guarantor for
packing credit.

• Advance Against Back-To-Back L/C:

• The merchant exporter who is in possession of the original L/C may request
his bankers to issue Back-To-Back L/C against the security of original L/C in
favour of the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C
on the basis of which he can obtain packing credit.

• Advance Against Exports Through Export Houses:

• Manufacturer, who exports through export houses or other agencies can
obtain packing credit, provided such manufacturer submits an undertaking
from the export houses that they have not or will not avail of packing credit
against the same transaction.

• Advance Against Duty Draw Back (DBK):

• DBK means refund of customs duties paid on the import of raw materials,

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components, parts and packing materials used in the export production. It

also includes a refund of central excise duties paid on indigenous materials.
Banks offer pre-shipment as well as post-shipment advance against claims for
DBK.

• Special Pre-Shipment Finance Schemes:

• Exim-Bank’s scheme for grant for Foreign Currency PreShipment Credit
(FCPC) to exporters.
• Packing credit for Deemed exports.

- POST-SHIPMENT FINANCE
• MEANING:
• Post shipment finance is provided to meet working capital requirements
after the actual shipment of goods. It bridges the financial gap between the
date of shipment and actual receipt of payment from overseas buyer thereof.
Whereas the finance provided after shipment of goods is called post-shipment
finance.

• DEFENITION:
• Credit facility extended to an exporter from the date of shipment of goods till
the realization of the export proceeds is called Postshipment Credit.
• IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE:
• To pay to agents/distributors and others for their services.
• To pay for publicity and advertising in the over seas markets.
• To pay for port authorities, customs and shipping agents charges.
• To pay towards export duty or tax, if any.
• To pay towards ECGC premium.
• To pay for freight and other shipping expenses.
• To pay towards marine insurance premium, under CIF contracts.
• To meet expenses in respect of after sale service.
• To pay towards such expenses regarding participation in exhibitions and
trade fairs in India and abroad.
• To pay for representatives abroad in connection with their stay board.

• FORMS/METHODS OF POST SHIPMENT FINANCE

• Export bills negotiated under L/C:

• The exporter can claim post-shipment finance by drawing bills or drafts
under L/C. The bank insists on necessary documents as stated in the L/C. if all
documents are in order, the bank negotiates the bill and advance is granted to
the exporter.

• Purchase of export bills drawn under confirmed contracts: The

banks may sanction advance against purchase or discount of export bills
drawn under confirmed contracts. If the L/C is not available as security, the
bank is totally dependent upon the credit worthiness of the exporter.

• Advance against bills under collection: In this case, the advance is

granted against bills drawn under confirmed export order L/C and which are

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sent for collection. They are not purchased or discounted by the bank.
However, this form is not as popular as compared to advance purchase or
discounting of bills.

• Advance against claims of Duty Drawback (DBK): DBK means

refund of customs duties paid on the import of raw materials, components,
parts and packing materials used in the export production. It also includes a
refund of central excise duties paid on indigenous materials. Banks offer
preshipment as well as post-shipment advance against claims for DBK.

• Advance against goods sent on Consignment basis:

The bank may grant post-shipment finance against goods sent on
consignment basis.

• Advance against Undrawn Balance of Bills:

There are cases where bills are not drawn to the full invoice value of gods.
Certain amount is undrawn balance which is due for payment after
adjustments due to difference in rates, weight, quality etc. banks offer advance
against such undrawn balances subject to a maximum of 5% of the value of
export and an undertaking is obtained to surrender balance proceeds to the
bank.

• Advance against Deemed Exports:

Specified sales or supplies in India are considered as exports and termed as
“deemed exports”. It includes sales to foreign tourists during their stay in
India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is
offered for a maximum of 30 days.

• Advance against Retention Money:

In respect of certain export capital goods and project exports, the importer
retains a part of cost goods/ services towards guarantee of performance or
completion of project. Banks advance against retention money, which is
payable within one year from date of shipment.

• Advance against Deferred payments:

In case of capital goods exports, the exporter receives the amount from the
importer in installments spread over a period of time. The commercial bank
together with EXIM bank do offer advances at concessional rate of interest for
180 days.

Import Finance :

Import finance is the capital that is used to bring goods into the country.
Import transactions can be a significant burden on a company’s cash-flow
because the delays and complications often involved mean money is paid out
long before the goods are delivered. As well as the cash-flow burden, changing
freight rates and import tariffs add costs and uncertainty to the transaction.

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 Financing Importers
(1) Letter of Credit (financing with the use of an L/C)While the L/C can be
used as payment mechanism, it can also be used to provide financing to the
applicant (importer).a. Deferred and Acceptance credits (i.e. term credits) are
considered to be financing instruments for the buyer, since during deferred
payment the buyer can often sell the goods and pay the amount due with the
proceeds.By Deferred PaymentPayment is made to the seller at a specified
future date, for example 60 days after presentation of the documents or after
the date of shipment (i.e. the date of the bill of lading).By AcceptanceThis type
of credit requires the exporter to draw a draft (bill of exchange) either on the
issuing or confirming bank. The draft is accepted by the bank for payment at a
fixed date. For example, payment date under an acceptance credit may be at
sight or after 90 days from presentation of the documents or from the
shipment of goods.

(2) Bills of Exchange (financing without the use of an L/C)In the absence
of a letter of credit, the exporter (beneficiary) can also grant extended
payment terms directly to the importer and generally would issue bills of
exchange addressed to, and accepted by, the importer (drawee and acceptor)
who commits to pay on demand, or at a fixed or determinable future time, a
certain sum to the exporter (drawer and, generally, payee).Bills of exchange
are similar to invoices: the exporter issues a demand for payment to an
importer (or to a guarantor). This is a trade bill, drawn by one commercial
party on another. Once it has been accepted or endorsed by the importer, it
becomes a trade acceptance, which, with a bank guarantee, becomes
negotiable.

3.6 International Marketing –

Introduction
Do you know that Apple - the tech giant designs its iPhone in California;
outsources its manufacturing jobs to different countries like - Mongolia,
China, Korea, and Taiwan; and markets them across the world. Apple have not
restricted its business to a nation, rather expanded it to throughout the world.
Apple is a multinational organisation dealing in international business /
marketing.

Meaning of International Marketing

Definition & Meaning of International Marketing
International Marketing refers to application of marketing principles in more
than a nation. International marketing involves making one or more
marketing mix decisions across national borders. International marketing
involves establishing production facilities overseas and coordinating
marketing strategies across the world.

In simple words, international marketing involves business activities that

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directs the flow of an organisation's goods or services to consumers or users in

more than a nation for a profit.

Definition of International Marketing

According to Cateora and Graham, “international marketing is the
performance of business activities designed to plan, price, promote and direct
the flow of a company’s goods and services to consumers or users in more
than one nation for a profit.”

According to Terpstra and Sorathy, “international marketing consists of

finding and satisfying global customer needs better than the competition, both
domestic and international and of coordinating marketing activities with in
the constraints of the global environment.”

Definition of Global Marketing

According to Kotler, “Global Marketing is concerned with integrating or
standardising marketing actions across a number of geographic markets.”

Global Marketing treats the entire world as a single market and standardises
the marketing actions for every geographic location. Mc Donald’s is a well
known example of global marketing.

3.6.1 nature compared with domestic marketing.

Key Differences Between Domestic and International Marketing

The significant differences between domestic and international marketing are

explained below:

1. The activities of production, promotion, advertising, distribution,

selling and customer satisfaction within one’s own country is known as
Domestic marketing. International marketing is when the marketing
activities are undertaken at the international level.
2. Domestic marketing caters a small area, whereas International
marketing covers a large area.
3. In domestic marketing, there is less government influence as compared
to the international marketing because the company has to deal with
rules and regulations of numerous countries.
4. In domestic marketing, business operations are done in one country
only. On the other hand, in international marketing, the business
operations conducted in multiple countries.
5. In international marketing, there is an advantage that the business
organisation can have access to the latest technology of several
countries which is absent in case domestic countries.
6. The risk involved and challenges in case of international marketing are
very high due to some factors like socio-cultural differences,
exchange rates, setting an international price for the product and so on.
The risk factor and challenges are comparatively less in the case of
domestic marketing.

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7. International marketing requires huge capital investment, but domestic

marketing requires less investment for acquiring resources.
8. In domestic marketing, the executives face less problem while dealing
with the people because of similar nature. However, in the case of
international marketing, it is quite difficult to deal with customers of
different tastes, habits, preferences, segments, etc.
9. International marketing seeks deep research on the foreign market due
to lack of familiarity, which is just opposite in the case of domestic
marketing, where a small survey will prove helpful to know the market
conditions.

3.6.2 Benefits from international marketing.

Benefits of international marketing

International marketing daily affects consumers in many ways, though its
importance is neither well understood nor appreciated. The benefits of
international marketing must be explicitly discussed here under.

1 Survival: most countries must trade with others to survive. For example
Hong Kong without food and water from china would not have survived long.

2 Growth of overseas markets: developing countries, in spite of economic

& marketing problems are excellent markets. For example, Latin America and
Asia/Pacific are experiencing strong economic Growth.

3 Sales and profits: foreign markets constitute a large share of total

business of many firms that have wisely cultivated markets abroad. For
example, IBM and Compaq sell more computers abroad than home. Coca-
Cola‟s international sales account more than 80 % of its operating profits. For
example, for soft drinks, all countries will not enter to winter season at the
same time and some countries are relatively warm round the year.

4 Diversification: Demand for most products is affected by such cyclical

factors as recession and seasonal factors as climate. One way to diversify risk
is to consider foreign markets as a solution for variable demand. Such markets
provide outlets for excess product capacity.

5 Inflation and price moderation: the lack of imported product alterative

forces consumers to pay more, resulting in inflation and excessive profits for
local firms.

6 Employment: unrestricted trade improves the world‟s GNP and enhances

employment generally for all nations.

7 Standard of living: trade affords countries and their citizen‟s higher

standards of living than otherwise possible.

8 Understanding of marketing process: can prove to be valuable in

providing insights for the understanding of behavioral patterns often taken for

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granted at home. Coca cola has applied the lessons learned in Japan to the US
and European markets.

3.6.3 Major activities –

market assessment:
International businesses have the fundamental goals of expanding market
share, revenues, and profits. They often achieve these goals by entering new
markets or by introducing new products into markets in which they already
have a presence. A firm’s ability to do this effectively hinges on its developing
a through understanding of a given geographical or product market. To
successfully increase market share, revenue, and profits, firms must normally
follow three steps,

Assess alternative markets

Evaluate the respective costs, benefits, and risks of entering each, and
Select those that hold the most potential for entry or expansion.

1. Assessing Alternative Foreign Markets

In assessing alternative foreign market a firm must consider a variety of factor
including the current and potential sizes of the markets, the levels of
competition the firm will face, their legal and political environment, and
socio-cultural factors that may affect the firm’s operations and performance.
Information about some of these factors is relatively objective and easy to
obtain.

Market potential: The first step in foreign market selection is assessing

market potential. Many publications such as those listed in “Building Global
Skills” provide data about population, GDP, per capita GDP, public
infrastructure, and ownership of such goods as automobiles and televisions.
The decisions a firm draws from these information often depend upon the
positioning of its products relative to those of the competitors. A firm
producing high quality products at premium prices will find richer market
attractive but may have more difficulty penetrating a poorer market.
Conversely a firm specializing in low priced, lower quality goods may find the
poorer market even more lucrative than the richer market.

Level of competition: Firm must consider in selecting a foreign market is

the level of competition in the market both the current level and the likely
future level. To assess the competitive environment it should identify the
number and sizes of firms already competing in the market, their relative
market share, their pricing and their distribution strategies, and their relative
strength and weaknesses, both individually and collectively. It must then
weigh these factors against actual market conditions and its own competitive
position.

Legal and political environment: A firm contemplating entry into a

particular market also needs to understand the host country’s trade policies
and its general legal and political environment. A firm may choose to forgo
exporting its goods to a country that has high tariffs and other trade

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restriction in favor of exporting to one that has fewer or less significant

barriers. Government stability is an important factor in foreign market
assessment.
Socio-cultural influences: Manger assessing foreign markets must also
consider socio-cultural influences, because of their subjective nature, are often
difficult to quantify. To reduce the uncertainty associated with these factors,
firms often focus their initial internationalization in countries culturally
similar to their home markets.

2. Evaluating Costs, Benefits and Risks

The next step in foreign market assessment is a careful evaluation of the
costs, benefits, and risks associated with doing business in a particular foreign
market.

Costs: Two types of costs are relevant at this point: direct and opportunity.
Direct costs are those firm incurs in entering a new foreign market and
include costs associated with setting up a business operation, transferring
managers to run it, and shipping equipment, and merchandise. The firm also
incurs opportunity costs, because the firm has limited resources, entering one
market may preclude or delay its entry in another.

Benefits: Among the most obvious potential benefits are the expected sales
and profits from the markets. Other includes lower acquisition and
manufacturing costs, foreclosing of markets to competitors, competitive
advantage, access to new technology, and the opportunity to achieve synergy
with other operations.

Risks: Of course, few benefits are achieved without some degree of risk.
Generally, a firm entering a new market incurs the risk of exchange rate
fluctuation, additional operating complexity, and direct financial losses due to
inaccurate assessment of market potential. In extreme cases, it also faces the
risk of loss through government seizure of property or due to war or terrorism.

3. Most Potentiality for Entry or Expansion

The factors of ownership advantages, location advantages and
internationalization advantages are the most potentiality for an organization
for entry or expansion. Other factors to be considered include the firm’s need
for control, the availability of resources, and the firm’s global strategy.

Product decisions:
The important product decisions needed to be taken in global marketing
management are as follows:

1) Identification of Products for International Market:

The firm has to carry out preliminary screening, that is, identification of
markets and products by conducting market research. A poorly conceived
product often leads to marketing failures. It was not a smooth sailing in the
Indian market for a number of transnational food companies after the initial
short-lived euphoria among Indian consumers.
Kellogg’s, Pizza Hut, McDonald’s, and Domino’s Pizza have all run into
trouble in the experienced the troubled waters in Indian market at one point

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of time or the other. The basic mistakes that these firms made were:

i) Gross Overestimation of Spending Patterns of Indian

Consumers:

Despite the ability to buy products, the customers in South Asia are very
cautious and selective when spending. They look for value for money in their
purchase decisions far more than their Western counterparts do.

ii) Gross Overestimation of the Strength of their Transnational

Brands:

These MNCs estimated their brand image very high in the international
markets and the globalization of markets was considered to be a very potent
factor for getting a large number of customers for their products, as happened
in African and other East Asian countries.

iii) Gross Underestimation of the Strength of Ethnic Indian

Products:

As Indian food is traditionally prepared on a small scale, and mass

manufacturing and organised mass-marketing of Indian products was
missing, it was wrongly believed that the food products manufactured by the
multinationals would change the traditional eating habits of the Indian
consumers. They failed to recognize the variety and strength of ethnic Indian
foods. India is not only the largest producer of milk in the world with an 80
million metric ton output, that is, about 20 million tons ahead of the US but
also home to hundreds of varieties of sweets.

2) Developing Products for International Markets:

Various approaches followed for developing products for international
markets are as follows:

i) Ethnocentric Approach:

This approach is based on the assumption that consumer needs and market
conditions are more or less homogeneous in international markets as a result
of globalization. A firm markets its products developed for the home market
with little adaptation. Generally, an exporting firm in the initial phases of
internationalization relies too heavily on product expansion in international
markets.

This market extension approach of product development facilitates cost

minimization in various functional areas and a firm gains rapid entry into
international markets. However, the ethnocentric approach does not always
lead to maximization of market share and profits in international markets
since the local competitors are in a relatively better position to satisfy
consumers’ needs.

ii) Polycentric Approach:An international firm is aware of the fact that

each country market is significantly different from the other. It therefore

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adopts separate approaches for different markets. In a polycentric approach

products are developed separately for different markets to suit local marketing
conditions.

iii) Regiocentric Approach:

Once an international firm establishes itself in various markets the world over,
it attempts to consolidate its gains and tries to ascertain product similarity
within market clusters. Generally, such market clusters are based on
geographical and psychic proximity.

iv) Geocentric Approach:

Instead of extending the domestic products into international markets, a firm

tries to identify similarities in consumption patterns that can be targeted with
a standard product around the world. Psychographic segmentation is helpful
in identifying consumer profiles beyond national borders.

In a geocentric approach to product development, there is a high degree of

centralization and coordination of marketing and production activities
resulting in higher economies of scale in the various constituents of the
marketing mix. However, it needs meticulous and consistent researching of
international markets.

3) Market Segment Decision:

The first product decision to be made is the market segment decision because
all other decisions—product mix decision, product specifications, and
positioning and communications decisions—depend upon the target market.

4) Product Mix Decision:

Product mix decision pertains to the type of products and product variants to
be offered to the target market.

5) Product Specifications:
This involves specification of the details of each product item in the product
mix. This includes factors like:

i) Product Attributes:

Some of the key characteristics and features of a product are its quality,
styling, and performance. These characteristics are affected by consumer
needs, conditions of product use, and ability to buy. The factors that affect
product attributes change from country to country.

ii) Packaging:

The main concerns in packaging a product are product protection and

promotion. For example, in a hot and humid climate product deteriorate
rapidly. Special packaging is necessary to minimize the deterioration of the
product. An international marketer has to pay attention to this aspect in
designing the packaging material for the product.

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In designing the packaging material for promotion, an international marketer

has to consider different aspects, such as colour, size, appearance, disposable
income, and shopping habits. When designing packaging for a low-income
market, it must be ensured that packaging costs less and the goods are
packaged in smaller amounts and sizes. When the product is meant for a high-
income market the packaging must be in large amounts and must be durable,
because, high-income buyers, in general, go for shopping very infrequently.

iii) Labelling:

The primary role of labelling is to provide information. Often the host

governments determine the information requirements. The information the
manufacturer may be asked to provide includes description of weight,
contents, ingredients, product dating, name of the manufacturer, and unit
price information. Language difference is a barrier for a firm operating in
international markets. When it is operating in overseas markets the labels
have to be translated into local languages. Alternatively, the firm can use
internationally recognized symbols or multilingual labels.

iv) Service Policies:

Services of physical products can be classified into pre-sale services and post-
sale services. Pre-sale services include delivery, technical advice, and postal
services. Post-sale services include repair services, maintenance, and
operating advice. The level of service necessary depends upon the complexity
of the product.

The more complex the product the greater the demand for pre-and post-sales
service. When an international firm appoints foreign distributors and agents
for providing service it has to train them adequately to meet its after sales
needs. The emphasis it lays on service support must be proportionate to the
value the customer attaches to the service support.

v) Warranties:

A warranty is a written guarantee of a manufacturer’s responsibility when a

product fails to perform. Through warranties a firm takes responsibility for
repair and replacement of defective products. Warranties must conform to
local laws both in terms of product standards and a manufacturer’s liability.

Local consumers in many countries view the products manufactured by a

foreign firm as less dependable. Providing a strong warranty can go a long way
in assuring the local consumers about the trustworthiness of the product. The
international firm can in fact use the superior warranty protection as a
promotional tool.

6) Positioning and Communications Decisions:

Positioning is the image projected for the product. Communication refers to
the promotional message designed for the product. Obviously, both
positioning and marketing communication are very much interrelated. For the

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same product, sometimes the positioning and communication strategies differ

between markets.

7) Product Elimination:
Product Elimination is one of the most important product related decision.
Too many product introductions can risk overburdening the firm’s marketing
system. There is a constant need for a regular review of the range and for
elimination decisions to be made where a product is either in its decline stage
or simply failing to generate sufficient profit.

The international perspective, however, means that decision-making is more

difficult, since a product may be manufactured principally in a plant in one
country, be a ‘cash cow’ in one market and a ‘dog’ in another. Careful analysis
is therefore needed before the product elimination decision is taken. The
identification of overlaps in the product range or poor performance of specific
products may necessitate elimination of products if they are in the declining
stage of the product life cycle, have been duplicated or have been replaced by a
newer product.

8) Product Diversification:
Diversification means seeking unfamiliar products or unfamiliar markets, or
both, for the purpose of expansion. Diversification requires substantially
different and unfamiliar knowledge, thinking skills, and processes. Thus,
diversification is at best a risky strategy, and a company should choose this
path only when current product/market orientation seems to provide no
further opportunities for growth.

promotion decisions:
When a company develops a new product, changes an old one or wants
increase sales of an existing product or service, it must transmit its selling
messages to potential customers.
“ Promotion includes all the tools in the marketing mix whose major role is
persuasive communication.”
“ Promotion consists of those activities that are designed to bring a company's
goods and services to the favourable attention of customers.”

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1. Identify the Target Audience

( Audience Analysis)
 The communication process start with a clear target audience
 Target audience can be current users, deciders, influencers, individuals,
groups, potential customers etc.
 The target audience analysis is a critical influence on the communicators
decision on what to say? When to say? And to whom to say it?
 Audience analysis also includes the image analysis which assess the
current image of the company, its product, and its competitors.
 Audience analysis helpful for the organization to determine the
communication objectives, design the message, select the media, set the
communication budget and to select the appropriate promotional tool.

2. Determining the Communication Objectives

The communication objectives may also be different in some cases. For
example, when the product is in the introduction stages in a market, the
emphasis of communication could be on consumer education and creation of
primary demand. In a market where the product is at other stages of the life
cycle, the communication objectives would be different.

3. designing a message:

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The decisions regarding the message content, message structure, message

format and message source are influenced by certain environmental factors
like cultural factors and legal factors. The differences in the environmental
factors among the countries may, therefore, call for different messages so as to
be appropriate for each market.

4. select the communication channel:

The promotion decisions faced by export marketing management can be
reduced to the following:
i) What messages?
ii) What communications media?
iii) How much effort or money to spend?
These decision areas are interrelated. International marketing promotion
takes various forms such as personal selling, advertising, sales promotion, and
publicity.

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5. Establish market communication budget:

The size of the total promotional expenditure and the apportioning of this
amount to the different elements of the promotion mix are very important but
difficult decisions.

Promotion Mix
“The basic tools used to accomplish an organization's communication
objectives are often referred to as promotional mix.”
Basic Elements of the Promotional Mix

The fourth element of the 4 P’s of Marketing Mix is the promotion; that

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focuses on creating the awareness and persuading the customers to initiate

the purchase. The several tools that facilitate the promotion objective of a firm
are collectively known as the Promotion Mix.
The Promotion Mix is the integration of Advertising, Personal Selling, Sales
Promotion, Public Relations and Direct Marketing. The marketers need to
view the following questions in order to have a balanced blend of these
promotional tools.
What is the most effective way to inform the customers?
Which marketing methods to be used?
To whom the promotion efforts be directed?
What is the marketing budget? How is it to be allocated to the promotional
tools?

Elements of Promotion Mix:

Advertising: The advertising is any paid form of non-personal presentation

and promotion of goods and services by the identified sponsor in the exchange
of a fee. Through advertising, the marketer tries to build a pull strategy;
wherein the customer is instigated to try the product at least once.The
complete information along with the attractive graphics of the product or
service can be shown to the customers that grab their attention and influences
the purchase decision.
Personal Selling: This is one of the traditional forms of promotional tool
wherein the salesman interacts with the customer directly by visiting them.It
is a face to face interaction between the company representative and the
customer with the objective to influence the customer to purchase the product
or services.
Sales Promotion: The sales promotion is the short term incentives given to the
customers to have an increased sale for a given period. Generally, the sales
promotion schemes are floated in the market at the time of festivals or the end
of the season. Discounts, Coupons, Payback offers, Freebies, etc. are some of
the sales promotion schemes. With the sales promotion, the company focuses
on the increased short term profits, by attracting both the existing and the
new customers.
Public Relations: The marketers try to build a favorable image in the
market by creating relations with the general public. The companies carry out
several public relations campaigns with the objective to have a support of all
the people associated with it either directly or indirectly.The public comprises
of the customers, employees, suppliers, distributors, shareholders,
government and the society as a whole. The publicity is one of the form of
public relations that company may use with the intention to bring newsworthy

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information to the public.E.g. Large Corporates such as Dabur, L&T, Tata

Consultancy, Bharti Enterprises, Services, Unitech and PSU’s such as Indian
Oil, GAIL, and NTPC have joined hands with Government to clean up their
surroundings, build toilets and support the swachh Bharat Mission.
Direct Marketing: With the intent of technology, companies reach
customers directly without any intermediaries or any paid medium. The e-
mails, text messages, Fax, are some of the tools of direct marketing.The
companies can send the emails and messages to the customers if they need to
be informed about the new offerings or the sales promotion schemes. E.g. The
Shopperstop send SMS to its members informing about the season end sales
and extra benefits to the golden card holders.
Thus, the companies can use any tool of the promotion mix depending on the
nature of a product as well as the overall objective of the firm.

Pricing decisions:
 Introduction

Pricing is one of the most critical parts of the marketing mix for international
firms. Pricing, above all other elements of the marketing mix, is what creates
revenue for the firm. The remaining “P’s (Product, Placement, and
Promotion), contribute to cost for a company. It can be observed that pricing
technique can either make or break expansion efforts. Marketers must work
cooperatively with other organizational departments, mainly Finance, to
integrate finance, accounting, manufacturing, tax and legal components into
the chosen pricing strategy. One of the biggest obstacles for multinational
firms to overcome is how to set prices across different countries. There are
many factors to consider to ensure that parallel trade or gray market
situations do not occur.

Drivers in Foreign Market Pricing:

Many different factors come into play when setting prices for the same
product in different countries. Major influencers are labeled the 4 C’s:

Company (costs, company goals)

Customers (price sensitivity, segments, consumer preferences)
Competition (market structure and intensity of competition)
Channels (of distribution)

 Components of Pricing:

The price variable is made up of two components viz costs and profit. The cost
component is further subdivided as fixed and variable.

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 The Process of Price Setting

The marketing manager uses the parameters suggested by the

economists for arriving at a price. These parameters may be
enumerated as under:
1.Costs
2.Demand and supply
3.Economic, legal and political conditions.
1. Costs
Costs represent the base line for setting the price. In other words,
costs represent the price floor beyond which prices cannot be
dropped. As already explained costs are made up of two components,
fixed costs and variable costs. Fixed costs represent the un-escapable
element of cost, whereas, the variable cost represent the escapable
costs. The variable costs are also sometimes interpreted as marginal
costs or incremental costs.
Each of these component has its own significance when pricing a
product but the significance is in turn dependent upon the marketing
goals, and other similar variables.
2.Demand & Supply
For a marketing manager, the upper limit is demonstrated by the
demand and supply conditions as they exist in the market. The
demand conditions are interpreted from the market conditions and
the consumer behaviour whereas, the supply conditions are
interpreted by an analysis of the competition. The prices charged by
the competitors, and the attributes and quantity sold by the
competitors, set the supply parameters. Thus for example, the prices
being charged for garments by the Italians and the South Asians will
determine broadly the range that can be charged by the apparel
exporters. Again, if the international buyer is alert he will through his
awareness, bargain against the subsidies being provided by the
Government to the exporter, thus forcing the Indian exporter to
charge as per real costs.
3.Economic, Legal and Political conditions
These represent parameters outside the market forces which influence
the price structure. The Government, it has been noted, can through
its policy, in fact modify the market conditions, making them
lopsided. Thus, the countries where the economic policies are directed
by the Government, the economic and political conditions have an
important bearing on price structures. Taxes and duty drawbacks
represent excellent examples for the same.
Legalities lengthen any process and complicate it and thereby
influence the price structure. The more the legal constraints to be

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adhered to, the more the price charged from the customers, in an
effort to pass the increase in costs.e parameters explained above
suggest the upper and lower limits but, the actual price lies
somewhere in between. The effort of every manager is to arrive at a
process that is easy and minimizes the deviation from the chosen
price, in order to ensure the resultant profit. As a result of this,
various methods of pricing, have come into vogue which emphasise
one variable as against the other variable for example, cost plus
pricing, competitive pricing. Cost plus pricing reflects an accounting
thought rather than a managerial thought whereas competitive
pricing reflects a supply side thought process.
It must be pointed out that marketing efforts are directed at fulfilling the
need of the identified consumers. Price is an inherent factor of need.
Therefore price must reflect managerial thought, and must fit into the
overall marketing strategy.

 Pricing in International Market

Although the parameters and the process of pricing remain the same, new
dimensions are added to the pricing decision when a firm starts exploiting the
international markets.
When an organisation enters a new market in the international marketing
arena, it opens itself to an absolutely new set of characteristics: Thus, as each
market stands out as a separate entity, this influences the parameters of
pricing.
Moreover, a product's position on its life-cycle curve and the firm's
position on its life-cycle curve no longer remain sacred, adding, more
complexities to the pricing
decision.

Firm Life-Cycle
In international marketing operation a firm moves from the export
marketing stage to international marketing to multinational marketing and
finally graduating to global marketing.
At each stage the position of the firm on its life-cycle curve emphasizes the
influence it will bear on the pricing decision. The influence is likely to be felt in
two ways-the marketing process it adopts and the marketing goal the firm
chooses.
Export Marketing
Export marketing represents an entry mode for a firm, in its infancy, in
international marketing, process. At this stage the firm has neither the
requisite marketing experience nor the accompanying financial clout at its
disposal. As a result of these shortcomings it cultivates large and organized
buyers and has little commitment to the market.
Moreover, such a firm has little or no control over the distribution and
promotion functions, owing to the above shortcomings. Therefore, price

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becomes the only variable that remains controllable given the product. Such a
firm, therefore, uses price as its unique selling proposition.
As already pointed out the second influence is on the marketing goals and
through it, the process of price settings. Because the firm is committed to large
buyers, it has little involvement with the market. Therefore, the goal of such
firm is short-term in nature with maximum emphasis on profit element of the
price. It therefore resorts to marginal pricing to seek bulk orders. As the firm
gains marketing experiences the goals become long-term in nature with
emphasis on market cultivation. In such cases the firm vacillate between fixed
or full cost pricing vs variable pricing.

Objectives of pricing:

Pricing strategy begins with the determination of objectives. Pricing objectives

reflect the overall goals a firm wants to accomplish through pricing. In
international marketing, pricing objectives may vary, depending on a product
life cycle stage and the country specific competitive situation. The important
pricing objectives are discussed under the following headings:

Market penetration
Market skimming
Market share
Meeting competition
Preventing potential competitors
Early recoupment of the investment
Quick cash recovery
Discharging export obligation
Disposal of surplus
Return on investment; and
Profit maximization

1. Market penetration: In penetration and pricing, price is used as a

competitive weapon to gain market position. Penetrative pricing means a
product may even be sold at a loss for a certain length of time. So, companies
new to exporting cannot absorb such losses. A low price is charged in the
initial period or until the product gains acceptance of the buyers. This method
of pricing attracts buyers who are sensitive to price, effects large volume of
sales, avoids competition and stabilizes the price.

2. Market skimming: In skimming, a high initial price is charged in a

market segment which is willing to pay a premium price for a product. In
skimming pricing, the product must create a high value for the buyers. This is

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often used in the introductory phase of the product life cycle when both
production capacity and competition are limited. Sony used skimming
strategy when it introduced Betamax video cassette recorders in the United
States.

3. Market share: The efficiency of the product may be evaluated in terms of

market share it holds. Increasing the market share is a sure way to lower costs.
A larger market share might increase profitability because of greater
economies of scale.

4. Meeting competition: The present market is highly competitive. When a

product is introduced in a competitive market, meeting competition can be an
important objective. The price must remain competitive in order to gain a
competitive edge in the market.

5. Preventing potential competition: The objective of pricing may be to

prevent the entry of new competitors into the market. When a low price is set
on the product, the marketer may incur loss. This discourages the competitors
to gain an entry into the market with similar product.

6. Early recoupment of investment: Some products may have short

product life cycle. They may also be affected by swift technological changes.
There may also be potential danger of political threats and cut throat
competition. In such a situation, the marketer may have the objective of
recouping his investment as early as possible. Prices bring revenue to the firm.
A high price determined in the initial period may help the manufacturer
recoup the investment in the project early.

7. Quick cash recovery: When a firm has liquidity problem, it may prefer to
generate quick cash flow. The pricing method adopted by it may liquidate the
stock quickly thereby encouraging channel members and buyers to make
prompt payment.

8. Discharging export obligation: Having gained a good market share in

the domestic market, the firm may be willing to foray into foreign market.
Entering foreign market and meeting export obligation may not be easy for all
firms. Sometimes, even by charging a price lower than the cost, the firm gains
a share in the foreign market.

9. Disposal of surplus: When a firm has surplus stock, it may resort to

dumping. Dumping is an important global pricing strategy. It is the sale of an
imported product at a price lower than that is normally charged in a domestic
market or country of origin. The firm views export sales as passive
contribution to sales volume.

10. Return on Investment: Price is the only source of revenue to the firm.
The firm has to earn sufficient revenue in order to meet the needs of
stakeholders. It may set a target rate of return on its investment. Pricing
serves to secure the target rate of return on the investment.

11. Profit maximization: Profit is by far the most important pricing

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objective. Prices are viewed as active instrument for profit maximization. In

general, pricing is a tool of accomplishing marketing objectives. The firm may
use price to achieve a specific objective, whether a targeted rate of return on
profit, a targeted market share or some other specific goal.

 Information for Pricing Decisions

An important pre-requisite for scientific export pricing decisions is

regular availability of authentic basic data relating to export
products, foreign market and other relevant marketing
information. The details of information requirements vary from
product to product, market to-market and firm to firm.
In general, the following information is usually necessary for
facilitating export pricing decision :
A. Product Information
1)Production cost details :
a)Prime cost
b)Factory overheads
c)General Administration overheads
2)Cost of distribution
a)Cost of packing
b)Cost of selling
c)Cost of transportation including insurance
d)Distribution costs

3)cost of marketing support-advertising, sales promotion and

technical literature.

These data may have to be obtained for the exporting countries, for competing
countries and for consuming countries.

4)Nature of the product

a)Whether a consumer or an industrial product

b)Elasticity of demand
c)Demand be pushed up by promotion
d)Importance given to the price-quality mix
e)Elasticity of supply of the product
5)International levies, taxes, etc.
6)Export incentives
7)Product guarantees
8)Installation and after-sales service requirements, and
9)Percentage incidence of rejects.

B)Market Information
1)Market Structure-high competition, little competition or low competition
2)Peculiarities of the market-developed and developing countries. Particular
segments in developed countries may be interested in low price goods.
3)Ruling price in the foreign market including prices of substitutes
4)Terms of payment offered by the competitors and demanded by importers
5)Import duties, border fiscal charges and quota, restrictions.

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6)Major sources of supply in the importing country-local and foreign

7)Trade preferences and/or trade agreements, if any
8)Extent of G.S.P. concessions, if any
9)Brand image, brand loyalty and consumer preferences
10)The nature of market segmentation, if any
11)Publicity-need, media and cost
12)Channels of distribution and margins allowed to various intermediaries
13)Shipping freight, insurance, packing, banking, transportation and other
charges incidental to export, and
14)Documentation and invoicing requirements, health and sanitary
regulations and other government regulations.

C)Information Required at the Micro Level

Some of the strategic points of information necessary for pricing decisions at

the micro level cover the following aspects:

1)Production capacity of the firm-installed as well as utilised

2)Proportion of total production supplied to the home market
3)Proportion at present exported
4)competition among domestic firms in the export field.
5)Additional export possibilities

Pricing Policy

As regards the supplies for additional exports, the essential

information required is:

1)Whether it would involve curtailment of supplies to the domestic market?

2)Whether it would lead to the utilisation of idle capacity, or
3)Whether it would require commissioning of new capacity?

 Sources of Price Information:

The exporters' own files could give an idea of the prices charged in the past
and as to what extent they were acceptable.

Domestic export statistics usually provide quantity and value of the

commodities/ products exported. If we divide the value by quantity, we can
get an idea of the export price realised by the domestic exporters. So also a
look at the foreign import statistics could give an idea of the prices paid by
importers for imports of various products/commodities from various
countries.

Export Promotion Councils/Bureaus also provide an idea of the possible

prices at which the products could be exported.

Commodity Price Bulletins issued by the United Nations, International

Monetary Fund and Food and Agriculture Organisation provide an idea of the
export, import and wholesale prices of the various commodities. The prices at
which the commodities are traded at the various commodity exchanges are
usually published. So also publications of commodity oriented organisations

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like International Sugar Agreement could provide an idea of the spot and
auction prices. The Committee also publishes wholesale, quoted and import
prices of commodities of interest to Commonwealth countries.

Catalogues published by departmental stores of the major developed countries

can provide an idea of the prices charged for the various products from
consumers. Of course, the exporter would have to work backwards by
deducting the retail margins, wholesale margins, the import duties and the
freight and insurance charges. Trade Journals very often provide price data
about the products covered. Studies made by various research organisations
including the International Trade Centre also contain the data about prices
and the margins applicable at various distribution levels.

Reports of Trade Delegations could be another sources of price information.

Participation in trade fairs and exhibitions could possibly give the best idea
about the prices of the products covered by the fairs & exhibitions as also of
the modifications required in the product.

In addition, there are specialised price information agencies which could also
help the exporters about prices which could be obtained for the products
exported by them.

 Issues in International Pricing

International Pricing Issues

 Export Price Escalation: Exporting products requires more steps

and higher risks than selling products domestically. To make up for
incremental costs, such as shipping, insurance and tariffs, foreign retail
prices may often become much higher than prices in the home country
of where a product is produced. The most important questions to ask
yourself as a marketer are: will my customers pay an inflated price for
our products/services? and will the price of our product make allow us
to compete successfully with other firms? – – If the answer to these
questions are negative, then there are 2 approaches to dealing with
price escalation. The first way is find a way to cut the export price, and
the second is to position the product as a exclusive or premium brand.

 Inflation: Intense and unrestrained inflation rates in countries can

become a huge obstacle for multinational corporations. In places where
inflation rates are rampant, setting prices and controlling costs are
imperative, often involving complete dedication by marketing and
financial divisions of an organization. There are many alternatives to
protect against the affects of inflation. Common plans include
modifying components of products or packaging materials, getting raw
materials from low-cost suppliers, shortening credit terms, including
escalator clauses in long-term contracts (used in many b2b situations),
quoting prices in stable currencies and pursuing rapid inventory
turnovers. When governments impose price controls, which may
accompany wage freezes, companies must also adapt several plans of

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action. Often in these circumstances, businesses will alter their product

lines to minimize negative affects from price controls, change defined
market segments, launch new products, spark negotiations with the
government, and try to better predict when pricing controls may occur.
In extreme cases, companies may choose to exit foreign markets when
inflation or pricing controls become too costly to the company. If,
however, a company can better manage these challenges, they will gain
a long-term competitive advantage by creating higher barriers to entry
for potential new competitors.

 Currency Movements

Exchange rates represent how much one form of currency is worth in terms of
another. Political and economic conditions cause exchange rates to constantly
fluctuate. With these rates so unstable, setting a price strategy that can
combat these changes can be difficult. The two main pricing issues for
managers are how much of the exchange rate gain or loss should be
transferred to customers (the pass-through issue), and deciding what currency
price quotes are given in.

 Transfer Pricing

Another challenge facing organizations operating globally is how they handle

sales transactions between related parts of the same company. Transfer
pricing are the prices charged for transactions involving the trade of raw
materials, components, finished goods, or services. Transfer pricing decisions
involve the need to balance the interests of a variety of stakeholders including:
the parent company, local country managers, host governments, domestic
governments, and joint-venture partners. Some of the factors that influence
transfer pricing decisions are the following:  tax regimes, local market
conditions, market imperfections, joint venture partners and the morale of
local country managers. There are two major transfer pricing strategies,
market-based transfer pricing and nonmarket-based pricing.

Anti-dumping Regulations
Dumping occurs when imports are sold at an unfair price. Recently the
removal of trade barriers (tariffs, quotas) has caused countries to switch to
non-tariff barriers such as anti-dumping laws in order to protect their local
industries. It is important for multinational corporations to take into account
anti-dumping laws when they determine their global pricing policy. If firms
price too aggressively, this may cause anti-dumping measures that will hurt
their competitive position. It is important to monitor how anti-dumping laws
affect similar companies in your industry.

 Price Coordination

The last issue that affects pricing in the global environment is price
coordination. Price coordination is the relationship that exists between prices
charged in different countries. Although the laws of economics indicate that
prices should vary across region so that overall profits are maximized, reality

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is just not that simple. In the majority of instances, markets cannot be

separated perfectly, and too much price differentiation creates gray markets.
So, when deciding on how to coordinate your pricing strategy, consider these
factors:

 The nature of your customers

 The amount of product differentiation
 Nature of your distribution channels
 Nature of you competition
 Market Integration
 Characteristics if your internal organization
 Government regulations

Countertrade

The international marketer can use countertrade to gain rewards when

conducting business globally. Countertrade describes many unconventional
trade-financing transactions that involve some form of non-cash
compensation. In recent times, countertrade has become more popular. The
most common forms of countertrade are barters, clearing arrangements,
switch trading, buyback, counterpurchases and offsets. The most important
idea to remember from countertrade is that its benefits may cause short-term
or long-term benefits for your company, but there are potential risks involved.

Methods of pricing:

An organization has various options for selecting a pricing method. Prices are
based on three dimensions that are cost, demand, and competition.

The organization can use any of the dimensions or combination of dimensions

to set the price of a product.
Figure- shows different pricing methods:

The different pricing methods (Figure-4) are discussed below;

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Cost-based Pricing:
Cost-based pricing refers to a pricing method in which some percentage of
desired profit margins is added to the cost of the product to obtain the final
price. In other words, cost-based pricing can be defined as a pricing method in
which a certain percentage of the total cost of production is added to the cost
of the product to determine its selling price. Cost-based pricing can be of two
types, namely, cost-plus pricing and markup pricing.

These two types of cost-based pricing are as follows:

i. Cost-plus Pricing:

Refers to the simplest method of determining the price of a product. In cost-

plus pricing method, a fixed percentage, also called mark-up percentage, of
the total cost (as a profit) is added to the total cost to set the price. For
example, XYZ organization bears the total cost of Rs. 100 per unit for
producing a product. It adds Rs. 50 per unit to the price of product as’ profit.
In such a case, the final price of a product of the organization would be Rs.
150.

Cost-plus pricing is also known as average cost pricing. This is the most
commonly used method in manufacturing organizations.

In economics, the general formula given for setting price in case of cost-plus
pricing is as follows:

P = AVC + AVC (M)

AVC= Average Variable Cost

M = Mark-up percentage

AVC (m) = Gross profit margin

Mark-up percentage (M) is fixed in which AFC and net profit margin (NPM)
are covered.
AVC (m) = AFC+ NPM

ii. For determining average variable cost, the first step is to fix prices.
This is done by estimating the volume of the output for a given period of time.
The planned output or normal level of production is taken into account to
estimate the output.

The second step is to calculate Total Variable Cost (TVC) of the output. TVC
includes direct costs, such as cost incurred in labor, electricity, and
transportation. Once TVC is calculated, AVC is obtained by dividing TVC by
output, Q. [AVC= TVC/Q]. The price is then fixed by adding the mark-up of
some percentage of AVC to the profit [P = AVC + AVC (m)].

iii. The advantages of cost-plus pricing method are as follows:

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a. Requires minimum information

b. Involves simplicity of calculation

c. Insures sellers against the unexpected changes in costs

The disadvantages of cost-plus pricing method are as follows:

a. Ignores price strategies of competitors

b. Ignores the role of customers

iv. Markup Pricing:

Refers to a pricing method in which the fixed amount or the percentage of cost
of the product is added to product’s price to get the selling price of the
product. Markup pricing is more common in retailing in which a retailer sells
the product to earn profit. For example, if a retailer has taken a product from
the wholesaler for Rs. 100, then he/she might add up a markup of Rs. 20 to
gain profit.

It is mostly expressed by the following formulae:

a. Markup as the percentage of cost= (Markup/Cost) *100

b. Markup as the percentage of selling price= (Markup/ Selling Price)*100

c. For example, the product is sold for Rs. 500 whose cost was Rs. 400. The
mark up as a percentage to cost is equal to (100/400)*100 =25. The mark up
as a percentage of the selling price equals (100/500)*100= 20.

Demand-based Pricing:
Demand-based pricing refers to a pricing method in which the price of a
product is finalized according to its demand. If the demand of a product is
more, an organization prefers to set high prices for products to gain profit;
whereas, if the demand of a product is less, the low prices are charged to
attract the customers.

The success of demand-based pricing depends on the ability of marketers to

analyze the demand. This type of pricing can be seen in the hospitality and
travel industries. For instance, airlines during the period of low demand
charge less rates as compared to the period of high demand. Demand-based
pricing helps the organization to earn more profit if the customers accept the
product at the price more than its cost.

Competition-based Pricing:
Competition-based pricing refers to a method in which an organization
considers the prices of competitors’ products to set the prices of its own
products. The organization may charge higher, lower, or equal prices as
compared to the prices of its competitors.

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The aviation industry is the best example of competition-based pricing where

airlines charge the same or fewer prices for same routes as charged by their
competitors. In addition, the introductory prices charged by publishing
organizations for textbooks are determined according to the competitors’
prices.

Other Pricing Methods:

In addition to the pricing methods, there are other methods that are discussed
as follows:

i. Value Pricing:
Implies a method in which an organization tries to win loyal customers by
charging low prices for their high- quality products. The organization aims to
become a low cost producer without sacrificing the quality. It can deliver high-
quality products at low prices by improving its research and development
process. Value pricing is also called value-optimized pricing.

ii. Target Return Pricing:

Helps in achieving the required rate of return on investment done for a
product. In other words, the price of a product is fixed on the basis of expected
profit.

iii. Going Rate Pricing:

Implies a method in which an organization sets the price of a product

according to the prevailing price trends in the market. Thus, the pricing
strategy adopted by the organization can be same or similar to other
organizations. However, in this type of pricing, the prices set by the market
leaders are followed by all the organizations in the industry.

iv. Transfer Pricing:

Involves selling of goods and services within the departments of the
organization. It is done to manage the profit and loss ratios of different
departments within the organization. One department of an organization can
sell its products to other departments at low prices. Sometimes, transfer
pricing is used to show higher profits in the organization by showing fake sales
of products within departments.

Steps involved in Pricing in International Marketing

The task of determining prices in international marketing is a complex one.
Particularly, it is complicated by fluctuating exchange rates which may bear
only limited relationship to underlying cost. So, global marketers should
follow appropriate steps to determine export price. The steps involved in
pricing are
1. defining pricing objectives
2. analyzing market characteristics
3. Calculating costs
4. Calculating values of incentives; and
5. determining export price.

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1.Determining pricing objectives: Pricing is a means to achieve certain

marketing objectives. An overall goal should aim at contributing to the
company’s sales and profit objectives. However, the other pricing objectives
may include market penetration, market skimming, market share, preventing
entry of competitors, early recoupment of investment, profit maximization,
etc.
Generally, consumers do not object to price. Pricing may be based on any
objective depending upon the conditions of the marketer. But what they
actually object to is the inconsistent relationship between the price charged for
the product and its perceived value.

2. Analyzing market characteristics: The firm’s pricing objective must be

consistent with the nature and characteristics of markets. The characteristics,
competitive conditions and the paying capacity of different markets differ
from each other.
The international marketer should study the market to determine the prices to
be charged. He should find out what the market can afford to pay. The upper
limit is set by what the market can afford to pay, The marketer should
consider other factors related to the price. The margins of various middlemen,
import duty, internal taxes, insurance cost and transport cost, etc., should also
be covered by the price.

3. Calculating cost: A careful analysis of cost is necessary for determining

export prices. There is a variety of costs to exports. Direct production costs
include material, labor and other expenses required to manufacture the goods.
Materials, labor and the expenses which are indirectly involved in producing
the goods constitute production overheads. Market and distribution costs are
incurred for getting orders, handling orders, packing the goods and sending
them to customers.

Apart from these routine costs, special packaging and handling, credit and
collection, documentation for export transactions involve costs. Those costs
which are directly incurred for export purposes should necessarily be realized
from the price.

4. Estimating the value of incentives: The value of incentives available to

the exporter should be deducted from the total cost incurred for the export
order. An exporter can claim several incentives in the form of duty drawback,
cash compensatory support, replenishment license or exim scrip, premium on
the foreign exchange and income tax benefits. These incentives reduce the cost
of exporter.

5. Determining export price: The costs as enumerated above give the

lower limit for export pricing. The estimates of the cost should be compared
against the market price. Then the company should determine whether export
at the estimated market price is feasible. The excess of market price over total
costs gives profit to the exporter.

Distribution decisions:

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International distribution is the processes, relationships and fulfilment that

you set in place to get your products into overseas markets. Not to be confused
with international ecommerce. That’s just international shipping.
International distribution is about wholesaling into new countries. If you
choose to control distribution in each country you operate in you will need to
research and understand your legal requirements regarding distribution
agreements, customs & duty taxes, terms & conditions in each and every
country.

Distribution is on of the four main component of marketing along with

product management promotion and production.
It essentially provides and avenue through which products are transferred
through manufacturers and consumers.
Distribution of products to customers can take place in a short channel or an
extensive channel of goods.

International distribution channels:

Distribution plays an important role in the implementation of the

international marketing programme as it enable the products and services to
reach the ultimate customer. An international marketing firm has the option
of managing its distribution function either directly or indirectly through
middleman or a suitable combination of the two.

Following are the distributions channels in International market

Indirect Distribution: Indirect channels are further classified based on

whether the international marketer makes use of domestic intermediaries. An
international marketer therefore can make use of the following types of
intermediaries for distribution in foreign markets.

Domestic Overseas Intermediaries

Commission buying agents
Country controlled buying agents
Export management companies (EMCs)
Export Merchants
Export agents
Piggy backing
Foreign Intermediaries
Foreign Sales Representatives
Foreign Sales Agent
Foreign Stocking and Non-Stocking Agents
State Controlled Trading Companies

Direct Distributions: The options available to international marketer in

organizing direct distributions include sending representatives abroad from
the headquarters, setting up of local sales/branch office in the foreign country
of for a region establishing a subsidiary abroad, entering into a joint venture
or franchising agreement.

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Companies having long-term interest in international marketing find it

expedient to deploy their own sales forces in foreign markets. This helps them
in increasing their sale volume through committed market development
activities, better control and motivation of foreign intermediaries being used
and paving the way for smoother transition to direct distribution and
marketing.

Factors Determining the Choice of Distribution Channels

Selection of the perfect marketing channel is tough. It is among those few
strategic decisions which either make or break your company.

Even though direct selling eliminates the intermediary expenses and gives
more control in the hands of the manufacturer, it adds up to internal workload
and raises the fulfilment costs. Hence these four factors should be considered
before deciding whether to opt for the direct or indirect distribution channel.

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Market Characteristics
This includes the number of customers, their geographical location, buying
habits, tastes and capacity and frequency of purchase, etc.

Direct channels suit businesses whose target audience lives in a geographically

confined area, who require a direct contact with the manufacturer and are not
that frequent in repeating purchases.

In cases of customers being geographically dispersed or residing in a different

country, manufacturers are suggested to use the indirect channels.

The buying patterns of the customers also affect the choice of distribution
channels. If customers expect to buy all their necessaries in one place, selling
through retailers who use product assortment is preferred. If delivery time is
not an issue, if the demand isn’t that high, the size of orders is large or if
there’s a concern of piracy among the customers, direct channels are suited.

If the customer belongs to the consumer market, longer channels may be used
whereas shorter channels are used if he belongs to the industrial market.

Understanding the consumer behaviour is essential to deciding the most

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effective marketing channel for the business.

Product Characteristics
Product cost, technicality, perishability and whether they are standardised or
custom-made play a major role in selecting the channel of distribution for
them.

Perishable goods like fruits, vegetables and dairy products can’t afford to use
longer channels as they may perish during their transit. Manufacturers of
these goods often opt for direct or single level channels of distribution.
Whereas, non-perishable goods like soaps, toothpastes, etc. require longer
channels as they need to reach customers who reside in areas which are
geographically diverse.

If the nature of the product is more technical and the customer may require a
direct contact with the manufacturer, direct channels are used. Whereas, if the
product is fairly easy to use and a direct contact makes no difference to the
number of sales, longer channels are used.

The per unit value of the product also decides whether the product is sold
through a direct channel or through an indirect channel. If the unit value is
high like in the case of jewellery, direct or short channels are used, whereas
products like detergents whose unit value is low use longer channels of
distribution.

Competition Characteristics:
The choice of the marketing channel is also affected by the channel selected by
the competitors in the market. Usually, the firms tend to use a similar channel
as used by the competitors. But some firms, to stand out and appeal to the
consumer, use a different distribution channel than the competitors. For
example, when all the smartphones were selling in the retail market, some
companies partnered with Amazon and used the scarcity principle to launch
their smartphone as Amazon exclusive.

Company Characteristics:
Financial strength, management expertise, and the desire for control act as
important factors while deciding the route the product will take before being
available to the end user.
A company having a large amount of funds and good management expertise
(people who have sufficient knowledge and expertise of distribution) can
create the distribution channels of its own but a company with low financial
stability and management expertise has to rely on third-party distributors.

The companies who want to have a tight control over the distribution prefer
direct channels. Whereas, those companies to whom such control doesn’t
matter or those who are just interested in the sales of their products prefer
indirect channels.

The international distribution policy of a firm according to Cateora, should

cover the following factors:
1)Question of control, size of margins, length of channels, terms of sale and

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channel ownership.
2)Resource (money and personnel ) commitment plans for the distribution
function management keeping profit goals in a foremost position.
3)Specific market goals expressed in terms of volume, market share and
margin requirements, to be accomplished.
4) Return on investment, sales volume and long run potential as well as
guidelines for solving routine distribution problems, and
5)The relationship between long-and short-term goals, the extent of the
company's involvement in the distribution system as well as the extent of its
ownership of middlemen.

International physical distribution management:

The management of physical distribution of goods includes the functions as

well as costs associated with packing, order taking and processing, and
inventory control. Given the geographical distance, the associated business
risks and the variety of transportation modes available, the management of
this function poses a difficult challenge so far as the objectives of ensuring
ready and regular supply of goods, in foreign markets at the most optimal
costs are concerned.

Physical Distribution Management, known as the dark continent of marketing

offers tremendous potential in cost cutting and improving profitability. It
requires the use of a systems approach and the management of the
transportation, warehousing and inventory functions in an integrated manner.

To facilitate the performance of the tedious physical distribution activities and

procedure, international freight forwarders play an important role. The typical
functions performed by them are given below:

1) Figure costs, FAS or C&F.1Develop most economic methods of

shipment to port, port charges, wharfage, handling, tollage, etc. at port of exit;
ocean freight rate and steamship services available; consular requirements
and fees, insurance costs for terms of coverage specified in sale; export licence
or import permit requirements.
2) Make. steamship booking; If payment is by letter of credit, check date
shipment must be onboard and expiration date for negotiating documents.
Investigate transit time from plant to port, and free time allowed so shipment
will arrive in time and demurrage will not be incurred.
3) Instruct shipping department when to make shipment from plant.
Notify Steamship Company when shipment made and whether by rail, truck,
air or piggy express, giving routing, name of carrier.
4) Secure pier permit. Make arrangements for delivery to pier.
5) Prepare export declaration showing shipper, consignee, value and
commodity classification number.
6)Prepare bill of lading, checking compliance with all conditions and
terms of sale, shipper consignee, open or order notify, freight collect or
prepaid, description, etc.
7)Present export declaration to Custom House for approval and deliver to
Steamship Company.
8)Present bill of lading to steamship company for execution.

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9) Secure consular forms, prepare consular documents (in foreign

language if required) Present to consul for visa.
10)After shipment is on board, secure signed bill of lading from
steamship company, paying ocean freight and charges. Assemble documents;
bill of lading, commercial and consular invoices, certificate of origin, export
licence, import permit, as required.

If payment is by sight draft, prepare draft, attach necessary documents and

have exporter's bank forward. If on letter of credit, present documents to bank
holding credit.

Large-sized shipping vessels, increase in number of air cargo planes,

development of air cargo terminals, containerization and other innovations in
bulk transportation have been successful in reducing both the transit time and
delays but at higher costs. It is therefore necessary that the PDM be managed
in a cost-effective manner. An in-depth study of the PDM costs and an
analysis of the causes of delays and damages to goods can point out to areas of
potential savings in costs and improvement in customer service satisfaction.

TYPES OF DISTRIBUTION CHANNELS:

These are the middlemen that ensure smooth and effective distribution of
goods over your chosen geographical market. Middlemen are a very important
factor in the distribution process. let us take a look at the types of middlemen
we usually find.

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1. One Level Channel:(manufacturer to customer)

In this method an intermediary is used. Here a manufacturer sells the goods

directly to the retailer instead of selling it to agents or wholesalers. This
method is used for expensive watches and other like products. This method is
also useful for selling FMCG (Fast Moving Consumer Goods). This channel is
clarified in the following diagram:

2. Two Level Channel:(manufacturer to retailer to customer)

In this method a manufacturer sells the material to a wholesaler, the

wholesaler to the retailer and then the retailer to the consumer. Here, the
wholesaler after purchasing the material in large quantity from the
manufacturer sells it in small quantity to the retailer.

Then the retailers make the products available to the consumers. This medium
is mainly used to sell soap, tea, salt, cigarette, sugar, ghee etc. This channel is
more clarified in the following diagram:

3. Three Level Channel:(Manufacturer to wholesellerto retailer to

customer).

Under this one more level is added to Two Level Channel in the form of agent.
An agent facilitates to reduce the distance between the manufacturer and the
wholesaler. Some big companies who cannot directly contact the wholesaler,
they take the help of agents. Such companies appoint their agents in every
region and sell the material to them.

Intermediaries:

1] Agents
Agents are middlemen who represent the produces to the customer. They are
merely an extension of the company but the company is generally bound by
the actions 0of its agents. One thing to keep in mind, the ownership of the
goods do not pass to the agent. They only work on fees and commisions.

2] Wholesalers
Wholesalers buy the goods from the producers directly. One important
characteristic of wholesalers is that they buy in bulk at a lower rate than retail
price. They store and warehouse huge quantities of the products and sell them
to other intermediaries in smaller quantities for a profit.

Wholesalers generally do not sell to the end consumer directly. They sell to
other middlemen like retailers or distributors.

3] Distributors
Distributors are similar to wholesalers in their function. Except they have a
contract to carry goods from only one producer or company. They do not stock
a variety of products from various brands. They are under contract to deal in
particular products of only one parent company

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4] Retailers
Retailers are basically shop owners. Whether it is your local grocery store or
the mall in your area they are all retailers. The only difference is in their sizes.
Retailers will procure the goods from wholesaler or distributors and sell it to
the final consumers. They will sell these products at a profit margin to their
customers.

In the reality of the market, all producers rely on the distribution to channel to
some extent. Even those who sell directly may rely on at least one of the above
intermediary for any purpose. Hence the distribution channel is of paramount
importance in our economy.

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Module – 4
4.1 Integration between countries.
4.2 Levels of integration.
4.3 Impact of Integration.
4.4 Regional trading blocks
4.4.1EU,
4.4.2 NAFTA,
4.4.3 Mercosur,
4.4.4 APEC,
4.4.5 ASEAN,
4.4.6 SAARC,
4.5Commodity agreements.
4.6 GATT, WTO – functions, structure,
agreements, implications for India.
4.7 International Strategic Alliances –
Nature - Benefits. Pitfalls, scope,
managing alliances.

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Definition (by Business Dictionary)

Economic integration is an agreement among countries in a geographic region

to reduce and ultimately remove, tariff and non tariff barriers to the free flow
of goods or services and factors of production among each others; any type of
arrangement in which countries agree to coordinate their trade, fiscal, and/or
monetary policies are referred to as economic integration. Obviously, there are
many different stages of integration.

a. integration as an outcome – integration as something static;

integration can be achived when certain criteria are fulfilled
b. integration as a process – integration as a dynamic process;
represented by stages of integration going form FTA to political integration

Integration between countries:

There are several stages in the process of economic integration, from a very
loose association of countries in a preferential trade area, to complete
economic integration, where the economies of member countries are
completely integrated.

A regional trading bloc is a group of countries within a geographical region

that protect themselves from imports from non-members in other
geographical regions, and who look to trade more with each other. Regional
trading blocs increasingly shape the pattern of world trade - a phenomenon
often referred to as regionalism.

Integration between developed countries

The essential requirements for an increasing economic integration are:

 Comparable levels of economic development;

 Similar but potentially complementary structures in production and
demand;
 There are static effects (immediate general benefits) and dynamic effects
(accelerate development and raise welfare).
 The economic integration will stimulate research and development,
 inducing innovation and technical change faster economic growth.

Integration among developing countries

The economic integration is not based on static benefits, it aims at the

potential dynamic effects and the expectation that closer cooperation will
foster regional markets.

The objective of their integration is the acceleration of their development by:

Enlarging the market
Pooling resources essential for economic growth
Avoiding unnecessary and uneconomic duplication in capital

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investment

Integration between developing countries contains also elements of self-

destruction, for that reason the economic association rarely survive for a long
time.
Example: East Africa Common Market (EACM), Central American Common
Market (CACM).

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical
region agree to reduce or eliminate tariff barriers on selected goods imported
from other members of the area. This is often the first small step towards the
creation of a trading bloc. Agreements may be made between two countries
(bi-lateral), or several countries (multi-lateral).

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region
agree to reduce or eliminate barriers to trade on all goods coming from other
members. The North Atlantic Free Trade Agreement (NAFTA) is an example
of such a free trade area, and includes the USA, Canada, and Mexico.

Customs Union

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A customs union involves the removal of tariff barriers between members,

together with the acceptance of a common (unified) external tariff against
non-members.

Countries that export to the customs union only need to make a single
payment (duty), once the goods have passed through the border. Once inside
the union goods can move freely without additional tariffs. Tariff revenue is
then shared between members, with the country that collects the duty
retaining a small share.

The advantages of a customs union

Without a unified external tariff, trade flows would become distorted. If, for
example, Germany imposes a 10% tariff on Japanese cars, while France
imposes a 2% tariff, Japan would export its cars to French car dealers, and
then sell them on to Germany, thereby avoiding 80% of the tariff. This is
avoided if a common tariff is shared between Germany and France (and other
members of the customs union.)

A common external tariff effectively removes the possibility of arbitrage and,

some would argue, is one of the fundamental building blocks of economic
integration.

The disadvantages of a customs union

Union members must negotiate collectively with non-members or
organisations like the WTO as a single group of countries. While this is
essential to maintain the customs union, it means that members are not free
to negotiate individual trade deals.

For example, if a member wishes to protect a declining or infant industry it

cannot do so through imposing its own tariffs. Equally, if it wishes to open up
to complete free trade, it cannot do so if a common tariff exists.

Also, it makes little sense for a particular member to impose a tariff on the
import of a good that is not produced at all within a that country.

For example, the UK does not produce its own bananas, so a tariff on banana
imports only raises price and does not protect domestic producers. The
current EU tariff on bananas imported from outside the EU is 10.9%.

There is also a potential disadvantage to a single member in how the tariff

revenue is allocated. Members that trade relatively more with countries
outside the union, such as the UK, may not get their 'fair share' of tariff
revenue.

The UK's status as a customs union member is one of the dilemmas facing the
UK as a result of Brexit. If it wishes to create individual trade deals with, say
the USA and China, it cannot retain its current status as a full member of the
customs union.

Common Market

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A common (or single) market is the most significant step towards full
economic integration. In the case of Europe, the single market is officially
referred to a the 'internal market'.

The key feature of a common market is the extension of free trade from just
tangible goods, to include all economic resources. This means that all barriers
are eliminated to allow the free movement of goods, services, capital, and
labour.

In addition, as well as removing tariffs, non-tariff barriers are also reduced

and eliminated.

For a common market to be successful there must also be a significant level of

harmonisation of micro-economic policies, and common rules regarding
product standards, monopoly power and other anti-competitive practices.
There may also be common policies affecting key industries, such as the
Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP).

Full Economic Union

Economic union is a term applied to a trading bloc that has both a common
market between members, and a common trade policy towards non-members,
although members are free to pursue independent macro-economic policies.

The European Union (EU) is the best known Economic union, and came into
force on November 1st 1993, following the signing of the Maastricht Treaty
(formally called the Treaty on European Union.)

Monetary Union
Monetary union is the first major step towards macro-economic integration,
and enables economies to converge even more closely. Monetary union
involves scrapping individual currencies, and adopting a single, shared
currency, such as the Euro for the Euro-17 countries, and the East Caribbean
Dollar for 11 islands in the East Caribbean. This means that there is a common
exchange rate, a common monetary policy, including interest rates and the
regulation of the quantity of money, and a single central bank, such as the
European Central Bank or the East Caribbean Central Bank.

Fiscal Union
A fiscal union is an agreement to harmonise tax rates, to establish common
levels of public sector spending and borrowing, and jointly agree national
budget deficits or surpluses. The majority of EU states agreed a fiscal compact
in early 2012, which is a less binding version of a full fiscal union.

Economic and Monetary Union

Economic and Monetary Union (EMU) is a key stage towards compete
integration, and involves a single economic market, a common trade policy, a
single currency and a common monetary policy.

Complete Economic Integration

Complete economic integration involves a single economic market, a common
trade policy, a single currency, a common monetary policy, together with a

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single fiscal policy, including common tax and benefit rates – in short,
complete harmonisation of all policies, rates, and economic trade rules.

Impact of Integration

The arguments for Regional Integration

The economic case for integration has been largely presented in the previous
chapters. Free trade and movement of goods, services, capital, and factors of
production allow for the most efficient use of resources. That is positive sum
game, as all countries can benefit.

Regional economic integration is an attempt to go beyond the limitations of

WTO. While it is hard for 100 countries to agree on something, (e.g. the
United Nations) it is much more likely that only a few countries with close
proximity and common interests will be able to agree to even fewer
restrictions on the flows between their countries.

The political case for integration has two main points: (1) by linking countries
together, making them more dependent on each other, and forming a
structure where they regularly have to interact, the likelihood of violent
conflict and war will decrease. (2) By linking countries together, they have
greater influence and are politically much stronger in dealing with other
nations.

In the case of the EU, both a desire to decrease the likelihood of another world
war and an interest in being strong enough to stand up to the US and USSR
were factors in its creation.

There are two main impediments(obstacles) to integration:

(1) there are always painful adjustments, and groups that are likely to be
directly hurt by integration will lobby hard to prevent losses,
(2) concerns about loss of sovereignty and control over domestic interests.

For example, Canada has always been concerned about being dominated by its
southern neighbor, and Britain is very hesitant to give much control to
European bureaucrats (it still has not adopted the euro)

The case on NAFTA and the US Textile Industry shows that although the
effects of NAFTA have hurt employment in the US textile industry, the overall
effect has actually been positive. The reason: clothing prices have fallen,
exports have increased, and sales to apparel factories have surged. Those
factors more than compensate for the loss of jobs.
The arguments against Regional Integration

Many groups within a country do not accept the case for integration,
especially those that are likely to be hurt or those that feel that sovereignty
and individual discretion will be reduced. Thus, it is not surprising that most
attempts to achieve integration have progressed slowly and with hesitation.

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Whether regional integration is in the economic interests of the participants

depends upon the extent of trade creation as opposed to trade diversion.

Trade creation occurs when low cost producers within the free
trade area replace high cost domestic producers.

Trade diversion occurs when higher cost suppliers within the free
trade area replace lower cost external suppliers.

A regional free trade agreement will only make the world better off if the
amount of trade it creates exceeds the amount it diverts.

Regional trading blocks

As trade integration across countries is intensifying, we hear more and more

about Free Trade Agreements (FTAs) and Regional Trade Blocs (RTBs). As
their name suggests these RTBs/FTAs are arrangements aimed for faster trade
liberalisation at regional levels.

Countries are convinced that trade is an engine of growth and they are
searching for arrangements that promote trade.

The WTO that contains 162 countries is the most popular one; a truly
multilateral forum for trade liberalisation. But the history of WTO led trade
liberalisation shows that the organisation is facing difficulty in bringing
further trade liberalisation because of conflicting interest among large number
of countries.

This has led to interest in trade liberalisation within a limited number of

countries that may be regionally close together. These regional trade
promoting arrangements advocate more tariff cuts and removal of other
restrictions within the group while maintaining restrictions against the rest of
the world.

Though many regional trade agreements like the EU, NAFTA and ASEAN
were established before or around the time of WTO’s formation, there is
mushrooming of RTBs in recent years. Recently formed Trans Pacific
Partnership (TPP) shows this increasing affinity towards RTBs. Many RTBs
like the TPP would like to make advanced level trade liberalisation and hence
they are not satisfied with the slow pace of trade liberalisation within the
WTO.

What are Regional Trade Blocs (RTBs)?

Regional Trade Blocs or Regional Trade Agreements (or Free Trade

Agreements) are a type of regional intergovernmental arrangement, where the
participating countries agree to reduce or eliminate barriers to trade like
tariffs and non-tariff barriers. The RTBs are thus historically known for
promoting trade within a region by reducing or eliminating tariff among the
member countries.

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Over the last few decades, international trade liberalisations are taking place
in a serious manner through the formation of RTBs. They are getting wide
attention because of many important international developments. First, now
the world is trying hard to escape from the ongoing great recession phase.
Second is the failure of the WTO to take further liberalisation measures on the
trade liberalisation front.

The EU, NAFTA, ASEAN, SAFTA etc are all examples for regional integration.
The triad of North America, Western Europe, and Asia Pacific have the most
successful trade blocs. Recently signed Trans Pacific Partnership is a powerful
RTB. Similarly, another one called RCEP is in negotiation round. India has
signed an FTA with the ASEAN in 2009. Simultaneously, the country has
signed many bilateral FTAs.

Different types of RTBs

All regional trade blocs don’t have the same degree of trade liberalisation.
They may differ in terms of the extent of tariff cutting, coverage of goods and
services, treatment of cross border investment among them, agreement on
movement of labour etc.

The simple form of regional trade bloc is the Free Trade Area. The Free Trade
Area is a type of trade bloc, a designated group of countries that have agreed
to eliminate tariffs, quotas and preferences on most (if not all)goods and
services traded between them.

From the lowest to the highest, regional trade integration may vary from
just tariff reduction arrangement to adoption of a single currency. The most
common type of regional trade bloc is the free trade agreement where the
members abolish tariffs within the region. Following are the main types of
regional economic integrations.

Classification of RTBs

Preferential trading union: Here, two or more countries form a trading

club or a union and reduce tariffs on imports of each other ie, when they
exchange tariff preferences and concessions.

Free trade union or association: Member countries abolish all tariffs

within the union, but maintain their individual tariffs against the rest of the
world.

Customs union: countries abolish all tariffs within and adopt a common
external tariff against the rest of the world.

Common market: in addition to the customs union, unrestricted movement

of all factors of production including labour between the member countries. In
the case of European Common Market, once a visa is obtained one can get
employed in France or Germany or in any other member country with limited
restrictions.

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Economic union: The Economic Union is the highest form of economic co-
operation. In addition to the common market, there is common currency,
common fiscal and monetary policies and exchange rate policies etc.
European Union is the example for an Economic Union. Under the European
Monetary Union, there is only one currency- the Euro.

At present, out of the total regional trade arrangements FTAs are the most
common, accounting for nearly 90 per cent.

The main advantages for members of trading blocs

Free trade within the bloc

Knowing that they have free access to each other's markets, members are
encouraged to specialise. This means that, at the regional level, there is a
wider application of the principle of comparative advantage.

Market access and trade creation

Easier access to each other’s markets means that trade between members is
likely to increase. Trade creation exists when free trade enables high cost
domestic producers to be replaced by lower cost, and more efficient imports.
Because low cost imports lead to lower priced imports, there is a 'consumption
effect', with increased demand resulting from lower prices.

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

Jobs
Jobs may be created as a consequence of increased trade between member
economies.

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

The main disadvantages of trading blocs

1. Loss of benefits
2. The benefits of free trade between countries in different blocs is lost.
3. Distortion of trade
4. Trading blocs are likely to distort world trade, and reduce the beneficial
effects of specialisation and the exploitation of comparative advantage.
5. Inefficiencies and trade diversion
Inefficient producers within the bloc can be protected from more efficient
ones outside the bloc. For example, inefficient European farmers may be
protected from low-cost imports from developing countries. Trade diversion
arises when trade is diverted away from efficient producers who are based
outside the trading area.

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Retaliation
The development of one regional trading bloc is likely to stimulate the
development of others. This can lead to trade disputes, such as those between
the EU and NAFTA, including the recent Boeing (US)/Airbus (EU) dispute.
The EU and US have a long history of trade disputes, including the dispute
over US steel tariffs, which were declared illegal by the WTO in 2005. In
addition, there are the so-called beef wars with the US applying £60m tariffs
on EU beef in response to the EU’s ban on US beef treated with hormones;
and complaints to the WTO of each other’s generous agricultural support.

During the 1970s many former UK colonies formed their own trading blocs in
reaction to the UK joining the European common market.

– EU: The European Union (EU)

EU pictureThe EU is the world’s largest trading bloc, and second largest
economy, after the USA. In 2014 the value of the EU's output totalled $18.5
trillion*. The five largest Economies, Germany, France, the United Kingdom,
Italy and Spain, account for around 70% of the 28-country trading bloc.

The UK's decision to leave the EU, following its referendum vote in June 2016,
will have a considerable impact on the overall value of the EU's output, as well
as triggering a period of uncertainty during the exit negotiations to create a
new trade relationship.

The EU was originally called the Economic Community (Common Market, or

The Six) after its formation following the Treaty of Rome in 1957. The original
six members were Germany, France, Italy, Belgium, Netherlands, and
Luxembourg. Since then the EU has, despite Brexit, undergone extensive and
continuous enlargement.

History of EU:
The initial aim of the EU was to create a single ('common') market for goods,
services, capital, and labour by eliminating all barriers to trade and hence
promoting free trade between members.

In terms of dealing with non-members, common tariff barriers were erected

against cheap imports, such as those from Japan, whose goods prices were
artificially low because of the undervalued yen.

By 2014, following continuous enlargement, the EU had 28 members. Croatia

was the latest country to join, in July 2013.

A ‘common market’ is the first significant step towards full economic

integration. For a common market to be successful there must also be a
significant level of harmonisation of micro-economic policies, and common
rules regarding monopoly power and other anti-competitive practices. There
may also be common policies affecting key industries, such as the Common
Agricultural Policy (CAP) and Common Fisheries Policy (CFP).

Firms inside the bloc are protected from cheaper imports from outside, such
as the protection of the EU shoe industry from cheap imports from China and

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Vietnam.

Members − Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic,

Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden, The Netherlands, and the United Kingdom.

Goal of EU − To construct a regional free-trade association of states through

the union of political, economic, and executive connections.

NAFTA:
NAFTA, the North American Free Trade Agreement, was signed by the United
States, Canada, and Mexico.

NAFTA was signed in 1993 and went into effect on January 1, 1994.

NAFTA was written to create a Free Trade Area in North America.

 “Free Trade” means that countries may freely trade goods with each other
without having to pay a tariff (tax) on those goods. In other words, “free trade”
means no trade barriers.

The purpose of the agreement is to:

 Allow free movement of goods and services among the countries.
 Promote competition in the free trade areas.
 Protect the property rights of people and businesses in each country.
 Be able to resolve problems that arise among the countries.
 Encourage cooperation among countries.

BACK GROUND
In 1988 Canada & the United States signed the CanadaUnited states Free
Trade Agreement.
The American government then entered into negotiations with the Mexican
government for a similar treaty. Canada asked to join the negotiations in order
to preserve its perceived gains under the 1988 deal.
The agreement NAFTA was signed by U.S. president - George H. W. Bush,
Canadian prime minister - Brian Mulroney and Mexican president - Carlos
Salinas in San Antanio, Texas on December 17,1992.

OBJECTIVES OF NAFTA
 To eliminate trade barriers & facilitate the cross-border movements of
goods and services between the parties.
 To promote conditions of fair competition.
 To substantially increase investment opportunities.
 To provide adequate and effective protection & enforcement of intellectual
property rights in each territory.
 To create effective procedures for the implementation and application of
this agreement ,for its joint administration & for resolution of disputes.
 To establish a framework for further trilateral, regional and multilateral
co-operation to expand and enhance benefits of this agreement.

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North American Agreement on Environmental Cooperation

(NAAEC):

NAAEC created Commission for Environmental Cooperation (CEC) in 1994.

Development of common priorities for the protection of certain species.

Developing North American Conservation Action Plans for three shared

marine species.

Provide tools such as map of terrestrial eco-regions which management

agencies are using in this programs.

Setting out common mechanism for planning and monitoring bird

conservation programs.

North American Agreement on Labor Co-operation (NAALC)

NAALC members work together to protect, enhance and enforce

the basic rights of workers.

Establishment of institutions & creation of formal process to raise concerns

related to labor law enforcement directly with government
Undertaken a wide range of co-operative programs and technical exchanges
on industrial relations:

 occupational safety and health,

 child labor,
 gender equality,
 protection of migrant workers

NAFTA PROS:

 Free trade increases sales and profits for Mexico, Canada and the U.S.A.,
thus strengthening their economies. 
 Lack of tariffs has allowed Mexico to sell its goods in the USA and Canada
at lower prices. This makes Mexican products more competitive in these
markets and increases Mexico’s profits as it tries to develop its economy.
 Free trade is an opportunity for the U.S. to provide financial help to
Mexico by making jobs available in factories located there.

NAFTA CONS:

 Free trade has caused more U.S. jobs losses than gains, especially for
higher wage jobs.

 Factories, called Maquiladoras, are built on the Mexican border and

workers are hired there to make goods at a much lower wage than workers
would be paid in the U.S.A.

Mercosur:

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Introduction
Mercosur is an economic and political bloc comprising Argentina, Brazil,
Paraguay, Uruguay, and Venezuela. Created during a period when longtime
rivals Argentina and Brazil were seeking to improve relations, the bloc saw
some early successes, including a tenfold increase in trade within the group in
the 1990s. However, many experts say Mercosur has since failed to live up to
its ambitions of integrating the region.

In recent years, other experts have questioned the bloc’s commitment to

democracy. Mercosur’s one-year suspension of Paraguay in 2012 and
indefinite suspension of Venezuela in 2016 have revealed fractures within the
group.

Mercosur revived long-stalled trade talks with the European Union in 2017,
and there was hope in late 2018 that they could reach a landmark deal.

Purpose:

Mercosur's purpose is to promote free trade and the fluid movement of goods,
people, and currency. It currently confines itself to a customs union, in which
there is free intra-zone trade and a common trade policy between member
countries. The official languages are Spanish, Portuguese, and Guarani.[11]
Since its foundation, Mercosur's functions have been updated, amended, and
changed many times: it is now a full customs union and a trading bloc.
Mercosur and the Andean Community of Nations are customs unions that are
components of a continuing process of South American integration connected
to the Union of South American Nations (USAN).

Objective• The free transit of produced goods, services and factors among
the member states Among other things, this includes the elimination of
customs rights and lifting of nontariff restrictions on the transit of goods or
any other measures with similar effects
• Fixing of a common external tariff (CET)
• Move member countries’ economies away from import-substitution models
• Develop institutional groups.

History:

1991: Treaty of Asunción goes into force in

1991, effectively mandating the creation of a common southern market
(MERCOSUR) by December 31, 1994.
Original signatories are Brazil, Argentina, Paraguay, and
Uruguay
• 1994: Creation of Mercosur
• 1995: Creation of customs union. MERCOSUR and the European Union sign
an agreement of trade association and cooperation in various areas
• 1999: Free trade agreement with two trading block EU and NAFTA
• 2004: Preferential trade agreement with India

Facts :

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• Population : 0.3 billion(2010) , 43% of Latin America’s population

• Languages : Portuguese, Guaraní and Spanish
• Combined GNI : $1.1 trillion(2010) ,encompasses roughly 50% of Latin
America’s Gross Domestic Product
• Land : 7,941,856 sq. miles, 59% of its total landmass
• Climate : most types of climate from Arctic to tropical
• 4 th largest trading bloc in the world after EU, NAFTA, ASEAN (2010).

Levels of regional economic integration

• Free Trade Areas
• Customs Union
• Common Markets
• Economic Union
MERCUSOR’s current position- Customs Union

Administrative/Institutional Structure of MERCOSUR

• Common Market Council (CMC):The Council is the highestlevel agency

of MERCOSUR with authority to conduct its policy, and responsibility for
compliance with the objects and time frames set forth in the Asuncion.

• Common Market Group ( CMG):basic duties are to cause compliance

with the Asuncion Treaty and to take resolutions required for implementation
of the decisions made by the Council. Furthermore, it can initiate practical
measures for trade opening, coordination of macroeconomic policies, and
negotiation of agreements with non-member states and international
agencies, participating when need be in resolution of controversies under
MERCOSUR.

• Commercial Commission of MERCOSUR (CCM):assists the Common

Market Group in the enforcement of trade policies.

• Joint Parliamentary Commission (CPS):The Committee will have both

an advisory and decision-making nature, with powers to submit proposals as
well.

• Social-Economic Consultative Forum (FCES):brings together various

associations and interest groups from member countries.

India and Mercosur

• A Framework Agreement had been signed between India and MERCOSUR
on 17th June 2003
• India – MERCOSUR PTA came into effect from 1st June, 2009
• Products covered in Indian offer list are meat and meat products, organic &
inorganic chemicals,
• Product covered in the offer list of MERCOSUR are food preparations,
pharmaceuticals, essential oils
• Trade volume should reach 17 billion USD in 2012 and 30 billion USD by
2030.

APEC:APEC is the premier forum for facilitating economic growth,

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cooperation, trade and investment in the AsiaPacific region.

It is an inter-governmental forum, which operates on the basis of non binding

commitment and open dialog. No treaty obligations

APEC has 21 member economies with a population of over 2.6 billion which
accounts for more than 40% of the world’s population.

APEC countries have a combined GDP of 21 trillion US dollars which is more

than half of world GDP. APEC accounts for nearly half of world trade.

History

APEC began as an informal Ministerial-level dialogue group in
Canberra, Australia in 1989. It is a 21 member economic forum at
present.

Founding members are:

Australia,
New Zealand
6 ASEAN economies
Japan and South Korea
Canada and the United States

Member Economies
* Australia * Malaysia
* Brunei Darussalam * Mexico
* Canada * New Zealand
* Chile * Papua New Guinea
* People's Republic of China * Peru
* The Republic of the Philippines * Hong Kong, China
* The Russian Federation * Japan
* United States of America * Indonesia
* Chinese Taipei * Singapore
* Republic of Korea * Viet Nam
*Thailand

Key Milestones

1993- In the United States the Economic Leaders meet for the first time in
Blake Island, Washington and outline APEC’s vision, “stability, security, and
prosperity for our peoples”.

1994- In Indonesia APEC sets the Bogor Goals of “free and open trade
investment in the Asia Pacific by 2010 for developed countries and 2020 for
developing countries.

1995- In Japan the framework for meeting the Bogor goals through trade and
investment liberalization, business facilitation and sectorial activities,
underpinned by policy dialogues and finally, economic and technical

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cooperation.

1996- In the Philippines, the Manila Action Plan for APEC (MAPA) is
adopted,outlining the trade and investment liberalization and facilitation
measures to reach the Bogor goals.

1999- In New Zealand, APEC commits to paperless trading by 2005 in
developed economies and 2010 in developing economies.

Key Milestones
2001- In People’s Republic of China, APEC adopts the Shanghai Accord,
which focuses on broadening the APEC vision, clarifying the roadmap to
Bogor and strengthening the implementation mechanism.

2005- In Korea, APEC adopts the Busan Roadmap, completes the mid-term
Stocktake, which gauges that APEC is well on its way to meeting the Bogor
Goals.

2007- In Australia, for the first time APEC member economies issue a
Declaration on Climate Change, Energy Security, and Open Development.

2013- In Indonesia, the Bali Package is concluded. The target is then set for a
yearly enrolment of one million students in the intra-APEC university by
2020. The first joint APEC ministerial meeting on Women and SMEs issues
especially to protect women entrepreneurship.

Mission/Vision

 To support sustainable economic growth and prosperity in Asia-Pacific

region
 To build a dynamic and harmonious Asia-Pacific community
 Decrease number of obstacles in trade and also reduce tariffs across APEC
nations
 Set it’s eye on achieving ‘Bogor goals’ by the year 2010
 To encourage the flow of goods, services, capital, and technology
 To develop and strengthen the multilateral trading system;

APEC Relations

ASEAN and APEC


ASEAN has been at APEC's core from the very beginning and is doing its part
to advance APEC's purposes and is consistent with APEC goals.
ASEAN Free Trade Area (AFTA) can be said to be a building block for the
fulfillment of the goals that APEC set for eventual free trade among its
members. It can be said that the two organizations could be seen as
complementing, and not competing with each other.

NAFTA and APEC

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Accomplishment of Bogor goals and free trade among APEC member

economies leads to significant trade diversion from western countries to APEC
member economies.
Western economies trying to maintain balance of power between east and
west in
APEC decisions by restricting Asian countries into economic co-operation.

Future Plans for Enlargement

India has requested membership in APEC and received initial support from
the United States, Japan and Australia. However officials did not allow India
to join for various reasons.

APEC Secretariat: APEC secretariat operates as the core support

mechanism for the APEC process. It provides coordination, technical and
advisory support as well as information management, communications and
public outreach services. It performs a central project management role It
is based in Singapore The APEC Secretariat is headed by an Executive
Director and a Deputy Executive Director Muhamad Noor Yacob is the
present Executive Director.

THREE PILLARSThree specific areas crucial to achieving the Bogor Goals:

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 Trade and investment liberalization 

 Business facilitation
 Economic and technical cooperation

. Trade and Investment liberalization Reducing and eliminating

tariff among member countries Reducing and eliminating non-tariff
barriers to trade and investment Opening of
marketsAchievements :1) Changes in the global trade of APEC
industrialized and volunteering economies.
. 2) Stocks of inward and outward FDI in APEC industrialized and
volunteering economies.
. 3) Real GDP/capita for APEC industrializedeconomies and
volunteering economies

. Business facilitation Reducing the costs of business

transactions Improving access to trade information Bringing into
line policy and business strategies to facilitate growth Free and open
tradeAchievements :
. 1. The Single Window Strategic Plan, adopted in 2007, provides a
framework for the development of Single Window systems which will
allow importers and exporters to submit information to government
once, instead of to multiple government agencies, through a single
entry point.

. 2. As a result of the APEC Trade Facilitation Action Plan (TFAP I) the

cost of business transactions across the region was reduced by 5%
between 2002 and 2006.
. 3. In 2008, a groundbreaking Investment Facilitation Action Plan was
endorsed which aims at improving the investment environment in
Member Economies.
. 4. The APEC Business Travel Card (ABTC) provides substantial time
and cost savings to business people and facilitates their travel in the
region, by allowing visa free travel and express lane transit at airports
in participating economies.
.
. Economic and technical cooperation ECOTECH is dedicated to
providing training and cooperation to build capacities in all APEC
Member Economies to take advantage of global trade. This area
builds capacity at the institutional and personal level to assist APEC
Member Economies and its people gain the necessary skills to meet
their economic potential.Achievements : APECs Economic and
Technical Cooperation (ECOTECH) activities are designed to build
capacity and skills in APEC Members at both the individual and
institutional level, to enable them to participate fully in the regional
economy and liberalization process Since APEC first began to
undertake capacity building work in 1993, more than 1200 projects
have been initiated; and in 2008, APEC was implementing a total of
212 capacity building projects with a total value of US$13.5m. A
network of 41 APEC Digital Opportunity Centers (ADOC) now operate
in seven Member Economies.

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. STRENGTHS OF APEC A supporter of the of the multilateral

trade negotiations, apply pressure to key countries, suggest visionary
initiatives and monitor compliances. APEC has considerable
experience in the reform process and can act as a model or
demonstration to the rest of the world. APEC is a large group of
countries that could be extremely influential if adopted a common
approach and joint bargaining objectives.
. WEAKNESSES OF APEC Absence of priorities- The effort in trade
reform within APEC has been diffused across too many areas and there
is need for more focus. Shortfalls in member commitments- Many
countries have gone no further than their existing pledges. Weak
evaluation procedures- there is lack of outside scrutiny of individual
members’ progress in implementing reforms Dearth of specific APEC
incentives- APEC operates by consensus and there is no mechanism for
enforcing group decisions.

ASEAN: Association of Southeast Asian Nations

ESTABLISHMENT AND MEMBERSHIP

•It was established on 8 August 1967.

•In Bangkok by the five Countries namely Indonesia, Malaysia,

Philippines, Singapore, and Thailand.

-Brunei Darussalam joined on 8 January 1984

-Vietnam on 28 July 1995
-Laos and Myanmar on 23 July 1997
-Cambodia on 30 April 1999

Goals of ASEAN
To accelerate the economic growth, social progress and cultural
development in the region.
 To promote
 Regional peace
 Stability Southeast Asian studies &
 Active collaboration and mutual assistance on matters of common interest
ineconomic, social, cultural, technical, scientific and administrative fields.

To provide assistance to each other in the form of training and research
facilities in the educational, professional, technical and administrative
spheres.

To collaborate more effectively for greater utilisation of their agriculture and
industries, expansion of their trade, improvement of their transportation and
communications facilities and raising of the living standards of their peoples.

To maintain close and beneficial cooperation with existing international and
regional organizations.

Challenges of ASEAN:

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1. Geopolitical stability and regional relationships

ASEAN was formed in 1967, with an agreement by the five original founding
nations – Indonesia, Malaysia, the Philippines, Singapore and Thailand – to
organize for the sake of peace, stability and cooperation. ASEAN states are
located at a strategically important junction, bordering two of the world’s
most populous economic powers, China and India, which makes ASEAN a
focal point for both regional and global powers. ASEAN member states are
also enmeshed in territorial disputes with interested powers. China’s claim to
territories in the South China Sea, for example, overlaps with competing
claims by Brunei Darussalam, Malaysia, the Philippines and Viet Nam. While
there are challenges, closer coordination and common goals among ASEAN
governments can help promote stability and lessen the prospect of conflicts.

2. Governance challenges for businesses

ASEAN is home to a wide variety of businesses, including a number of huge
family-owned conglomerates and state-linked enterprises, like the Central
Group in Thailand, Salim Group in Indonesia, state-linked Singtel in
Singapore, and Vinamilk in Viet Nam. Yet small- and medium-sized
enterprises (SMEs) together with micro-entrepreneurs make up at least 89%
of business activity in the region.

Entrenched interests with the large conglomerates, paired with widespread

corruption, is undermining the region’s business environment and is
particularly hurtful for small enterprises. The ASEAN region needs strong
independent civic institutions to prevent corruption and to help the region
compete globally. One hope is that digital innovations will enable greater
transparency and promote economic growth.

3. New business models

The ASEAN region offers a growing market of more than 600 million
consumers. The region’s GDP per capita measures about $6,500 (excluding
Singapore, the region’s most advanced economy), which is less than China but
more than India. Consumers in the region are price-sensitive and demanding,
resulting in local businesses with low margins and low labour costs –
formidable competitors to foreign rivals.

One way for new entrants to adapt and increase profits is to focus on specific
consumer needs and conditions in the region and work backward to develop
solutions. Mobile technologies can be particular useful, especially given the
high mobile adoption rates in the region. Government support can also ensure
companies are encouraged to innovate by reducing the cost burden of
potential failure. This can be done with a so-called “light touch” regulatory
approach, which fosters creativity and entrepreneurship.

4. Changing demographics
ASEAN is home to young, literate and increasingly urbanized and aspirational
populations. Consumers in the region are demanding higher-quality products
and services and presents an opportunity for businesses hoping to tap growing
consumer markets.

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Governments must help prepare young people to face the demands of an

increasingly integrated economic region, through education and training.
Current efforts by ASEAN countries may not be adequate. And as more people
migrate to cities such as Manila or Jakarta in search of better opportunities,
they create a pressure on existing infrastructure and job markets. Sustainable
solutions will require innovative approaches. Issues ranging from affordable
housing, to low-cost, quality healthcare and education call for ASEAN
governments to work closely with private sector and non-government
organizations.

5. Inclusive growth and sustainable development

ASEAN member states span a wide spectrum of income levels, ranging from
Singapore’s GDP per capita of $57,714 to Cambodia’s $1,384 and Myanmar’s
$1,298 in 2017. In recent years, lower-income states have made important
gains. However, regional economic gains have fallen short of erasing
significant differences among ASEAN member states. The World Bank’s most
recent 2017 edition of the Global Findex showed that while 98% of adults in
Singapore and 85% in Malaysia had a bank account, just 22% of Cambodian
adults and 26% Burmese adults did. These disparities illustrate the need for
broad, robust investment in infrastructure, financial institutions and strategic
planning.

6. Regional digital economy

South-East Asia is home to the world’s fastest growing population of internet
users, with more than 125,000 new users forecast to come online every day
through the year 2020. Most of that growth will come via mobile use, and it
has the potential to stimulate new industries, leapfrog legacy business models
and fundamentally change the lives of millions of people. However,
technology adoption differs greatly among ASEAN countries, and there is a
need to build regional internet infrastructure.

7. Economic integration
With the launch of the ASEAN Economic Community (AEC) in 2015, ASEAN
member states have formed a tighter, more integrated group. The AEC aims to
foster a single market and industrial production capacity, increase
competitiveness, support inclusive growth and further integrate the region
into the global economy. In addition, a revised Trans-Pacific Partnership
(TPP) was signed by ASEAN countries, Australia, Canada and others in 2018,
following the US’s withdrawal from the agreement.

ASEAN Surveillance Process

To prevent a recurrence of the financial crisis, the ASEAN finance ministers
agreed in October 1998 on a framework for closer consultations on economic
policies called the ASEAN Surveillance Process.

ELEMENTS:-

Monitoring of global as well as regional and national economic and financial

developments.
  To keep track of the recovery process
  To detect any sign of recurring vulnerability in the ASEAN financial

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systems and economies.

Provides a forum at which ASEAN finance ministers exchange views and

information on developments in their domestic economies, including policy
measures carried out and the progress of structural reforms.

ASEAN + 3 Financial Cooperation

In recognition of the financial interdependence in East Asia, ASEAN has
stepped up its cooperation with China, Japan and the Republic of Korea.

The Chiang Mai Initiative

In May 2000, the ASEAN+3 finance ministers agreed to establish a regional

financing arrangement called the “Chiang Mai Initiative.” It consists of two
components: an expanded ASEAN Swap Arrangement and a network of
bilateral swap arrangements among ASEAN countries, China, Japan and the
Republic
of Korea.

AIMS and Purposes of ASEAN:

As set out in the ASEAN Declaration, the aims and purposes of ASEAN are:

1. To accelerate the economic growth, social progress and cultural

development in the region through joint endeavours in the spirit of
equality and partnership in order to strengthen the foundation for a
prosperous and peaceful community of Southeast Asian Nations;
2. To promote regional peace and stability through abiding respect for
justice and the rule of law in the relationship among countries of the
region and adherence to the principles of the United Nations Charter;
3. To promote active collaboration and mutual assistance on
matters of common interest in the economic, social, cultural, technical,
scientific and administrative fields;
4. To provide assistance to each other in the form of training and
research facilities in the educational, professional, technical
and administrative spheres;
5. To collaborate more effectively for the greater utilisation of their
agriculture and industries, the expansion of their trade,
including the study of the problems of international commodity
trade, the improvement of their transportation and
communications facilities and the raising of the living standards of
their peoples;
6. To promote Southeast Asian studies; and
7. To maintain close and beneficial cooperation with existing international
and regional organisations with similar aims and purposes, and explore all
avenues for even closer cooperation among themselves

SAARC:

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South Asian Association for Regional Cooperation (SAARC):

The South Asian Association for Regional Cooperation (SAARC) is an
economic and political organization of eight countries in Southern Asia.
In terms of population, its sphere of influence is the largest of any regional
organization: almost 1.5 billion people, the combined population of its
member states. It was established on December 8, 1985 by India, Pakistan,
Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the
Association’s 14th summit, Afghanistan became its eighth member.
History:
In the late 1970s, Bangladeshi President Ziaur Rahman proposed the creation
of a trade block consisting of South Asian countries. The idea of regional
cooperation in South Asia was again mooted in May 1980.

The foreign secretaries of the seven countries met for the first time in
Colombo in April 1981. The Committee of the Whole, which met in Colombo
in August 1981, identified five broad areas for regional cooperation. New areas
of cooperation were added in the following years.

The objectives of the Association as defined in the Charter are:

i. To promote the welfare of the peoples of South Asia and to improve their
quality of life;

ii. To accelerate economic growth, social progress and cultural development in

the region and to provide all individuals the opportunity to live in dignity and
to realize their full potential;

iii. To promote and strengthen collective self-reliance among the countries of

South Asia;

iv. To contribute to mutual trust, understanding and appreciation of one

another’s problems;

v. To promote active collaboration and mutual assistance in the economic,

social, cultural, technical and scientific fields;

vi. To strengthen cooperation with other developing countries;

vii. To strengthen cooperation among themselves in international forums on

matters of common interest; and

viii. To cooperate with international and regional organizations with similar

aims and purposes.

The Declaration on South Asian Regional Cooperation was adopted by the

Foreign Ministers in 1983 in New Delhi. During the meeting, the Ministers
also launched the Integrated Programme of Action (IPA) in nine agreed areas,
namely, Agriculture; Rural Development; Telecommunications; Meteorology;
Health and Population Activities; Transport; Postal Services; Science and
Technology; and Sports, Arts and Culture.

The South Asian Association for Regional Cooperation (SAARC) was

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established when its Charter was formally adopted on 8 December 1985 by the
Heads of State or Government of Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.

Secretariat:
The SAARC Secretariat was established in Kathmandu on 16 January 1987
and was inaugurated by Late King Birendra Bir Bikram Shah of Nepal.

It is headed by a Secretary General appointed by the Council of Ministers from

Member Countries in alphabetical order for a three-year term. He is assisted
by the Professional and the General Services Staff and also an appropriate
number of functional units called Divisions assigned to Directors on
deputation from Member States.

The Secretariat coordinates and monitors implementation of activities,

prepares for and services meetings and serves as a channel of communication
between the Association and its Member States as well as other regional
organizations.

The Memorandum of Understanding on the establishment of the Secretariat

which was signed by Foreign Ministers of member countries on 17 November
1986 at Bangalore, India contains various clauses concerning the role,
structure and administration of the SAARC Secretariat as well as the powers
of the Secretary-General.

In several recent meetings the heads of state or government of member states

of SAARC have taken some important decisions and bold initiatives to
strengthen the organization and to widen and deepen regional co-operation.

The SAARC Secretariat and Member States observe 8 December as the SAARC
Charter Day.

Free Trade Agreement:

Over the years, the SAARC members have expressed their unwillingness on
signing a free trade agreement. Though India has several trade pacts with
Maldives, Nepal, Bhutan and Sri Lanka, similar trade agreements with
Pakistan and Bangladesh have been stalled due to political and economic
concerns on both sides. India has been constructing a barrier across its
borders with Bangladesh and Pakistan.

In 1993, SAARC countries signed an agreement to gradually lower tariffs

within the region, in Dhaka. Eleven years later, at the 12th SAARC Summit at
Islamabad, SAARC countries devised the South Asia Free Trade Agreement
which created a framework for the establishment of a free trade area covering
1.4 billion people. This agreement went into force on January 1, 2006. Under
this agreement, SAARC members will bring their duties down to 20 per cent
by 2007.

Areas of Co-operation:

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The current areas of cooperation under the reconstituted Regional Integrated

Programme of Action which is pursued through the Technical Committees
cover:

1. Agriculture and Rural Development;

2. Health and Population Activities;

3. Women, Youth and Children;

4. Environment and Forestry;

5. Science and Technology and Meteorology;

6. Human Resources Development; and

7. Transport.

Recently, high level Working Groups have also been established to strengthen
cooperation in the areas of Information and Communications Technology,
Biotechnology, Intellectual Property Rights, Tourism and Energy.

Economic Co-operation:
The acceleration of economic growth is a Charter objective of SAARC.
Cooperation in the core economic areas among SAARC Member Countries
was initiated following the Study on Trade, Manufactures and Services (TMS),
which was completed in June 1991.

Currently, the following important processes of SAARC are promoting

cooperation in the field of Trade, Economy and Finance and related areas:

i. Committee on Economic Cooperation: Overall Coordination of cooperation

in economic areas;

ii. South Asian Free Trade Area (SAFTA) Committee of Experts and SAFTA
Ministerial Council: Administration and implementation of SAFTA;

iii. Finance Ministers Mechanism: Cooperation in the field of Finance and

related areas;

iv. Standing Group on Standards and SAARC Standards Coordination Board:

Cooperation in the field of harmonization of Standards;

v. Group on Customs Cooperation is dealing with issues related to

harmonization of Customs rules and procedures.

Principles of SAARC:
The SAARC member nations are guided by the following principles:

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(i) Cooperation within the framework of the Association shall be based on

respect for the principles of sovereign equality, territorial integrity, political
independence, non-interference in internal affairs of other states and mutual
benefit.

(ii) Such cooperation shall not be a substitute for bilateral and multilateral
cooperation but shall complement them.

(iii) Such cooperation shall not be inconsistent with bilateral and multilateral
obligations.

Remedial Measures of SAARC:

In the present globalized scenario, where the countries are moving towards
unipolar world, there is a paramount importance of regional co-operation.
Globalisation has been forcing the small and large countries to think and work
jointly.

Some measures which could propel the wheel of SAARC forward are to give
preference to private companies of the region to tie up with Indian companies.
India could initiate unilateral steps for allowing duty-free and quota-free entry
of goods into India from the least developed countries of South-Asia.

Similarly, organising SAARC Trade Fairs in the various countries Of South

Asia can also bring the SAARC countries into closer economic and general co-
operation. There is also the urgent need to initiate and expand close contact
among the people, to enhance cultural identities and civic consciousness and
to break mental barriers among the people of the member countries.

There is the need to attain regional consensus on important global and

regional economic issues like international trade, investment, development
and transfer of technology and disarmament. With a view to promote trade
among SAARC countries, India unilaterally removed all quantitative
restrictions (QRs) on imports of around 2300 items from SAARC countries
with effect from August 1, 1998.

This move in expected to give a considerable boost to the eventual

establishment of a South Asia Free Trade Area (SAFTA).

Commodity agreements:

Introduction:
Commodity agreements are arrangements between producing and consuming
countries to stabilise markets and raise average prices. Such agreements are
common in many markets, including the market for coffee, tea, and sugar.

Meaning:
International Commodity Agreements which are inter- governmental

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arrangements concerning the production of & trade in, certain primary

products with a view to stabilizing their prices.

Objectives:

The basic objective is to stimulating a dynamic & steady growth & ensuring
reasonable predictability in the real export earnings of the developing
countries so as to provide:

 Expanding the resources for economic & social development.

 Consider the interest of the consumers in importing countries
 Considering the remunerative & equitable & stable prices for primary
commodities.
 Considering the import purchasing power .
 Increased imports & consumption & also coordination of production &
marketing policies

Commodity agreements are arrangements between producing and

consuming countries to stabilise markets and raise average prices.
Such agreements are common in many markets, including the
market for coffee, tea, and sugar.

Example - The International Cocoa Agreement

In 2003, an agreement was made between the seven main cocoa exporting
countries, Cameroon, Ivory Coast, Gabon, Ghana, Malaysia, Nigeria and Togo,
and the main importing countries including the EU members, Russia, and
Switzerland. The main purpose of this agreement was to promote the
consumption and production of cocoa on a global basis as well as stabilise
cocoa prices, which had been falling steadily. The agreement was planned to
continue until 2010, but in that year it was decided to extend the agreement
for a further two years, until 2012. In 2012 the signatories decided on a further
extension, until 2026.

Commodity agreements often involve intervention schemes, such as buffer

stocks, and usually only last for a few years, whereupon they are re-negotiated.
They differ from cartels such as OPEC, largely because discussions and
negotiations involve both producer and consumer countries, unlike cartels,
which are established to protect the interest of producers only.

Forms of Commodity Agreements:

1. Quota agreements: In international trade, a governmentimposed limit

on the quantity of goods and services that may be exported or imported over a
specified period of time. Limits on the amount of a goods produced, imported,
exported or offered for sale.

International quota agreements seek to prevent a fall in commodity prices by

regulating prices.

This agreement undertake to restrict the export or production by a certain

percentage of the basic quota decided by the Central Committee or Council.

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This type of agreement mostly in the case of the commodities like coffee, tea &
sugar.

This agreement avoids accumulation of stocks require no financing & do not
call for continuous operating decisions.

2. Buffer Stock Agreements:

A practice in which a large investor, especially a government, buys large
quantities of commodities during periods of high supply and stores them so
they do not trade or circulate. The investor then sells them when supply is low.
This is done to stabilize the price.

It is to stabilizing the prices by maintaining the demand & supply balance.

It is more useful for the commodities like tea, sugar rubber, copper.

This arrangements only for those products which can be stored at relatively
low cost without the danger of deterioration & this is one of the limitation of
this agreement.

3.Bilateral or Multilateral Contracts:

Bilateral agreements may be formed as business or personal agreements

between individuals or companies.
They may also be formed between sovereign countries in the form of trade
agreements or agreements in other areas. In either case, a bilateral agreement
is a binding contract between the two parties that have agreed to mutually
acceptable terms.

 International sale & purchase contracts may also be entered into by two or
more major exporters & importers.

 Bilateral contract to purchase & sell certain quantities of a commodity at
agreed prices.

 In this agreement, an upper price & a lower price are specified.

 If the market price, throughout the period of the agreement, remains
within these specified limits the agreement becomes inoperative.
 If the market price rises above the upper limit specified, the exporter
country is obliged to sell to the importing country a certain specified
quantity of the upper price fixed by the agreement.
 On the other hand, if the market price falls below the lower limit specified,
the importer is obliged to purchase the contracted quantity at the specified
lower price.

GATT:

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Introduction: (GATT) is a multilateral agreement regulating international

trade. Its purpose is the "substantial reduction of tariffs and other trade
barriers and the elimination of preferences, on a reciprocal and mutually
advantageous basis. It was negotiated during the UN Conference on Trade and
Employment and was the outcome of the failure of negotiating governments to
create the International Trade Organization (ITO). GATT was signed in 1947
and lasted until 1993, when it was replaced by the World Trade Organization
in 1995. The original GATT text (GATT 1947) is still in effect under the WTO
framework, subject to the modifications of GATT 1994.

Provisions of GATT

Tariff 
Quantitative Restrictions 
Developing Countries
Provisions of GATT

GATT has enjoyed a membership of over 100 countries and

generated
about 85-90% of world trade.
(i) trade liberalization in industrial products (Kennedy Round)
(ii) Adopted codes on NTBs (Tokyo Round)
(iii) No world wars since 1948 (Increased trade promotes world peace)
(iv) Replaced by WTO on January 1, 1995.

WTO Over GATT

It came into existence on 1st January 1995.
The original intention was to create a third institution to handle the trade side
of the international economic cooperation, joining the two “Bretton Woods”
institutions, the International Monetary Fund and the World Bank. All was
not going well under the GATT and with the world trade becoming more and
more complex, GATT was not able to deal with it. For instance, in agriculture,
loopholes in the multilateral system were heavily exploited, and efforts at
liberalizing agricultural trade met with little success.

In the textiles and clothing sector, an exception to GATT’s normal disciplines

was negotiated in the 1960s and early 1970s, leading to the Multifibre
Arrangement. Even GATT’s dispute settlement systems were causing concern.
 The WTO framework ensures a “single undertaking approach” to the
results of the Uruguay Round — thus, membership in the WTO entails
accepting all the results of the Round without exception

FUNCTIONS OF WTO
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations

Structure:

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PRINCIPLES OF WTO
The basic principles of the WTO (according to the WTO):

• Trade Without Discrimination

1. Most-favoured-nation (MFN): treating other people equally Under the
WTO agreements, countries cannot normally discriminate between their
trading partners. Grant someone a special favour (such as a lower customs
duty rate for one of their products) and you have to do the same for all other
WTO members.
2. National treatment: Treating foreigners and locals equally Imported
and locally-produced goods should be treated equally — at least after the
foreign goods have entered the market. The same should apply to foreign and
domestic services, and to foreign and local trademarks, copyrights and
patents.

• Freer trade: gradually, through negotiation

• Promoting fair competition

The WTO is sometimes described as a “free trade” institution, but that is not
entirely accurate. The system does allow tariffs and, in limited circumstances,
other forms of protection. More accurately, it is a system of rules dedicated to
open, fair and undistorted competition.

• Encouraging development and economic reform. The WTO system

contributes to development. On the other hand, developing countries need
flexibility in the time they take to implement the system’s agreements. And the
agreements themselves inherit the earlier provisions of GATT that allow for
special assistance and trade concessions for developing countries.

Structure of WTO

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Structure of the World Trade Organisation:

Ministerial Conference
WTO is headed by the Ministerial Conference who enjoys absolute authority
over the institution. It not only carries out functions of the WTO but also takes
appropriate measures to administer the new global trade rules. It is integrated
by representatives of all WTO Members and shall meet at least once in every
two years. It is the chief policy-making body of WTO and any major policy
changes, such as a decision to alter competition policy or to rewrite the WTO
agreement, require its approval.

General Council
In addition to these, the structure of the WTO consists of a General Council to
oversee the WTO agreement and ministerial decisions on a regular basis. It is
also formed by the representatives of all WTO Members and acts on behalf of
Ministerial Conference whenever the Conference is not in sessions. The
General Council also meets as the Dispute Settlement Body and the Trade
Policy Review Body. The Council sits in its headquarters Geneva, Switzerland
usually once a month.

Trade Councils
Besides General Council, there is the Council for Trade in Goods, the Council
for Trade in Services, the Council for Trade-Related Intellectual Property
Rights (TRIPS). These Councils and their respective subsidiary bodies
perform their respective functions. Each member has one vote. Decision-

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making is made by consensus. If consensus is not reached then majority

voting plays the crucial rate.

In addition to these councils, Working Parties can be established by the

General Council in order to deal with specific issues defined by General
Council.

Trade Committees
Trade Committees are formed for delegation under four authorities, namely:

Under the terms of one of the Multilateral Trade Agreements

By one of the Trade Councils
By the Ministerial Conference
Under the terms of one of the Plurilateral Trade Agreements
Each committee organizes its own procedures and may establish further
subsidiary committees if it seems fit. They also serve as the forum for
discussions on ways to improve trade. And the Committees meet once every
two to three months.

Secretariat
The WTO secretariat (numbering 625 of many nationalities) is headed by
Director General who is appointed by Ministerial Conference. The Secretariat
of the WTO is responsible for servicing the WTO bodies with respect to
negotiations and the implementation of agreements. Since decisions are taken
by Members only, Secretariat has no decision making power.

Dispute Settlement Body

The task of ensuring that all Members live up to their commitments and that
there is a common understanding of the nature of those commitments is a
central part of the work of the WTO. WTO’s procedure is a mechanism which
is used to settle trade dispute under the Dispute Settlement Understanding
(DSU). A dispute arises when a member government believes that another
member government is violating an agreement which has been made in the
WTO. And the dispute settlement under WTO not only ensures security and
predictability to the multilateral trading system but is also concerned with the
situations where a Member seeks remedy for damage to its trade interests
caused by the actions/inactions of other members. There are different stages
of dispute settlement under WTO which are as follows:

1. Consultations
2. Establishing a Dispute Panel
3. Implementing of Panel and Appellate Body Ruling

Differences between GATT and WTO:

The points given below explain the difference between GATT and WTO in
detail:
. GATT was ad-hoc and provisional. The WTO and its agreement are
permanent with WTO having a sound legal basis because members
have ratified the WTO agreements.

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. GATT refers to an international multilateral treaty to promote

international trade and remove cross-country trade barriers. On the
contrary, WTO is a global body, which superseded GATT and deals with
the rules of international trade between member nations.
. While GATT is a simple agreement, there is no institutional existence,
but have a small secretariat. Conversely, WTO is a permanent
institution along with a secretariat.
. The participating nations are called as contracting parties in GATT,
whereas for WTO, they are called as member nations.
. The grandfather clause in the Protocol of Provisional Application in
GATT 1947 has not been carried forward to WTO. WTO contains an
improved version of original GATT rules-GATT Rules 1994.
. GATT commitments are provisional in nature, which after 47 years the
government can make a choice to treat it as a permanent commitment
or not. On the other hand, WTO commitments are permanent, since
the very beginning.
. The scope of WTO is wider than that of GATT in the sense that the rules
of GATT are applied only when the trade is made in goods. As opposed
to, WTO whose rules are applicable to services and aspects of
intellectual property along with the goods.
. GATT agreement is primarily multilateral, but the plurilateral
agreement is added to it later. In contrast, WTO agreements are purely
multilateral.
. The domestic legislation is allowed to continue in GATT, while the
same is not possible in the case of WTO.
. The dispute settlement system of GATT was slower, less automatic and
susceptible to blockages. Unlike WTO, whose dispute settlement
system is very effective.

Agreements:

Frame work starts with basic principles

1. GENERAL AGREMENT ON TARRIFS & TRADE (GATT)
2. GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)
3. TRADE RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS
(TRIPS)
4. TRADE RELATED INVESTMENT MEASURES (TRIMS)

The WTO oversees about 60 different agreements which have the

status of international legal texts. Member countries must sign and
ratify all WTO agreements on accession. A list of WTO agreements
can be found here A discussion of some of the most important
agreements follows.

1 .Agreement on Agriculture (AoA)

The Agreement on Agriculture came into effect with the establishment of the
WTO at the beginning of 1995. The AoA has three central concepts, or
"pillars": domestic support, market access and export subsidies.
2 . General Agreement on Trade in Services (GATS)

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The General Agreement on Trade in Services was created to extend the

multilateral trading system to service sector, in the same way the General
Agreement on Tariffs and Trade (GATT) provides such a system for
merchandise trade. The Agreement entered into force in January 1995.

3.Trade-Related Aspects of Intellectual Property Rights

Agreement(TRIPs)
The Agreement on Trade-Related Aspects of Intellectual Property Rights sets
down minimum standards for many forms of intellectual property (IP)
regulation. It was negotiated at the end of the Uruguay Round of the General
Agreement on Tariffs and Trade (GATT) in 1994.

4 . Sanitary and Phyto-Sanitary (SPS) Agreement

The Agreement on the Application of Sanitary and Phytosanitary Measures -
also known as the SPS Agreement was negotiated during the Uruguay Round
of the General Agreement on Tariffs and Trade, and entered into force with
the establishment of the WTO at the beginning of 1995.

5. Agreement on Technical Barriers to Trade (TBT)

The Agreement on Technical Barriers to Trade is an international treaty of the
World Trade Organization. It was negotiated during the Uruguay Round of the
General Agreement on Tariffs and Trade, and entered into force with the
establishment of the WTO at the end of 1994.

Iimplications or effects for India:

How Does it Affect India?

India is a founder member of World Trade Organization, and also treated as

the part of developing countries group for accessing the concessions granted
by the organization. As a result, there are several implications for India for the
various agreements that are signed under WTO. Let us understand each
agreement in general, what it means and its implications for India in specific.

1. India was a signatory of the General Agreement on Tariffs &

Trade (GATT), and as a part of the commitment had to change several laws
and policies; the major changes that were incorporated were as a follows
Reduction of peak and average tariffs on manufactured products
Commitments to phase out the quantitative restrictions over a period as these
were considered non-transparent measure in any countries policy structure.

The result of this agreement as mentioned earlier was limited as, GATT was
only an agreement and there was no enforcing agency to strictly implement
the clauses and punish the country which breaks the clauses. Thus the impact
was partial. However, with WTO coming into effect, the competition from
imports for the domestic firms has increased. WTO had the deadline till 2005,
for the domestic policy was supposed to phase out the QR's; for those
countries which face severe balance of payments problems special concession
period was given. Thus it is very clear that only those firms that have
competitive advantage would be able to survive in the long run, and those
firms which are weak would fade into history in the process.

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2. Trade Related Investment Measures (TRIMS)

The agreement relates to investments originating from one country to
another. The agreement prohibits the host country to discriminate the
investment from abroad with domestic investment, which implies that it
favours national treatment of foreign investment. Besides this, there are
several other clauses of the agreement totaling to 5 in this segment, one
agreement requires investment to be freely allowed within domestic borders
without any maximum cap on it. Another restricts to impose any kind of
export obligation or import cap on the investment. Another requires that there
should not be any domestic content requirement on foreign firms operating
and manufacturing in other countries.

These agreements have a direct impact on our Trade, Investment and foreign
exchange policy, domestic annual budgetary proposals and also on the
industrial policy.

Implementation process for the above requires proper preparation by the

industries and policy makers, as sudden change may result in loss of revenue
and decline of foreign exchange for the government and economy, and it may
result in decline of market share and profitability of businesses, decline in
employment opportunities and over all decline in growth.

3. Trade Related Intellectual Property Rights (TRIPS)

An intellectual property right refers to any creation of human mind which gets
legal recognition and protection such that the creator of the intangible is
protected from illegal use of his creation. This agreement includes several
categories of property such as Patents, Copyrights, Trademarks, Geographical
indications, Designs, Industrial circuits and Trade secrets.

Since the law for these intangibles vastly varied between countries, goods and
services traded between countries which incorporated these intangibles faced
severe risk of infringement. Therefore the agreement stipulated some basic
uniformity of law among all trading partners. This required suitable
amendment in the domestic IPR laws of each country. Since this process is not
a simple one, a time period of 10 years was given to the developing countries.

As a result, in India there was a requirement to change the patents act, Trade
and merchandise mark act and the copyright right act. Besides these main
laws, other related laws also required changes.

The main impact of this is on industries such as pharma and bio-technology,

because now with the law in place, it is not possible to reverse engineer the
existing drugs and formulas, change the process and produce the same
product. Now new investment in fresh research is required. This is quite a
burden for small industries and there is a possibility that they are thrown out
of business due to competition.
Besides these, the technology transfer from abroad is expected to become
costly and difficult.
Strict implementation of law is very important in India, otherwise there could

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be disastrous affect on the revenue of industries which invest millions of

rupees in Research and development if their products get infringed.

4. Agreement on Agriculture (AOA): The Agriculture happens to be one

of the most protected sectors in all the countries without any exceptions, and
therefore an agreement on the agricultural issues have always been evading
and debated strongly by all the countries involved in trade in agriculture.

The agreement on agreement deals with market access, Export subsidies and
government subsidies. Broadly, as of now the requirement is to open up the
markets in specific products in market access and incase of subsidies, it is to
go for tarrification and phase it out eventually or reduce it to bound limits.
The immediate impact of the agreement would be on the policy makers to
scrutinize all the items under subsidy, QRs and tariffs. However, the
calculation of AMS reveals that the subsidy given to Indian farmers are much
below the acceptable levels and therefore need not be changed. Looking from
other perspective, the reduction of tariffs and subsidy in export and import
items would open up competition and give a better access to Indian products
abroad. However, the concern is on the competitiveness and sustainability
that the Indian farmer would be able to prove in the long run once the markets
open up. Thus there is a requirement to change policy support to meet the
changing needs of Indian agriculture to gear it up for future.

5. Agreement on Sanitary and psyto-sanitary measures (SPM): this

agreement refers to restricting exports of a country if they do not comply with
the international standards of germs/bacteria etc… if the country suspects that
allowing of such products inside the country would result in spread of disease
and pest, then there is every right given to the authorities to block the imports.

Indian standards in this area are already mentioned and therefore there is no
need to change the law, but the problem is that of strictly implementing the
laws. There is an urgent need to educate the exporters regarding the changing
scenario and standards at the international arena, and look at the possible
consequence and losses to be incurred if the stipulations are not followed.
Therefore, to meet the standards certain operational changes are required in
the industries such as food processing, marine food and other packed food
that is being currently exported from India.

6. Multi-Fiber Agreement (MFA): This agreement is dismantled with

effect from 1 January 2005. The result was removal of QR on the textile
imports in several European countries. As a consequence a huge textile
market is opened up for developing countries textile industry as well as for
other countries that have competitive advantage in this area. The immediate
impact is on the garment and textile manufacturers and exporters. However, it
still needs to be seen whether the industry is able and ready to take advantage
of the large markets. This requires quite an amount of modernization,
standardization, cost efficiency, and customization and frequent up gradation
of designs to meet the changing need of global customers. The dismantling of
QR also mean more competition to Indian textile exporters and therefore, it
becomes imperative to enhance the competitiveness in niche areas.
Besides these major agreements there are several other agreements such as

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agreement on Market Access , which propagates free market access to

products and reduction of tariff and non-tariff barriers; agreement to
have Safeguard Measures if there is an import surge and it is liable to affect
the domestic industries in the transition economies. These measures can
include imposing QR for a certain period and also imposing tariffs on the
concerned products. There are other agreements that call for direct reduction
of S ubsidies on Exports, which are not permissible, and phasing it out over a
period of time. Besides these there are other Counter-Veiling Duties
(CVD) that are permitted to be used in certain conditions. These are supposed
to have an impact positive if they help the industries and negative if they
reduce the cost competitiveness.

The trading countries are allowed to impose an Anti-Dumping Duty

(ADD) against imported products if the charge of Dumping is claimed against
them. The requirement is to prove that the product is being sold at a price,
which results in material injury to the domestic industries. There are several
cases in which the duty is imposed but it still remains to be proven by the
Dispute settlement tribunal in case the other trading party opposes the duty
imposed as "unfair". However, the proposal always should come from the
representatives of the industries affected; this may result in a problem, as
small industries voice may remain unheard in the process.

International Strategic Alliances – Nature - Benefits. Pitfalls,

scope, managing alliances.

Strategic Alliance:

A Strategic Alliance is a relationship between two or more parties to pursue a

set of agreed upon goals or to meet a critical business need while remaining
independent organizations.strategic alliances involve exchange, sharing, or
co development of products, services, procedures, and processes.
In the new economy, strategic alliances enable business to gain competitive
advantage through access to a partner's resources, including markets,
technologies, capital and people.
Enabling participants to grow and expand more quickly and efficiently.
Especially fast-growing companies rely heavily on alliances to extend their
technical and operational resources. In the process, they save time and boost
productivity by not having to develop their own, from scratch. They are thus
freed to concentrate on innovation and their core business.
Many fast-growth technology companies use strategic alliances to benefit
from more-established channels of distribution, marketing, or brand
reputation of bigger, better-known players. However, more-traditional
businesses tend to enter alliances for reasons such as Teaming up with others
adds complementary resources and capabilities,geographic expansion, cost
reduction, manufacturing, and other supply-chain synergies.

CHARACTERISTICS:

1. Two or more firms that unite to pursue a set of agreed upon goals, remain
independent subsequent to the formation of an alliance.

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2. The partner firms share that benefits of the alliance and control over the
performance of assigned tasks.
3. The partner firms contribute on a continuing basis in one or more key
strategic areas, sector products, etc.
NEED:

1.Satisfy customer demands.

2.Share R&D costs.
3.Fill knowledge gaps.
4.Make scale economies.
5.Make scope economies: Alliances can enlarge dramatically the scope of a
company operations. Alliances focusing on scope help counter the ever-
shorter product cycle of modern technology.
6.Jump market barriers.
7.Speed in product introduction.
8.Pre-empt competitive threats
9.Use excess capacity.
10.Reduction in costs.

Stages of Alliance Formation:

Strategy development involves studying the alliance’s feasibility, objectives

and rationale, focusing on the major issues and challenges and development
of resource strategies for production, technology, and people. alliance
objectives with the overall corporate strategy.
Partner Assessment:

analyzing a potential partner’s strengths and weaknesses creating strategies

for accommodating all partners’ management styles preparing appropriate
partner selection criteria understanding a partner’s motives for joining the
alliance addressing resource capability gaps that may exist for a partner.

Contract Negotiation:

Involves determining whether all parties have realistic objectives forming high
calibre negotiating teams defining each partner’s contributions and rewards as
well as protect any proprietary information, addressing termination clauses
penalties for poor performance, highlighting the degree to which arbitration
procedures are clearly stated and understood
Alliance Operation:

Addressing senior management’s commitment, finding the calibre of

resources devoted to the alliance, linking of budgets and resources with
strategic priorities, measuring and rewarding alliance performance, assessing
the performance and results of the alliance.
Alliance Termination:

Alliance Termination winding down the alliance, for instance when its
objectives have been met or cannot be met, or when a partner adjusts
priorities or re-allocates resources elsewhere.

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Types of strategic alliances:

Joint Venture Strategic Alliances

Joint ventures are distinguished from Equity Strategic Alliances in that the
participating companies usually form a new and separate legal entity in
which they contribute equity and other resources such as brands,
technology or intellectual property. The parties agree to share revenues,
expenses and control of the created company for one specific project only or
a continuing business relationship.
Example of joint ventures in india :Sony-Ericsson is a joint venture by
the Japanese consumer electronics company Sony Corporation and the
Swedish telecommunications company Ericsson to make mobile phones.
The stated reason for this venture is to combine Sony's consumer
electronics expertise with Ericsson's technological leadership in the
communications sector. Both companies have stopped making their own
mobile phones.

Equity strategic alliance:

Equity strategic allianceis an alliance in which two or more firms own
different percentages of the company they have formed by combining some
of their resources and capabilities.
Examples of strategic alliances in india: Tata Motors and Fiat are
close to signing a worldwide agreement that will have the two automobile
majors cooperating in a wide range of areas, including joint research and
development for cars for overseas markets and the use of Fiat's retail
presence abroad for marketing Tata cars. Blue star has entered into a
strategic alliance with italian co., ISA, for providing a range of supermarkets
and food refrigeration solutions
Non-equity strategic alliance:
Non-equity strategic alliance is an alliance in which two or more firms
develop a contractual- relationship to share some of their unique resources
and capabilities.
One example is the partnership between Starbucks and Kroger:
Starbucks has kiosks in many Kroger supermarkets. Starbucks pays Kroger
for space, and Kroger customers have the opportunity to sit down and relax
with a coffee while shopping. Both parties benefit nicely.
4.Global Strategic Alliances:
Global Strategic alliance working partnerships between companies across
national boundaries and sometimes formed between company and a foreign
government, or among companies and governments.
Example:In 2001, The Coca-Cola Company and Procter & Gamble declared
a joint venture to make use of CocaCola’s massive distribution system to
improve reach and reduce time to market for the P&G products.
Reasons for entering a Strategic Alliance
Firms entering strategic alliances often have multiple objectives, some of
them listed below:
 Access to intellectual property rights
 Access to knowledge

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 Access to new technology

 Access to new markets
 Access to distribution skills
 Access to manufacturing capabilities
 Access to marketing skills
 Access to management skills
 Access to capital
 Create critical mass
 Create common standards
 Create new businesses
 Create synergies
 Diversification
 Improve agility
 Improve quality
 Improve R&D
 Improve material flow
 Improve speed to market
 Influence structural evolution the industry
 Inhibit competitors
 Reduce administrative costs
 Reduce R&D costs
 Reduce risk and liability
 Reduce cycle time
 Utilize by-products

Advantages:

1. Allowing each partner to concentrate on activities that best match their

capabilities.
2. Learning from partners & developing competences that may be more
widely exploited elsewhere.
3. Adequate suitability of the resources & competencies of an organization
for it to survive.
4. Share risk between the companies.
5. Respond more quickly to change.
6. Increase a company market share.
7. Adapt with greater flexibility.

Pitfalls of strategic Alliance:

1.Values Based Pitfalls
In looking at the issue of values, frequently partners of an alliance will have
core values that are conflicting. This is especially a problem with issues like
trust and integrity. Corporate culture clashes; employee turf protection, and
resistance of certain employees to new ideas can wreak havoc on your efforts
to maintain a prosperous alliance.

When one of the alliances partners does not completely embrace the
principles of Partnering, big challenges occur. This can include top-level
executives or even supervisory and functional employees in departments,

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divisions or regions within a Partnering organization. As an example, DuPont

believes that if a contractor is looking just to maximize his profits, on just one
job, then Partnering with that contractor is not for DuPont because they know
there will be problems in the relationship.

Supplier relationships can become challenging, especially when business is

great. Suppliers can make the relationship mistake of conveniently forgetting
about the loyalty of smaller long-term customers, and snubbing them for the
larger orders. This is short-term profitability and long-term disaster. When
those large order companies go out of business or are consolidated, the
supplier could be left without any customers.

2.Goals Based Pitfalls

In situations where a customer is the driving force behind a Partnering

arrangement, you can be left holding the bag. Be sure to examine each
Partnering proposal in the context of your company's overall business
strategy. This challenge was recently apparent to IBM and it discontinued its
alliance with Somerset PowerPC and Motorola, in producing microprocessors
for Apple.

When sitting down at the Partnering table a partner might find the
relationship seat uncomfortable. It could be that your partner has a different
level of emotional and physical comfort, or sometimes it is simply a change in
corporate strategy or a restructuring which leads away from a partner's
product and/or technology causing the partners distress. It is important that
you know the short and long-term goals of your alliance partner.

3.Facts Based Pitfalls

Relinquishing some control with the expectation of greater shared

returns can be a difficult waiting game. Additionally, your resources can get
pulled in too many directions based on collective alliance decisions. Be certain
you can spare the resources you devote to your alliance. Otherwise you may
put the success of your entire operation in harm’s way.

The lack of third-party cooperation can be a true relationship problem.

All the primary members of a Partnering agreement will have to give a little
for your agreement to work. Worse yet is your partner receiving unfavorable
or harmful media coverage. This is because you are usually pulled into the
picture and believed guilty by association. Real or perceived, image and
reputation are critical to any company's success.

Be careful in global alliances. Contracts with an overseas market, for

instance, often take a long time to finalize. By the time you get going, in the
technology industries, your competition may have already gotten started. If
you are already behind and you have developed an alliance with a partner
organization that is weak and bleeding, they will only bring you down faster
and harder.

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4.Procedures Based Pitfalls

It is easy to underestimate how much time, energy and resources will

be necessary to commit to your new alliance. Then not having access to your
alliance partner’s employees is an important issue. The closer the planned
relationship between the two companies, the greater the importance of the
linkages between them. You might find yourself in a situation of a small
company Partnering with a large company. A challenge in working together
will be that of the representatives, usually top executives of the small can
make decisions on the spot. Unfortunately, the employees of the giant must
take a proposal up the chain of command. This sometimes slows progress to a
snail’s pace.

Culture clash is a frequent Partnering challenge. The failed alliance of IBM

and Apple is a typical example.

Misinformation Based Pitfalls

You could easily be guilty of underestimating the complexity of

coordinating and integrating corporate resources, and overestimating your
partner's abilities to achieve the end result. Self-doubt and not believing you
have the skills and tools to create an alliance can crop up here.

Eventually, Partnering success depends on management’s abilities,

skills, commitment, aspirations and passions in assembling the pieces of the
puzzle. When unequal dependence in a relationship occurs, the partner with
the least dependence could be less likely to compromise and put energy into
the relationship.

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Books for Reference:

1. Darrell Mahoriy, etal, International Business, Longman.
2. Charles W.L. Hill, International Business, McGraw – Hill.
3. Czinkota, etal, Global Business, Dryden Press.
4. John D. Daniels, etal, International Business, Pearson Education.
5. Don Ball and Wendell McCulloch, International Business, McGraw – Hill.
6. A.V. Vedipurishwar, The Global CEO, Vision Books.
7. Aswathappa. K., International Business, Tata McGraw Hill (In Press)

Reference websites

1. Joha D. Danials & Charles W.L.Hill,

International Business.
2. www.wikipedia.org 3. www.investopedia.com 4. www.freedictionary.com 5.
Encyclopedia of Britannica6. http://www.citehr.com/ 7.
http://www.sparknotes.com/ 8.
http://www.answers.com/T/Business_and_Finance 9.
www.businessmate.org

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