FMS Trade Theories PPT 1

International Business Theories
Chapter Six
International Trade and Factor
Mobility Theory
6-1
Laissez-Faire versus Interventionist Approaches

to Exports & Imports
Interventionist:
Mercantilism
Neo-mercantilism
Free-trade theories:
Absolute advantage
Comparative advantage
Theories of Trade Patterns

Explaining trade patterns:
Country size
Factor proportions
Country similarity
Trade competitiveness:
Product life cycle theory
Porter diamond
What the major trade theories Do and Dont

discuss
Mercantilist Theory
Mercantilist theory proposed that a country should
try to achieve a favorable balance of trade (export
more than it imports)
Neo-mercantilist policy also seeks a favorable
balance of trade, but its purpose is to achieve some
social or political objective
Theory of Absolute Advantage

Suggests specialization through free trade
because consumers will be better off if they
can buy foreign-made products that are priced
more cheaply than domestic ones
A country may produce goods more efficiently
because of a natural advantage or because of
an acquired advantage
6-6
Theory of Comparative Advantage

Also proposes specialization through free
trade because it says that total global output
can increase even if one country has an
absolute advantage in the production of all
products
Theories of Specialization
Both absolute and comparative advantage theories
are based on specialization
Assumptions policymakers question:
full employment
economic efficiency
division of gains
transport costs
statics and dynamics
services
production networks
mobility
Trade Pattern Theories

How much a country will depend on trade if it
follows a free trade policy
What types of products countries will export
and import
With which partners countries will primarily
trade
Theory Of Country Size

Countries with large land areas are apt to have
varied climates and natural resources
They are generally more self-sufficient than
smaller countries are
Large countries production and market
centers are more likely to be located at a
greater distance from other countries, raising
the transport costs of foreign trade
Factor-Proportions Theory
A countrys relative endowments of land,
labor, and capital will determine the relative
costs of these factors
Factor costs will determine which goods the
country can produce most efficiently
Country-similarity Theory
Most trade today occurs among high-income
countries because they share similar market
segments and because they produce and consume so
much more than emerging economies
Much of the pattern of two-way trading partners
may be explained by cultural similarity between the
countries, political and economic agreements, and by
the distance between them
Product Life Cycle (PLC) Theory

Companies will manufacture products first in
the countries in which they were researched
and developed, almost always developed
countries
Over the products life cycle, production will
shift to foreign locations, especially to
developing economies as the product reaches
the stages of maturity and decline
Life Cycle of the International Product
The Porter Diamond

Four conditions as important for competitive
superiority:
demand conditions
factor conditions
related and supporting industries
firm strategy, structure, and rivalry
Limitations of the Porter Diamond Theory

Production factors and finished goods are
only partially mobile internationally
The cost and feasibility of transferring
production factors rather than exporting
finished goods internationally will determine
which alternative is better
The Relationship between Trade and Factor

Mobility
Capital and labor move internationally to gain

more income and flee adverse political
situations
Although international mobility of production
factors may be a substitute for trade, the
mobility may stimulate trade through sales of
components, equipment, and complementary
products
Theories & Current Practices of International

Trade:
The Ricardian Model: Labour Productivity &
Comparative Advantage
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall
Theories of why trade occurs:

Differences across countries in labor, labor skills,
physical capital, natural resources, and
technology
Economies of scale (larger scale of production is
more efficient)
Sources of differences across countries that

lead to gains from trade:
The Ricardian model examines differences in the
productivity of labor (due to differences in
technology) between countries.
The Heckscher-Ohlin model examines differences
in labor, labor skills, physical capital, land, or
other factors of production between countries.
Comparative Advantage and

Opportunity Cost
The Ricardian model uses the concepts of
opportunity cost and comparative advantage.
The opportunity cost of producing something
measures the cost of not being able to
produce something else with the resources
used.
For example, a limited number of workers

could produce either roses or computers.
The opportunity cost of producing computers is
the amount of roses not produced.
The opportunity cost of producing roses is the

amount of computers not produced.
Suppose that in the U.S. 10 million roses could

be produced with the same resources that
could produce 100,000 computers.
Suppose that in Colombia 10 million roses
could be produced with the same resources
that could produce 30,000 computers.
Workers in Columbia would be less productive
than those in the U.S. in manufacturing
computers.
Colombia has a lower opportunity cost of

producing roses.
Colombia can produce 10 million roses, compared
to 30,000 computers that it could otherwise
produce.
The U.S. can produce 10 million roses, compared
to 100,000 computers that it could otherwise
produce.
The U.S. has a lower opportunity cost of producing computers.

Colombia can produce 30,000 computers, compared to 10 million roses
that it could otherwise produce.
The U.S. can produce 100,000 computers, compared to 10 million roses
The U.S. can produce 30,000 computers, compared to 3.3 million roses
A country has a comparative advantage in

producing a good if the opportunity cost of
producing that good is lower in the country
than in other countries.
The U.S. has a comparative advantage in
computer production.
Colombia has a comparative advantage in rose
production.
Suppose initially that Colombia produces

computers and the U.S. produces roses, and
that both countries want to consume
computers and roses.
Can both countries be made better off?
Comparative Advantage and Trade

When countries specialize in production in which they have a
comparative advantage, more goods and services can be
produced and consumed.
Have U.S. stop growing roses and use those resources to make
100,000 computers instead. Have Colombia stop making 30,000
computers and grow roses instead.
If produce goods in which have a comparative advantage (U.S.
produces computers and Colombia roses), they could still consume the
same 10 million roses, but could consume 100,000 30,000 = 70,000
more computers.
One-Factor Ricardian Model

The simple example with roses and computers
explains the intuition behind the Ricardian
model.
Constructing a one-factor Ricardian model
using the following assumptions:
The assumptions are:

1 Labor is the only factor of production.
2. Labor productivity varies across countries
due to differences in technology, but labor
productivity in each country is constant.
3. The supply of labor in each country is
constant.
4. There is no transport cost
5. There is full employment
6. Two are only two countries & two goods.

7. International trade is free from all barriers.
8. Goods are exchanged against one another
according to the relative amounts of labor
embodied in them
9. Production is subject to the law of constant
returns
Therefore, What is the Gains From

Trade?
Gains from trade come from specializing in
the type of production which uses resources
most efficiently, and using the income
generated from that production to buy the
goods and services that countries desire.
where using resources most efficiently means
producing a good in which a country has a
comparative advantage.
Without trade, a country has to allocate

resources to produce all of the goods that it
wants to consume.
With trade, a country can specialize its
production and exchange for the mix of
goods that it wants to consume.
Consumption possibilities expand beyond the

production possibility frontier when trade is
allowed.
With trade, consumption in each country is
expanded because world production is
expanded when each country specializes in
producing the good in which it has a
comparative advantage.
What are Relative Wages?

Relative wages are the wages of the home country relative to
the wages in the foreign country.
Productivity (technological) differences determine relative
wage differences across countries.
The home wage relative to the foreign wage will settle in

between the ratio of how much better Home is at making
cheese and how much better it is at making wine compared to
Foreign.
Relative wages cause Home to have a cost advantage in only
cheese and Foreign to have a cost advantage in only wine.
Do Wages Reflect Productivity?

Do relative wages reflect relative
productivities of the two countries?
Evidence shows that low wages are associated
with low productivity.
Wage of most countries relative to the U.S. is
similar to their productivity relative to the U.S.
Other evidence shows that wages rise as

productivity rises.
For example in 1975, wages in South Korea were
only 5% of those of the United States.
However, as South Koreas labor productivity rose

(to about half of the U.S. level by 2007), so did its
wages (which were more than half of U.S. levels
by 2007).
However, there are certain Misconceptions about Comparative

Advantage?
1. Free trade is beneficial only if a country is more productive

than foreign countries.
But even an unproductive country benefits from free trade by avoiding

the high costs for goods that it would otherwise have to produce
domestically.
High costs derive from inefficient use of resources.
The benefits of free trade do not depend on absolute advantage,

rather they depend on comparative advantage: specializing in
industries that use resources most efficiently.
2. Free trade with countries that pay low wages hurts high
wage countries.
While trade may reduce wages for some workers, thereby affecting
the distribution of income within a country, trade benefits
consumers and other workers.
Consumers benefit because they can purchase goods more cheaply.
Producers/workers benefit by earning a higher income in the

industries that use resources more efficiently, allowing them to earn
higher prices and wages.
3. Free trade exploits less productive countries.
While labor standards in some countries are less than exemplary

compared to Western standards, they are so with or without trade.
Are high wages and safe labor practices alternatives to trade?

Deeper poverty and exploitation may result without export
production.
Consumers benefit from free trade by having access to cheaply

(efficiently) produced goods.
Producers/workers benefit from having higher profits/wages

higher compared to the alternative.
Comparative Advantages with many

goods
If each country specializes in goods that use resources
productively and trades the products for those that it wants
to consume, then each benefits.
If a country tries to produce all goods for itself, resources
are wasted.
The home country has high productivity in apples, bananas,

and caviar that give it a cost advantage, despite its high wage.
The foreign country has low wages that give it a cost
advantage, despite its low productivity in date production.
How is the relative wage determined?

By the relative supply of and relative (derived) demand for
labor services.
The relative (derived) demand for home labor services falls
when w/w* rises. As domestic labor services become more
expensive relative to foreign labor services,
goods produced in the home country become more expensive, and
demand for these goods and the labor services to produce them falls.
fewer goods will be produced in the home country, which will reduce
further the demand for domestic labor services.
Transportation Costs and Non-traded

Goods
The Ricardian model predicts that countries
should completely specialize in production.
But this rarely happens for three main
reasons:
1. More than one factor of production reduces the
tendency of specialization
2. Protectionism.
3. Transportation costs reduce or prevent trade,
which may cause each country to produce the
same good or service.
Nontraded goods and services (for ex., haircuts

and auto repairs) exist due to high transport
costs.
Countries tend to spend a large fraction of national
income on nontraded goods and services.
This fact has implications for the gravity model and
for models that consider how income transfers
across countries affect trade.
Empirical Evidence
Do countries export those goods in which their productivity is
relatively high?
Compare Chinese output and productivity with that of
Germany for various industries using 1995 data.
Chinese productivity (output per worker) was only 5 percent
of Germanys on average.
In apparel, Chinese productivity was about 20

percent of Germanys, creating a strong
comparative advantage in apparel for China.
The main implications of the Ricardian model

are well supported by empirical evidence:
productivity differences play an important role in
international trade
comparative advantage (not absolute advantage)
matters for trade
To Sum up
1. Differences in the productivity of labor across
countries generate comparative advantage.
2. A country has a comparative advantage in
producing a good when its opportunity cost
of producing that good is lower than in other
countries.
3. Countries export goods in which they have a

comparative advantage - high productivity
or low wages give countries a cost
advantage.
4. With trade, the relative price settles in
between what the relative prices were in
each country before trade.
5. Trade benefits all countries due to the

relative price of the exported good rising:
income for workers who produce exports
rises, and imported goods become less
expensive.
6. Empirical evidence supports trade based on
comparative advantage, although
transportation costs and other factors
prevent complete specialization in
production.
Theories of Tradecond.
Heckscher-Ohlin Model:
(Resources and Trade)
The Heckscher-Ohlin theory argues that trade occurs due to

differences in labor skills & its productivity, capital availability
& its efficiency, or other factors of production across
countries.
Countries have different relative abundance of factors of production.
Production processes use factors of production with different relative
intensity.
Two Factor Heckscher-Ohlin Model

1.
2.
3.
4.
5.
Two countries: home and foreign.

Two goods: cloth and food.
Two factors of production: labor and capital.
The mix of labor and capital used varies across goods.
The supply of labor and capital in each country is constant and
varies across countries.
6. In the long run, both labor and capital can move across
sectors, equalizing their returns (wage and rental rate) across
sectors.
Economy must produce subject to both

constraints i.e., it must have enough capital
and labor.
Without factor substitution, the production
possibilities frontier is the interior of the two
factor constraints.
Trade in the Heckscher-Ohlin Model
Like the Ricardian model, the Heckscher-Ohlin

model predicts a convergence of relative prices
with trade.
With trade, the relative price of cloth rises in
the relatively labor abundant (home) country
and falls in the relatively labor scarce (foreign)
country.
Relative prices and the pattern of trade: In

Home, the rise in the relative price of cloth
leads to a rise in the relative production of
cloth and a fall in relative consumption of cloth.
Home becomes an exporter of cloth and an
importer of food.
The decline in the relative price of cloth in

Foreign leads it to become an importer of cloth
and an exporter of food.
Heckscher-Ohlin Model: An economy has a

comparative advantage in producing, and thus
will export, goods that are relatively intensive
in using its relatively abundant factors of
production,
and will import goods that are relatively intensive
in using its relatively scarce factors of production.
Factor Price Equalization

Unlike the Ricardian model, the Heckscher-Ohlin model
predicts that factor prices will be equalized among countries
that trade.
Free trade equalizes relative output prices.
Due to the connection between output prices and factor
prices, factor prices are also equalized.
Trade increases the demand of goods produced by relatively
abundant factors, indirectly increasing the demand of these
factors, raising the prices of the relatively abundant factors.
In the real world, factor prices are not equal across countries.
The model assumes that trading countries produce the same
goods, but countries may produce different goods if their
factor ratios radically differ.
The model also assumes that trading countries have the same
technology, but different technologies could affect the
productivities of factors and therefore the wages/rates paid to
these factors.
The model also ignores trade barriers and transportation

costs, which may prevent output prices and thus factor prices
from equalizing.
The model predicts outcomes for the long run, but after an
economy liberalizes trade, factors of production may not
quickly move to the industries that intensively use abundant
factors.
In the short run, the productivity of factors will be determined by their
use in their current industry, so that their wage/rental rate may vary
across countries.
Therefore, the question is:

Does Trade Increase Income Inequality?
Over the last 40 years, countries like South Korea, Mexico,
and China have exported to the U.S. goods intensive in
unskilled labor (ex., clothing, shoes, toys, assembled goods).
At the same time, income inequality has increased in the U.S.,
as wages of unskilled workers have grown slowly compared
to those of skilled workers.
Did the former trend cause the latter trend?
The Heckscher-Ohlin model predicts that owners of relatively

abundant factors will gain from trade and owners of
relatively scarce factors will lose from trade.
Little evidence supporting this prediction exists.
1. According to the model, a change in the distribution of

income occurs through changes in output prices, but there is
no evidence of a change in the prices of skill-intensive goods
relative to prices of unskilled-intensive goods.
2. According to the model, wages of unskilled workers should

increase in unskilled labor abundant countries relative to
wages of skilled labor, but in some cases the reverse has
occurred:
Wages of skilled labor have increased more rapidly in Mexico than

wages of unskilled labor.
But compared to the U.S. and Canada, Mexico is supposed to be

abundant in unskilled workers.
3. Even if the model were exactly correct, trade is a small

fraction of the U.S. economy, so its effects on U.S. prices and
wages prices should be small.
Trade and Income Distribution

Changes in income distribution occur with every economic
change, not only international trade.
Changes in technology, changes in consumer preferences, exhaustion
of resources and discovery of new ones all affect income distribution.
Economists put most of the blame on technological change and the
resulting premium paid on education as the major cause of increasing
income inequality in the US.
It would be better to compensate the losers from trade (or any

economic change) than prohibit trade.
The economy as a whole does benefit from trade.
There is a political bias in trade politics:

potential losers from trade are better
politically organized than the winners from
trade.
Losses are usually concentrated among a few, but
gains are usually dispersed among many.
Each of you pays about $8/year to restrict imports
of sugar, and the total cost of this policy is about
$2 billion/year.
The benefits of this program total about $1 billion,
but this amount goes to relatively few sugar
producers.
Empirical Evidence on the

Heckscher-Ohlin Model
Tests on US data
Leontief found that U.S. exports were less capitalintensive than U.S. imports, even though the U.S.
is the most capital-abundant country in the world:
Leontief paradox.
Tests on global data

Bowen, Leamer, and Sveikauskas tested the
Heckscher-Ohlin model on data from 27 countries
and confirmed the Leontief paradox on an
international level.
Empirical Evidence on the

Heckscher-Ohlin Model cond.
Because the Heckscher-Ohlin model predicts that factor prices
will be equalized across trading countries, it also predicts that
factors of production will produce and export a certain
quantity goods until factor prices are equalized.
In other words, a predicted value of services from factors of
production will be embodied in a predicted volume of trade between
countries.
Empirical Evidence of the

Heckscher-Ohlin Model (cont.)
But because factor prices are not equalized across countries,
the predicted volume of trade is much larger than actually
occurs.
A result of missing trade discovered by Daniel Trefler.
The reason for this missing trade appears to be the

assumption of identical technology among countries.
Technology affects the productivity of workers and therefore the value
of labor services.
A country with high technology and a high value of labor services
would not necessarily import a lot from a country with low technology
and a low value of labor services.

Looking at changes in patterns of exports

between developed (high income) and
developing (low/middle income) countries
supports the theory.
US imports from Bangladesh are highest in
low-skill-intensity industries, while US imports
from Germany are highest in high- skillintensity industries.

As Japan and the four Asian miracle

countries became more skill-abundant, U.S.
imports from these countries shifted from less
skill-intensive industries toward more skillintensive industries.
3. An increase in the relative price of a good causes the real

wage or real rental rate of the factor used intensively in the
production of that good to increase,
while the real wage and real rental rates of other factors of
production decrease.
4. If output prices remain constant as the amount of a factor of

production increases, then the supply of the good that uses
this factor intensively increases, and the supply of the other
good decreases.
5. An economy exports goods that are relatively intensive in its

relatively abundant factors of production and imports goods
that are relatively intensive in its relatively scarce factors of
production.
6. Owners of abundant factors gain, while owners of scarce
factors lose with trade.
7. A country as a whole is predicted to be better off with trade,
so winners could in theory compensate the losers within
each country.
8.
9.
The Heckscher-Ohlin model predicts that relative output

prices and factor prices will equalize, neither of which
occurs in the real world.
Empirical support of the Heckscher-Ohlin model is weak
except for cases involving trade between high-income
countries and low/middle- income countries or when
technology differences are included.
Tariff & Non-tariff Trade Barriers
Tariff is a custom duty or a tax on the products that move

across borders. The custom duty is normally imposed upon by
the importing country on the products that enter into their
country
1. Ad valorem Duty: These duties are imposed according to
value. When a fixed percent of value of a commodity is
added as a tariff it is known as ad valorem duty. It ignores the
consideration of weight, size or volume of commodity.
The imposition of ad valorem duty is more justified in case of
those goods whose values cannot be determined on the basis
of their physical and chemical characteristics, such as costly
works of art, rare manuscripts, etc. In practice, this type of
duty is mostly levied on majority of items.
2. Countervailing Duty: It is imposed on certain imports

where products are subsidized by exporting governments. As
a result of government subsidy, imports become more
cheaper than domestic goods. To nullify the effect of subsidy,
this duty is imposed in addition to normal duties.
3. Revenue Tariff: A tariff which is designed to provide
revenue to the home government is called revenue tariff.
Generally, a tariff is imposed with a view of earning revenue
by imposing duty on consumer goods, particularly, on luxury
goods whose demand from the rich is inelastic.
4. Anti-dumping Duty: At times, exporters attempt to

capture foreign markets by selling goods at rock-bottom
prices, such practice is called dumping. As a result of
dumping, domestic industries find it difficult to compete
with imported goods. To offset anti-dumping effects, duties
are levied in addition to normal duties.
5.Protective Tariff: In order to protect domestic industries
from stiff competition of imported goods, protective tariff
is levied on imports. Normally, a very high duty is imposed,
so as to either discourage imports or to make the imports
more expensive as that of domestic products.
NON-TARIFF BARRIERS
A non tariff barrier is any barrier other than a tariff,
that raises an obstacle to free flow of goods in
overseas markets. Non-tariff barriers, do not affect
the price of the imported goods, but only the
quantity of imports. Some of the important nontariff barriers are as follows:
Types of non-tariff barriers
1. Import quotas:
Quotas are a restriction on the quantity of a good that may be
imported in any one period (usually below free-trade levels)
Global quotas restrict the total quantity of an import,
regardless of origin
Selective quotas restrict the quantity of a good coming from a
particular country
2. Orderly marketing agreements
Market sharing pact signed by trading partners

Intended to protect less efficient domestic producers
Usually involve voluntary export restraints, or export quotas
Recent trade negotiations have restricted the use of these
agreements
Carbaugh, Chap. 6
80
3. Domestic content requirements

Rules that require a certain percentage of a products total
value to be produced domestically
Often has the effect of forcing lower-priced imports to include
higher-cost domestic components or be assembled in a
higher-cost domestic market
Governments impose domestic content requirements to
boost domestic production. For instance, in the US bailout
package (to bailout General Motors and other organizations),
the US Govt. introduced Buy American Clause which means
the US firms that receive bailout package must purchase
domestic content rather than import from elsewhere.
Carbaugh, Chap. 6
81
4.Product Standards: Most developed countries impose

product standards for imported items. If the imported items
do not conform to established standards, the imports are not
allowed. For instance, the pharmaceutical products must
conform to pharmacopoeia standards.
5.Product Labeling: Certain nations insist on specific

labeling of the products. For instance, the European Union
insists on product labeling in major languages spoken in EU.
Such formalities create problems for exporters.
6.Packaging Requirements:
Certain nations insist on

particular type of packaging materials. For instance, EU
insists on recyclable packing materials, otherwise, the
imported goods may be rejected.
7. Subsidies
Domestic subsidy
Payments made to import-competing producers
to raise the price they receive above the market
price
Export subsidy
Payments and incentives offered to export
producers intended to raise the volume of
exports
Carbaugh, Chap. 6
84
8. Dumping
The practice of selling a product at a lower
price in export markets than at home (or
exporting at prices below production cost)
Sporadic dumping - to clear unwanted
inventories or cope with excess capacity
Predatory dumping - to undermine foreign
competitors
Persistent dumping - reaping greater profits by
engaging in price discrimination
Carbaugh, Chap. 6
85
9. Preferential Arrangements: Some nations form

trading groups for preferential arrangements in respect of
trade amongst themselves. Imports from member
countries are given preferences, whereas, those from other
countries are subject to various tariffs and other
regulations.
10. Foreign Exchange Regulations: The importer has

to ensure that adequate foreign exchange is available for
import of goods by obtaining a clearance from exchange
control authorities prior to the concluding of contract with
the supplier.
11.Other Non-Tariff Barriers: There are number of

other non tariff barriers such as:
health and safety regulations,
technical formalities,
environmental regulations,
embargoes, etc.
Sea transport and freight restrictions
Government procurement policies
International Strategic Alliances
Strategic Alliances
A strategic alliance is a business arrangement
whereby two or more firms choose to cooperate
for their mutual benefit.
Joint Venture
A joint venture (JV) is a special type of strategic
alliance in which two or more firms join
together to create a new business entity that is
legally separate and distinct from its parents.
Benefits of Strategic Alliances

Potential Benefits
of Strategic Alliances
Ease of
Market
Entry
Shared
Risk
Shared
Synergy
Knowledge
and
and
Competitive
Expertise
Advantage
Scope of Strategic Alliances

Significant variation
Comprehensive alliance
Narrowly defined alliance
Degree of collaboration depends upon basic

goals of each partner
The Scope of Strategic Alliances
Types of Functional Alliances

Production alliances
Marketing alliances
Financial alliances
R&D alliances
Issues in the Implementation of Strategic

Alliances
Partner
selection
Form of
ownership
Joint
management
13-95
Factors Affecting Partner Selection
Compatibility
Nature of
partner services
Relative safeness
Learning potential
Approaches to
Joint Management
Shared
management
agreements
Assigned
arrangements
Delegated
arrangements
Shared Management Agreement
Partner
1
Partner
2
Both parties are active

participants
Alliance
Assigned Arrangement
Partner
1
Partner
2
One partner takes primary

responsibility
Alliance
Delegated Arrangement
Partner
1
Partner
2
Joint venture
Pitfalls of Strategic Alliances

Changing
circumstances
Incompatibility
of partners
Pitfalls
Loss of
autonomy
Access to
information
Distribution
of earnings
INTERNATIONAL
ECONOMIC INTEGRATIONS
Significance of PTAs
Economic integrations among countries significantly influence
international business. The preferential treatment granted to
member countries affects the competitiveness of goods in

international markets. Elimination of import tariffs by the member
countries of a trade group encourages sourcing of goods from costefficient production locations. However, discriminatory tariff
against non-members do result in trade diversion to member
countries, even at the cost of production efficiency.
Trade-Creation Impact
Formation of an FTA results in the expansion of
consumption opportunities by making available lowcost goods.
Trade-Diversion Impact
Formation of an FTA results in trade diversion to its members
from non-members since the elimination of import tariffs
among member countries makes sourcing of goods from
member countries more attractive compared to nonmembers, even at the cost of production efficiency.
Forms of International Economic Integration
Preferential Trade Agreement (PTA)
Member countries in a PTA lower tariff barriers to
imports of identified products from one another e. g.

ECOWAS, GSTP, COMESA, etc.
Free Trade Agreement (FTA)

Form of economic integration in which member
countries seek to remove all tariffs and non-tariff
barriers for cross-border trade of goods and services

among themselves e.g. NAFTA, LAFTA., etc.
Customs Union (CU)

Countries
not
only
eliminate
tariff
barriers
among
themselves but also apply common external import tariffs for

non-members e. g. CARICOM, CACM, etc.
Common Market (CM)

In addition to free trade among members and
uniform tariff policy for non-members in a common
market, it involves elimination of all restrictions on
cross-border investments, movement of labour,

technology transfer, management, sharing of capital
resources, e.g. COMESA, MERCOSUR, etc.
Economic Union (EU)

It enjoys much greater level of economic integration where
free exchange of goods and services takes place. The
member countries in an economic union also maintain a
fiscal discipline, stability in exchange, and interest rates by
way of unified monetary and fiscal policies.
Political Union (PU)

As a culmination of economic integration, the member
countries strive to harmonize their security and foreign
policies.
common
parliament
is
created
with
representatives of member countries who work in

synchronization with an individual countrys legislature.
Major Regional Trade Agreements
European Union (EU)

Aimed at promoting regional co-operation among countries in
Europe, in addition to trade and economy, the EU deals with
many other subjects, such as citizens rights; ensuring
freedom, security, and justice; job creation; regional

development; environmental protection; and promoting
globalization
North American Free Trade Area (NAFTA)

Formed on 1 January, 1994, the economic integration
between the US, Canada and Mexico aims at elimination of
trade barriers related to industrial goods and services,
besides separate agreement on agriculture, intellectual

property rights(IPRs), labour adjustment, and environmental
protection.
MERCOSUR (Mercado Comun del Sur)

MERCOSUR, created in March 1991, aims at allowing free
movement of goods, capital, labour, and services with a
common uniform external tariff among member countries in

Latin America.
Gulf Cooperation Council (GCC)

Aimed at promoting
stability and economic
cooperation among the Persian Gulf nations, the
GCC was established on 25 May 1981. Its members

include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia,
and the United Arab Emirates.
Economic Cooperation (APEC) Asia-Pacific

Established in 1989, APEC aims to enhance economic growth
and prosperity for the region and to strengthen the AsiaPacific Community. APEC has no treaty obligations required
of its participants. Decisions are reached by consensus and
commitments and undertaken on a voluntary basis.
Association of South East Asian Nations (ASEAN)

The ASEAN was established on 8 August 1967 with major
objectives:
To accelerate economic growth, social progress, and
cultural development in the region through joint
endeavors
To promote regional peace and stability through abiding
respect for justice and the rule of law in the relationship
among countries
Regional Comprehensive Economic

Partnership(RCEP)
RCEP is a FTA negotiation that has been deve-loped
among 16 countries: 10 members of ASEAN and six
countries with which ASEAN has existing FTAsAustralia, China, India, Japan, Korea & New Zealand
covers total population of 3 billion, trade estimated
around 27 % of global trade covering GDP of US$ 21
trillion (2012).
Launched in November,2012, RCEP would be a

modern, comprehensive, high quality and mutually
beneficial economic partnership
Agreement establishing an open trade and
investment environment in the region to facilitate
the expansion of regional trade and investment
and contribute to global economic growth and
development.
Trans- Pacific Partnership(TPP)

TPP is a proposed regional regulatory and investment
treaty. Though agreement began in 2005, however as of
2014, 12 countries throughout of Asia Pacific region
participated in negotiations on the TPP: Australia,
Brunei, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, United States and Vietnam.
Basic aims is to counter the rising diplomatic and
economic influence of China in Asia.
It is more in Americas interest to nail

down the largest regional trade accord
which will be a milestone in
international economic cooperation.
Though there are certain contentious
issues among the nations with their
own national interests, it is toughest
nut to crack.
Indias Participation in PTAs
SAARC Preferential Trading Agreement (SAPTA)

The SAPTA was signed on 11 April 1993 at the Seventh SAARC
Summit held in Dhaka to provide a framework for the
exchange of tariff concessions with a view to promoting
trade and economic cooperation among the SAARC member

countries.
South Asian Free Trade Agreement (SAFTA)

SAFTA has come into force from 1 January 2006 aimed at
economic cooperation and integration among member countries.
It anticipates completion of the whole process of instituting free
trade among the member countries in ten years.
Comprehensive Economic Cooperation Agreement

(CECA) between India and Singapore
Signed on 29 June 2005, the CECA came into force on 1
August 2005. Besides trade in goods, it also covers
investment, services, mutual recognition agreements, and

customs co-operations.
Framework Agreement on Comprehensive Economic

Cooperation between the Association of South East Asian
Nations (ASEAN) and India
The framework agreement between ASEAN and India was
signed on 8 October 2003. It covers several aspects such as:
gradual tariff reductions leading to formation of FTA
trade facilitation measures,
Trade and investment promotion measures
early harvest programmes
tariff concessions.
Bay of Bengal Initiative for Multi-sectoral Technical

and Economic Co-operation (BIMSTEC)
BIMSTEC provides a unique link between South Asia and
Southeast Asia aimed to develop into an FTA and focus on
activities that facilitate trade, increase investment, and promote
technical cooperation among member countries.
Six areas were identified for cooperation include trade and
investment, technology, transportation and communication,
energy, tourism, and fisheries.
Indo-Sri Lanka Free Trade Agreement (ISLFTA)
An FTA between India and Sri Lanka was signed on 28

December 1998. The agreement envisages phasing out of
tariffs on all products except for a limited number of items in

the Negative List and tariff rate quota items over a period of
time.
Asia-Pacific Trade Agreement (APTA)

(Bangkok Agreement)
The Bangkok agreement was approved by the GATT council
in March 1978 aimed to liberalize and expand trade
progressively in the ESCAP region through mutually agreed

concessions by member countries. From 2 November 2005,
this agreement is renamed the Asia Pacific Trade Agreement
(APTA).
Global System of Trade Preferences (GSTP)
The GSTP establishes a framework for exchange of trade

concessions among the member developing countries. It also
lays down the rules, principles, and procedures for conduct of
negotiations and implementation of the decisions made.
Generalized System of Trade Preferences (GSP)
The GSP is a non-contractual instrument by which developed

countries extend tariff concessions to developing countries
unilaterally and on the basis of non-reciprocity.
Framework Agreement for Establishing FTA between

India and Thailand
Signed on 9 October 2003, the framework agreement covers
FTA in goods, services and investment, and areas of
economic cooperation. It also provides an Early Harvest

Scheme (EHS) under which common items have been agreed
for elimination of tariffs on a fast-track basis.
Bilateral Preferential Trading Agreement with

Afghanistan
The Preferential Trade Agreement between India and
Afghanistan, signed on 6 March 2003, aims to provide for
grant or concessions on a range of products of export

interest to Afghanistan, as a part of Indias endeavour to
strengthen bilateral trade and economic relations.
IndiaMERCOSUR PTA
Signed on 19 March, 2005, the PTA aims to expand and
strengthen existing trade relations between India and
MERCOSUR by granting reciprocal fixed trade preferences

with the ultimate objective of creating an FTA.
India-Chile Framework Agreement on Economic

Cooperation
Signed on 20 January 2005,
the agreement
envisages a PTA between the two countries.
IndoGulf Cooperation Council (GCC) FTA
Signed on 25 August 2004, it also aims to include

services as well as investment and general economic
cooperation alongwith goods.
Long Awaited India- EU FTA

India & EU have been negotiating a trade pact, known as
the Broad-based Trade and Investment Agreement(BTIA)
since 2007, however could not resolve on certain
contentious issues & latest is on drug ban issue on the
sale of 700 pharma products. Such ban will affect Indias
exports of $15 billion & this is our flagship sectors and has
developed its reputation through strong research and
safety protocols.
Limitations of Regional Economic Integrations

It can create an incentive for even further discrimination,
which eventually will hurt all trading partners.

PTAs cannot solve systemic issues, such as rules of origin,
anti-dumping, agricultural, and fisheries subsidies. These
issues simply cannot be handled at the bilateral or
regional level.
The proliferation of Regional Trade Agreements can

greatly complicate the trading environment, creating a
web of incoherent rules.

To many small and weak developing countries entering
into a PTA with a powerful big country means less leverage
and a weaker negotiating position as compared to that in
the multilateral talks.
Regional Trade Agreements Vis--vis

Multilateral Trading System Under the WTO
RTAs are an important exception under Article XXIV of the
GATT Agreement to the MFN rule of the WTO
agreements, under which tariff and other technical
barriers to trade can be reduced on preferential basis by
countries under the regional agreement.
Regionalism Vs Multilateralism
PTAs do have a fundamental conflict with

Multilateralism, as these are built on the
foundation of discrimination with the nonmembers while liberalizing trade.
The multilateral initiative under the WTO rests
on the Principle of NON-DISCRIMINATION.
MFN treatment Vs National Treatment
RTAs are an exceptional situation under the
multilateral trading system enunciated within
WTO
Any RTA is bound to have certain trade distortion

effects. This trade distortion arises due to
discriminatory treatment advanced to the nonmembers of the RTA vis--vis its members on account
of market access granted to the members of the same
regional bloc.
Though under Article XXIV of GATT of 1994 is now an
integral part of WTO agreement effective from 1995
recognizes the conditional right of members to form
RTAs imposes three conditions stipulated for regional
agreements under WTO :
w.r.t. the overall impact of the RTAs with non-members, there is

an obligation not to raise barriers to trade . Though this is
quantifiable in terms of tariffs, however less easy to measure in
terms of other trade regulations such as Rules of Origin.
For an external requirement, FTA can not lead to higher import
duties for its members while a custom union must harmonize the
external trade policies of its members and compensate affected
non-members accordingly.
on the internal dimension of regional agreements, tariffs and
other restrictive regulations of commerce must be phased out
substantially on all trade. (again the tariff component can be
quantified, but it is harder to determine in the case of their
restrictive trade regulations, as there is no agreed definition of the
term.
The WTO authorizes RTAs, the operation of which

should not lead to the situations where non-party
would pay the price for internal preferences. To
ensure coherence, RTAs are to be promptly notified to
the WTO and reviewed by peers before being
implemented.
The MFN treatment calls for non-discrimination among
members, while national treatment ensures nondiscrimination between domestic produced and
imported items.
RTA implies a higher degree if liberalization within the
region as compared to the rest of the world.
RTAs are thus allowed under the multilateral

trading system as an exception to the MFN principle
of the WTO in the belief that they would facilitate
trade liberalization at the multilateral level. The
idea is that regionalism would gradually expand,
leading to multilateral trade liberalization.
Therefore, it would facilitate the formation of a
liberalized fair global trading regime.
However,
because
of the
discriminatory
environment created by its formation, any RTA is
bound to result in some amount of trade diversion.
Building Blocks Vs Stumbling Blocks

The central question is : whether regional
agreements are building blocks or stumbling
blocks?
The proponents of stumbling blocks emphasize that:
1. RTAs may promote costly trade diversion rather
than efficient trade creation, especially when
sizable MFN tariffs remain these tariff create
vested interests to maintain preferential margins
in their markets.
2.Proliferating regional agreements absorb scarce

negotiating resources (especially in poorer WTO
members) and crowding out policy-makers
attention.
3. Competing RTAs (especially different North-South
combinations) may lock in incompatible
regulatory structures and standards and may
result in inappropriate norms for developing
partners; and
4. By creating alternative legal frameworks and
dispute settlement mechanisms, RTAs may
weaken the discipline and efficiency associated
with a broadly recognized multilateral framework
of rules
Building blocks proponents stress that:

1. Regional/bilateral agreements can help sensitize domestic
constituencies to liberalization and keep the stakes lower
to allow for incremental progress on trade.
2. Expanding the number and coverage of RTAs can erode
vested opposition to multilateral liberalisation because
each successive RTAs reduces the value of the margin of
preference , thereby reducing the discriminatory impact.
3. RTAs are often more about building strategic and /or
political alliances or locking in domestic reforms than
about actual trade liberalization and so are not necessarily
competitive with multilateral efforts.
4. Regional arrangement can provide an incubator for

developing country firms/producers to learn to trade
with RTAs partners without facing full global
competition;
5. For some issues, such as regulatory cooperation,
RTAs may be a viable and more manageable
alternative to the WTO where lowest common
denominator outcome trends to prevail.
Therefore, RTAs can be complement to

multilateral reform, but they are not
substitutes.
RTAs can be stumbling blocks to multilateral

arrangements by creating incentives to resist the
preference erosion that can occur through new
multilateral liberalization.
However, because the gains are often substantially larger
in multilateral agreements, concerns over preferences
erosion may be limited to a few small countries that could
conceivably block a multilateral agreement.
Large developed countries may gain more from signing
individual bilateral agreements than they would from a
multilateral accord, because they can use the carrot of
preferential access to extract concessions in nontrade
areas from developing country partners that would be
resisted in the WTO negotiating framework.
From development perspective WTO remains the bestavailable forum to discipline the use of trade-distorting
policies. RTAs can complement the WTO efforts by
cooperating on behind-the-border policies, especially
on regulation-intensive issues such as services, trade
facilitation and the investment climate. Governments
pursuing this agenda through RTAs must adopt rules
that are appropriate to their own level of development.
The potential for inappropriate outcomes is higher in
North-South RTAs because the asymmetry in
negotiating power can overtake real development
priorities.
All countries could take step to promote open

regionalism the developing countries, high income
countries and the international community working
together through WTO. Developing countries are
likely to have the greatest success in harnessing
trade for growth and poverty alleviation if they adopt
a three-pronged strategy that involves autonomous
liberalization, active multilateralism and open
regionalism.
High income countries could promote open
regionalism by including agriculture in RTA s. They
could adopt more common and non-restrictive rules
of origin across agreements.
They could work with prospective partners to ensure

that new regulations regarding investment and
intellectual property (IPRs) are appropriate to the level
of development, which would reduce the risks of
undue enforcement costs.
Finally they could provide trade related technical
assistance not only in the implementation phase but
also in the negotiating phase, which could promote
greater liberalization and supply response to new
market opportunities to regional or global markets.
International community working through the WTO

can reduce discrimination in the system. WTO
members should establish stronger multilateral
surveillance mechanisms to document , analyze and
monitor the effects of RTAs on non-members.
Expanding the information on the impact of RTAs to
stackholders- firms, consumers, taxpayers- would also
help to ensure that the potential benefits of
liberalization are both realiz
ed and distributed more equitably. Medium-term
efforts should focus on implementing WTO disciplines
on regional agreements.
Tariff & Non-tariff Trade Barriers
Tariff is a custom duty or a tax on the products that move

across borders. The custom duty is normally imposed upon by
the importing country on the products that enter into their
country
1. Ad valorem Duty: These duties are imposed according to
value. When a fixed percent of value of a commodity is
added as a tariff it is known as ad valorem duty. It ignores the
consideration of weight, size or volume of commodity.
The imposition of ad valorem duty is more justified in case of
those goods whose values cannot be determined on the basis
of their physical and chemical characteristics, such as costly
works of art, rare manuscripts, etc. In practice, this type of
duty is mostly levied on majority of items.
2. Countervailing Duty: It is imposed on certain imports

where products are subsidized by exporting governments. As
a result of government subsidy, imports become more
cheaper than domestic goods. To nullify the effect of subsidy,
this duty is imposed in addition to normal duties.
3. Revenue Tariff: A tariff which is designed to provide
revenue to the home government is called revenue tariff.
Generally, a tariff is imposed with a view of earning revenue
by imposing duty on consumer goods, particularly, on luxury
goods whose demand from the rich is inelastic.
4. Anti-dumping Duty: At times, exporters attempt to

capture foreign markets by selling goods at rock-bottom
prices, such practice is called dumping. As a result of
dumping, domestic industries find it difficult to compete
with imported goods. To offset anti-dumping effects, duties
are levied in addition to normal duties.
5.Protective Tariff: In order to protect domestic industries
from stiff competition of imported goods, protective tariff
is levied on imports. Normally, a very high duty is imposed,
so as to either discourage imports or to make the imports
more expensive as that of domestic products.
NON-TARIFF BARRIERS
A non tariff barrier is any barrier other than a tariff,
that raises an obstacle to free flow of goods in
overseas markets. Non-tariff barriers, do not affect
the price of the imported goods, but only the
quantity of imports. Some of the important nontariff barriers are as follows:
1. Import quotas:
Quotas are a restriction on the quantity of a good that may be
imported in any one period (usually below free-trade levels)
Global quotas restrict the total quantity of an import,
regardless of origin
Selective quotas restrict the quantity of a good coming from a
particular country
2. Orderly marketing agreements
Market sharing pact signed by trading partners

Intended to protect less efficient domestic producers
Usually involve voluntary export restraints, or export quotas
Recent trade negotiations have restricted the use of these
agreements
Carbaugh, Chap. 6
164
3. Domestic content requirements

Rules that require a certain percentage of a products total
value to be produced domestically
Often has the effect of forcing lower-priced imports to include
higher-cost domestic components or be assembled in a
higher-cost domestic market
Governments impose domestic content requirements to
boost domestic production. For instance, in the US bailout
package (to bailout General Motors and other organizations),
the US Govt. introduced Buy American Clause which means
the US firms that receive bailout package must purchase
domestic content rather than import from elsewhere.
Carbaugh, Chap. 6
165
4.Product Standards: Most developed countries impose

product standards for imported items. If the imported items
do not conform to established standards, the imports are not
allowed. For instance, the pharmaceutical products must
conform to pharmacopoeia standards.
5.Product Labeling: Certain nations insist on specific

labeling of the products. For instance, the European Union
insists on product labeling in major languages spoken in EU.
Such formalities create problems for exporters.
6.Packaging Requirements:
Certain nations insist on

particular type of packaging materials. For instance, EU
insists on recyclable packing materials, otherwise, the
imported goods may be rejected.
7. Subsidies
Domestic subsidy
Payments made to import-competing producers
to raise the price they receive above the market
price
Export subsidy
Payments and incentives offered to export
producers intended to raise the volume of
exports
Carbaugh, Chap. 6
168
8. Dumping
The practice of selling a product at a lower
price in export markets than at home (or
exporting at prices below production cost)
Sporadic dumping - to clear unwanted
inventories or cope with excess capacity
Predatory dumping - to undermine foreign
competitors
Persistent dumping - reaping greater profits by
engaging in price discrimination
Carbaugh, Chap. 6
169
9. Preferential Arrangements: Some nations form

trading groups for preferential arrangements in respect of
trade amongst themselves. Imports from member
countries are given preferences, whereas, those from other
countries are subject to various tariffs and other
regulations.
10. Foreign Exchange Regulations: The importer has

to ensure that adequate foreign exchange is available for
import of goods by obtaining a clearance from exchange
control authorities prior to the concluding of contract with
the supplier.
11.Other Non-Tariff Barriers: There are number of

other non tariff barriers such as:
health and safety regulations,
technical formalities,
environmental regulations,
embargoes, etc.
Sea transport and freight restrictions
Government procurement policies
INDIAS FOREIGN TRADE POLICY (FTP) 2015

2020
- Dr SUMEET JERATH , IAS,

ADDITIONAL DIRECTOR GENERAL FOREIGN
TRADE , NORTH ZONE - DEPARTMENT OF
COMMERCE , MINISTRY OF COMMERCE AND
INDUSTRY , GOVERNMENT OF INDIA

2020
INDIAS FOREIGN TRADE POLICY (FTP) 2015 2020
ALSO SOMETIMES CALLED COMMERCIAL POLICY AND
FORMULATED ; INTERPRETED AND ADMINISTERED BY DIRECTORATE
GENERAL OF FOREIGN TRADE (DGFT), A SUBORDINATE OFFICE OF
DEPARTMENT OF COMMERCE, MINISTRY OF COMMERCE AND
INDUSTRY, GOVERNMENT OF INDIA.
FTP 2015 2020 IS THE MICRO TRADE POLICY AND THE MACRO
TRADE POLICY INTERFACE WITH WORLD TRADE ORGANISATION
(WTO); PTAs AND FTAs WITH VARIOUS COUNTRIES AND TRADE
BLOCKS IS THE DOMAIN OF DEPARTMENT OF COMMERCE.
INDIAS FTP 2015 - 2020

Indias new five year FTP 2015 2020 provides a stable
and sustainable policy environment ; overarching
framework and architecture to catalyse exports and
facilitate
nay
rationalise
imports;
generate
employment and increase value addition in the
country.
Indias FTP Domestic Trade Policy is anchored in the
Domestic Policy framework (symbiotic relationship and
synergy) Export Promotion Mission to be created that
would be synergised with the National Missions of
Make in India; Digital India e Governance Improve the ease of doing business index; Skill India.

2020
Foreign Trade Policy Statement 2015. ( A

document released for the first time during
the announcement of FTP. It symbolises the
marriage of macro FTP with micro FTP)
Foreign Trade Policy 2015 2020 notified
under section 5 of the Foreign Trade
(Development & Regulation) Act, 1992 as
amended from time to time.
Hand Book of Procedures ; Appendices &
Aayat Niryat Forms and Standard Input Output
INDIAS FTP 2015 2020 SUPER ORDINATE

GOAL (bHAG)
Indias FTP Statement explains the Vision ,Mission. Objectives and
Goals ; Market and Product strategy; Structure and Architecture to
achieve the goals.
VISION - Super Ordinate Goal big Hairy Audacious Goal (b HAG )
of doubling Indias exports of merchandise and services from about
USD 450 Billion in FY 2013 -14 to USD 900 Billion in FY 2019 2020
and to raise Indias share in world exports from 2% to 3.5%.
Every thing hangs together in International Trade so Whole of
Government approach - State Governments ; Other Central
Government Ministries to be also involved rather than just the role
of Department of Commerce in the export value chain (both up
stream and down stream activities in terms of Michael Porters
value chain)
INDIAS FTP 2015 - 2020

State Governments and Central Government have to
act in tandem to remove the inefficiencies and
bottlenecks in Indias export value chains ; enhance
Indias export competitiveness ; address constraints
and in house challenges like infrastructural bottlenecks;
high transaction costs ; complex procedures.
Analyses Indias position on WTO (Multilateral Trading
System) ensures that Indias FTP is aligned with both
Indias national interests as well as its obligations and
commitments under various WTO Agreements.
EXTERNAL ENVIRONMENT OF INTERNATIONAL

BUSINESS
In the ongoing Doha Round , India is

committed to remove asymmetries in the
multilateral trade rules like public stock
holding for food security purposes and sign
the Trade Facilitation Agreement (TFA). Also
in sync with the futuristic plans of phasing out
export subsidies, Indias FTP is preparing the
Indian Industry and Trade for a regime that is
inclined more towards fundamental systemic
measures rather than incentives and subsidies
EXTERNAL ENVIRONMENT OF INTERNATIONAL

BUSINESS
The three Mega Agreements Trans Pacific Partnership
; Trans Atlantic Trade and Investment Partnership and
Regional Comprehensive Economic Partnership that
are currently being negotiated are a new challenge in
the external economic environment. India is party to
the RCEP negotiations. These would erode existing
preferences for Indian products in established
traditional markets such as the US and EU and
establish a more stringent and demanding framework
for rules. Indian industry needs to gear up to meet
these challenges.
MARKET STRATEGY
Market Strategy Market Penetration and Market
Development (Diversification). India has signed 5
limited PTAs ; 11 FTAs and is negotiating 17 FTAs. Some
of the issues being addressed are Rules of Origin;
Inversion in Duty Structure; Capturing preferential
export data; FTA outreach and information
dissemination and setting up a Trade Portal. Under
MEIS (Chapter 3 Export Reward Scrips), countries
have been grouped into three categories A
Traditional Markets ; B Emerging & Focus Markets; C
Other Markets.
MARKET STRATEGY
NAFTA Countries USA , Canada and Mexico negotiating a FTA
with Canada.
European Union (EU) negotiating a BTIA.
Australia and New Zealand negotiating a CECA/CEPA
South Asia Sri Lanka FTA and discussions with Pakistan.
Focus on Iran.
SE Asia under the Look/ Act East Policy ASEAN India Trade in
Goods/Services/ Investment Agreement.
Future Focus on CLMV (Cambodia; Lao PDR; Myanmar; Vietnam)
and India Myanmar Thailand Trilateral Highway.
MARKET STRATEGY
NE Asia Focus on China , Japan and South Korea.
Focus on Africa ; West Asia & North Africa (WANA)
particularly UAE; Latin American and Caribbean region India Chile/ Peru PTA being negotiated ; India
MERCOSUR (Argentina , Brazil , Paraguay, Venezuela and
Uruguay) PTA already in place.
Focus on 12 countries of Commonwealth of Independent
States (CIS) negotiating a RTA with the Customs Union of
Russian Federation, Kazakistan and Belarus. Connecting
India with the CIS the International North South Transport
Corridor.
PRODUCT STRATEGY
PRODUCT STRATEGY Focus on moving up the value chain
Value added products (more domestic value in sync with
Make in India) Engineering Products ; Electronics and
Drugs and Pharmaceuticals.
Focus on labour intensive products (create employment
opportunities so that our demographic dividend does not
become a demographic disaster) handicrafts , leather,
textiles, gems and jewellery; agro and plantation products;
marine products.
Focus on new , innovative and high tech products and
Project Exports.
PRODUCT STRATEGY
Move towards World Class Productstransforming India into a manufacturing and
exporting hub. Build Brand India.
Facilitating and encouraging export of Dual
use items Special Chemicals , Organisms,
Materials , Equipment and Technologies
(SCOMET) items validity of SCOMET
authorisation has been extended from 12 to
24 months to help industry to plan their
activity in an orderly manner and obviate the
PRODUCT STRATEGY
Facilitating and encouraging export of defence
items normal export obligation period under
Advance Authorisation is 18 months which has
been extended to 24 months. A list of military
stores requiring NOC of Department of
Defence Production has been notified by
DGFT recently. A committee has been formed
to create ITC (HS) codes for defence and
security items for which industrial licenses are
issued by DIPP.
PRODUCT STRATEGY
E COMMERCE EXPORTS
Goods falling in the category of handloom
products, books/periodicals, leather footwear,
toys and customised fashion garments, having
FOB value up to Rs 25,000 per consignment
(finalised using e commerce platform) shall
be eligible for benefits under FTP. Such goods
can be exported in manual mode through
Foreign Post Offices at New Delhi, Mumbai
and Chennai.
PRODUCT STRATEGY BOOST TO MAKE IN INDIA

Reduced Export Obligation (EO) for domestic procurement
under EPCG scheme specific EO under EPCG scheme in
case capital goods are procured from indigenous
manufacturers which is currently 90% of the normal EO (6
times the duty saved amount) has been reduced to 75% in
order to boost Make in India.
Higher level of reward DCSs under MEIS for export items
with high domestic content and value addition.
In order to encourage manufacturing of indigenous capital
goods, imports under EPCG authorisation shall not be
eligible for exemption from payment of Anti Dumping Duty,
Safeguard Duty and Transitional Product Specific Safeguard
Duty.
STRUCTURE /ARCHITECTURE
Already Board of Trade (BOT) exists as a forum for
discussion and consultation.
Other Institutional Mechanisms to be set up Council
for Trade Development and Promotion (CTDP)
community of Central Government and various States
and UT Governments; National Committee on Trade
Facilitation (NCTF) for domestic coordination and
implementation of the Trade Facilitation Agreement
(TFA); Export Promotion Mission (EPM) to work with
State Governments to boost Indias exports.
STRUCTURE/ ARCHITECTURE
Centre for Research in International Trade
(CRIT) to be set up to deepen existing research
capabilities and widen them to encompass
new and specialised areas .
Directorate General of Trade Remedies (DGTR)
to be set up to secure trade remedies for
Indian businesses as well as in taking
defensive action when trade remedies are
used against Indian businesses.
Strengthening of Commercial Wings in the
SYSTEMS
In
sync
with
Digitise
India
and
recommendations of the two Task Forces on
reducing transaction time and cost in
International Trade headed by DGFT , e
governance initiatives and ease of doing
measures have been taken in the new FTP
and HBP. Simple, transparent , user friendly
and Electronic Data Interchange (EDI)
compatible procedures have been put in place
in HBP 2015 -2020 to implement the FT(D&R)
SYSTEMS
Online filing of documents/applications and paperless
trade in 24 x 7 environment -:
70% of applications filed in DGFT relate to Chapter 3
and Chapter 4. Henceforth hard copies of applications
and specified documents under these chapters would
not be required to be submitted to the Regional
Authorities (RAs) under DGFT. Applications under
Chapter 5 would be taken in the next phase.
Certificates issued by C A s / Cost A s/ C S s to be
enabled to be digitally signed and uploaded in the new
system.
SYSTEMS
Landing documents of export consignments as
proofs for notified markets to be enabled to
be digitally up loaded by any exporter / Three
, Four , Five Star Export Houses.
SIMPLIFICATION OF PROCEDURES /PROCESSES
-:
Under Para 2.06 of FTP only 3 mandatory
documents are required for - :
Export of goods from India - : Bill of Lading/
Airway Bill ; Commercial Invoice cum Packing
SYSTEMS
Import of goods into India Bill of Lading/ Airway Bill ;
Commercial Invoice cum Packing List ; Bill of Entry.
Exporter Importer Profile (EIP) has been created to
upload documents and there would be no need to
submit copies of permanent records/ documents like
IEC, PAN , RCMC, Manufacturing Licence etc with each
application once uploaded.
Online Inter Ministerial Consultations for approval of
export of SCOMET items , Norms fixation, Import and
Export Authorisations in a phased manner.
SYSTEMS
FORTHCOMING E GOVERNANCE INITIATIVES -:
Message exchange for transmission of chapter 3 export
reward Duty Credit Scrips from DGFT to Customs.
Message exchange for transmission of Bills Of Entry
(Import details) from Customs to DGFT.
Online issuance of Export Obligation Discharge
Certificate (EODC).
Message exchange with CBDT for PAN.
Message exchange with Ministry of Corporate Affairs
for CIN & DIN.
SYSTEMS
Facility to pay application fee using Debit/
Credit Card.
Open API (Application Programme Interface)
for submission of IEC application.
Mobile applications for FTP.
SKILLS
Capacity building of the relevant stakeholders and
institutions is of utmost importance in order to fully realise
the potential of various Trade Agreements and FTP
measures. The focus areas would be as follows -:
Training of Officers of the Export Promotion Councils (EPCs)
and Export Development Authorities.
Establishment of a trade research/Analysis cell in these
institutions.
Creation of an internal team for soliciting value added
inputs from stakeholders.
Development and regular up dation of the web portals of
institutions.
SKILLS
BOOST TO SKILL INDIA -:
Under Para 1.08 of FTP , DGFT is implementing Niryat
Bandhu Scheme (NBS) for mentoring new and
potential exporters on the intricacies of foreign trade
through counselling , training and outreach
programmes.
Considering the strategic significance of Small and
Medium Enterprises (SMEs) in the manufacturing
sector and employment generation, SME Clusters have
been identified for focused interventions to boost
exports.
SKILLS
Accordingly, NBS has been galvanised and re
positioned to achieve the objective of Skill
India. Out reach activities would be organised
in a structured way at these clusters with the
help of EPCs as Industry Partners and willing
academia and research community members
as Knowledge Partners.
STYLE AND SHARED VALUES

DGFT and its 36 Field Formations Regional Authorities (R
A s ) are being encouraged , enthused and empowered to
shift from Max Webers bureaucratic model to Jack Welchs
paradigm of T Organisation (where Technology is the
hardware and Team work is the software) ; where Heads of
R A s are being counselled and inspired to graduate from
the model of Transactional Leader to that of a
Transformational Leader ; Officers are being mentored to
be Toyotas T managers where the vertical part of T is
deepening ones knowledge on micro FTP and HBP and the
horizontal part of T is widening ones knowledge on macro
policies trade , monetary , exchange rate and fiscal .
STYLE AND SHARED VALUES

Under para 1.07 of the FTP , DGFT Officers
have to work not as Controllers but as
Facilitators of exports / imports (Niryat
Bandhus). Focus would be on good
governance ; efficient, transparent and
accountable delivery systems.
FTP 2015 - 2020

RATIONALISATION , SIMPLIFICATION AND MERGER OF
CHAPTER 3 EXPORT INCENTIVE SCHEMES
Earlier there were a plethora of reward schemes like Focus
Product Scheme; Focus Market Scheme; Market Linked
Focus Product Scheme; Vishesh Krishi Gram Udyog Yojna
Scheme; Incremental Export Incentivisation scheme ; SHIS;
AIIS etc. These have been rationalised and now there are
only two schemes (Buckets) -:
Merchandise Exports from India Scheme (MEIS)shall be
payable as percentage of realised FOB Value (in FFE) as
reward for export of notified goods to notified markets.
FTP 2015 - 2020

The rewards would range from 2% to 5% on realised
FOB value of Exports in FFE.
SERVICE EXPORTS FROM INDIA SCHEME (SEIS)
This scheme has replaced Served from India Scheme
(SFIS) and now applies to Service Providers located in
India instead of Indian Service Providers earlier.
Under this scheme selected services would be
rewarded @ 3 % or 5% of the Net Foreign Exchange
(NFE) earned.
Under both the schemes Duty Credit Scrips (DCSs)
would be given as reward to the exporters.
FTP 2015 - 2020

DCSs would be freely transferable and usable for payment
of Customs Duty/ Excise Duty/ Service Tax. Basic Customs
Duty paid in cash or paid through DCS can be taken back as
Duty Drawback as per DoR rules , if inputs so imported are
used for exports.
Change in Status Holders The earlier classification of
Export/ Star Export/ Trading/ Star Trading/ Premium
Trading House has been replaced by a new 5 tier
classification of One/ Two/ Three/ Four/ Five Star Export
Houses with three year cumulative export performance of
USD 3/ 25/100/500/2000 Million.
Chapter 3 incentives (MEIS and SEIS) to be available to SEEZ
units also.
FTP 2015 - 2020

OTHER NEW INITIATIVES -:
New initiatives for EOUs, EHTPs and STPs share
infrastructural facilities; inter unit transfer of goods and
services ; set up warehouses near the port of export; use all
duty free equipment/goods for training purposes ;
simplified procedure to fast track the de bonding etc.
A new Chapter -8 on Quality Complaints and Trade Disputes
has been incorporated in the new FTP. A Committee on QC
&TD would be set up in 22 R A s of DGFT with members
from EPCs/ FIEO/APEDA/EIC etc to resolve disputes at a
faster pace.
FTP 2015 - 2020

Additional Ports allowed for export and
import Calicut Airport in Kerala and
Arakonam ICD in Tamil Nadu have been
notified as registered ports for import and
export. Vishakhapatnam and Bhimavaram
have been added as Towns of Export
Excellence (TEE) for sea foods category.
Indias Foreign Trade,

DGFT
&
FTP 2015-20
206
PART A Indias Foreign Trade

PART B DGFT Organisation
PART C FTP 2015-20
207
PART A : Indias Trade
208
Performance : Merchandise Trade

Value- US$ Billion
Export
Year
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Import
Trade deficit
%
%
annual
annual
% of
Value Change Value Change Value exports
185.3 13.6 303.7 20.7 118.4 63.9
178.8
-3.5 288.4
-5.1 109.6 61.3
251.1 40.5 369.8 28.2 118.6 47.2
306 21.8 489.3 32.3 183.4 59.9
300.4
-1.8 490.7
0.3 190.3 63.4
312.6
4.1 450.1
-8.3 137.5
44
310.6 -1.22 448.0 -0.48 137.4 44.2
209
% Share in world merchandise exports

In merchandise trade, India is the 19th
largest exporter in the world with a share of
1.7 percent in 2013.
In commercial services, India was the 6th
largest exporter in the world with a share of
3.2 percent.
Source-International Trade Statistics-2014-
Calendar year data
210
Global comparison-Growth in Volume of World

Merchandise Trade-2005-12
Source-International Trade Statistics-2013
Calendar year data
211
Exports: Top Destinations -US$B-2014-15

Rank
1
2
3
4
5
6
7
8
9
10
Countries
USA
U ARAB EMIRATES
HONG KONG
CHINA
SAUDI ARABIA
SINGAPORE
UK
GERMANY
SRI LANKA
BANGLADESH
OTHERS
India's Total Export
Value
% of total
42.45
33.03
13.60
11.94
11.17
10.00
9.32
7.54
6.70
6.46
158.36
310.57
13.7
10.6
4.4
3.8
3.6
3.2
3.0
2.4
2.2
2.1
51.0
100
212
161 Countries with whom India has Trade Surplus
20 Countries with whom India has Merchandise Trade Surplus >US$ 1 Billion-2013-14-U S A,
Singapore, Bangladesh, Hong Kong, Netherland, Sri Lanka , U K, Kenya, Turkey, Nepal, Vietnam,
Tanzania, Pakistan, Brazil, France, Israel, U Arab Emts, Italy, Spain, Philippines
213
Top 10 Trade surplus countries- (in US$B)-2014-15

Rank
1
2
3
4
5
6
7
8
9
10
Country
USA
HONG KONG
U ARAB EMTS
SRI LANKA
BANGLADESH
UK
KENYA
NEPAL
NETHERLAND
TURKEY
Export
42.45
13.60
33.03
6.70
6.46
9.32
4.12
4.56
6.32
5.36
Trade
Surplus
20.63
8.03
7.03
5.95
5.85
4.30
4.00
3.92
3.90
3.89
214
75 Countries with whom India has Trade Deficit
27 Countries with whom India has Merchandise Trade deficit >US$ 1 Billion-2013-14-China,
Saudi Arabia, Switzerland, Iraq, Kuwait, Qatar, Venezuela, Nigeria, Indonesia, S. Korea , Australia,
Angola, Iran, Germany, Malaysia, Belgium, Colombia, Japan, Chile, Taiwan, Russia, Thailand, Mexico,
Ukraine, Canada, Azerbaijan, South Africa
215
Top 10 Trade deficit countries-US$B-2014-15

Rank
Country
Import
Trade Deficit
CHINA
60.4
-48.5
SWITZERLAND
22.1
-21.1
SAUDI ARABIA
28.2
-17.1
QATAR
14.6
-13.5
IRAQ
14.2
-13.4
KUWAIT
13.4
-12.2
VENEZUELA
12.0
-11.7
NIGERIA
13.7
-11.0
INDONESIA
15.0
-11.0
10
KOREA RP
13.5
-8.9
216
Imports: Top supplier countries -US$B-2014-15

Rank
1
2
3
4
5
6
7
8
9
10
11
Countries
CHINA
SAUDI ARABIA
U ARAB EMIRATES
SWITZERLAND
U SA
INDONESIA
QATAR
IRAQ
NIGERIA
KOREA S
Others
India's Total
Value
60.41
28.24
26.01
22.13
21.82
15.00
14.60
14.25
13.68
13.53
218.31
447.98
% of total
13.5
6.3
5.8
4.9
4.9
3.3
3.3
3.2
3.1
3.0
48.7
100.0
217
Exports: Top 10 Principal Commodities- US $ Billion

Rank
1
2
3
Commodity
PETROLEUM PRODUCTS
DIAMONDS
GOLD AND OTH PRECIOUS METAL
JEWELLERY
4 DRUG FORMULATIONS,
BIOLOGICALS
5 READYMADE GARMENTS OF
COTTON
6 IRON AND STEEL
7 PRODUCTS OF IRON AND STEEL
8 MOTOR VEHICLE/CARS
9 AIRCRAFT, SPACECRAFT AND
PARTS
10 COTTON FABRICS, MADEUPS ETC.
11 OTHERS
Total
AprApr%Growth %Share
Mar 2014 Mar 2015
63.18
56.75
-10.18
18.33
27.16
24.62
-9.35
7.95
10.86
13.21
21.71
4.27
10.67
11.22
5.13
3.62
9.11
9.28
1.92
9.22
6.78
6.15
4.58
8.67
7.57
6.68
6.16
-6.02
11.61
8.73
34.41
2.8
2.44
2.16
1.99
5.12
5.52
7.75
1.78
161.58
314.41
159.89
309.57
-1.05
-1.54
51.66
100
218
Imports: Top 10 Principal Commodities- US$ Billion

Rank
Commodity
1
2
3
PETROLEUM: CRUDE
GOLD
DIAMONDS
4
5
PETROLEUM PRODUCTS
COAL,COKE AND BRIQUITTES
ETC
TELECOM INSTRUMENTS
IRON AND STEEL
OTHER COMMODITIES
ORGANIC CHEMICALS
VEGETABLE OILS
OTHERS
6
7
8
9
10
11
Total
AprApr%Growth %Share
Mar 2014 Mar 2015
143.64
116.44
-18.93
26.02
28.70
34.41
19.86
7.69
23.99
22.46
-6.35
5.02
21.13
16.40
21.88
17.69
3.57
7.86
4.89
3.95
11.22
9.11
13.18
11.07
7.25
164.52
450.20
14.70
12.34
11.48
11.35
9.67
175.10
447.52
31.06
35.41
-12.91
2.51
33.39
6.44
-0.59
3.29
2.76
2.56
2.54
2.16
39.12
100
219
Declining exports in recent months

( values in Billion USD)
Months
2013-14
2014-15
2015-16
April
24.52
25.63
22.05
May
24.92
28.00
22.35
June
24.00
26.48
July
25.84
27.73
August
26.34
26.96
September
28.14
28.90
October
27.48
26.09
November
24.20
25.96
December
26.39
25.40
January
26.89
23.88
February
25.35
21.55
30.34
23.95
March
220
PART B DGFT Organisation
221
DGFT: Background
DGFT is an attached office of Department of Commerce
Responsible for implementation of provisions under the Foreign Trade
(Development and Regulation) [FT(D&R)] Act 1992 (as amended in 2010).
Change of name and functions
Earlier known as Chief Controller of Imports and Exports (CCI&E) under
Imports and Exports (Control and Regulations) Act, 1947.
Renamed as Directorate General of Foreign Trade (DGFT) under FT(D&R) Act ,
1992.
Organization
ISO 9001:2008 certified, digital friendly

Headquarter in New Delhi
37 Regional offices
Nearly 2000 employees. (2387-Sanctioned strength)
Headed by Director General of Foreign Trade
222
DGFT Organization
Minister, Commerce
Commerce
Secretary
DGFT
4 Additional
DGFT at HQ
37 Regional Offices
Zonal office,
Mumbai
Zonal office, Kolkata
Zonal office, Delhi
Zonal office,
Chennai
RAs at Ahmedabad,
Surat, Vadodara etc.
RAs at Shillong,
Cuttack etc.
RAs at Jammu,
Jaipur, Kanpur etc.
RAs at Bengaluru,
Cochin, Coimbatore etc.
223
DGFT: Major Functions

Implementation of various provisions of FT(D&R)
Act
Issuance of authorisations for items under Import / Export controls (less than
5% of tariff lines)
Formulation of Foreign Trade Policy (FTP )

Implementation of various promotional schemes of
FTP
Grievance Redressal
Enforcement function
Capacity Building
Niryat Bandhu Scheme- capacity building of new entrepreneurs /MSMEs for
exports
Indian Trade Service (ITS) cadre management

224
Import/Export control Functions

Import/Export Controls are imposed predominantly on account of security, public
health, public morals and environment grounds. Less than 4% of Indias Tariff Lines
(at 8 digit level) are under some restriction.
IMPORT
Prohibited items 53 LinesInclude beef, beef tallow, products
of wild animals and ivory
Restricted items 485 Linesinclude live animals, birds,
vegetable
planting
material,
psychotropic substances
STEs
33 Lines. include
foodgrains,
certain
petroleum products and fertilizers.
EXPORT
Prohibited items 59 LinesInclude Wild animals, beef, pulses
and ivory
Restricted items 155 Linesinclude horses, birds, rice bran,
psychotropic substances, Dual Use
Items
[Special
Chemicals,
Organism, Materials, Equipment &
Technology (SCOMET)]
STEs
15 Lines. include Certain grades of Iron ore
225
Categories of schemes implemented by DGFT

A- Schemes for Duty/ Tax neutralisation
1- Schemes that enable Duty free Import of Raw Material
2- Schemes that enable Duty free Import of Capital Goods
3- Schemes for Deemed exports (including Refund of Terminal Excise Duty)
4- Schemes for Gems & Jewellery sector
B- Promotional Schemes
Schemes for Merchandise exports
Merchandise Exports from India Scheme (MEIS )
Schemes for Services exports

Service Exports from India Scheme (SEIS)
Other Schemes
1- Interest Subvention Scheme
2- Niryaat Bandhu
226
A- Schemes for Duty/ Tax neutralization

Category
Schemes for sourcing raw
material
Schemes for sourcing
Capital Goods
Schemes for Deemed
exports
Schemes for Gems &
Jewellery sector
Scheme
Advance Authorisation Scheme
Duty Free Import Authorisation (DFIA)
Scheme.
Export promotion Capital Goods
Scheme(EPCG)
Refund/ Exemption of Terminal Excise
Duty
Duty Drawback/ Duty free import under
Advance Authorisation
Replenishment of Gold/silver/Platinum
Duty free import under Advance
Authorisation
227
B- Promotional Schemes
Merchandise Exports from India Scheme (MEIS)
MEIS replaced 6 schemes: Focus Product Scheme (FPS), Focus Market Scheme (FMS), Market
Linked Focus Product Scrip (MLFPS), Vishesh Krishi and Gram Udyog Yojana (VKGUY), Agri. Infrastructure
Incentive Scrip, Incremental Export incentive Scheme.
2/3/5% incentive to 4914 Tariff lines (out of total 11,542 lines)

3 Country Groups:
A- Developed markets (30), B- Emerging markets and FTA countries

(139) and C- Remaining countries (70)
Most Agricultural products supported across the Globe

Industrial and other products supported in Developed and/or
Emerging markets only.
Higher incentives for following category of products:
Agricultural and Village industry products

Value added and packaged products
Eco-friendly and green products
Labour intensive Products with large employment potential
Industrial Products from potential winning sectors
Hi-tech products with high export earning potential
228
B- Promotional Schemes-II
Service Exports from India Scheme (SEIS)
Served From India Scheme (SFIS) has been replaced with Service Exports
from India Scheme (SEIS).
Only Mode 1 (Cross Border Supply) and Mode 2 (Consumption Abroad)
services eligible.
SEIS shall apply to Service Providers located in India instead of Indian
Service Providers.
The reward issued as duty credit scrip @3 or 5% to notified services
Services supported @ 5%-Professional services-Legal services, Accounting, Architectural services, Engineering services, Research
and development services, Audio-visual services, Educational Services, Hospital services
Services supported @ 3%-Hotels and Restaurants ,Travel agencies and tour operators services, Other business servicesAdvertising services, Market research and public opinion polling services, Management consulting service
The rate of reward under SEIS would be based on net foreign exchange
earned.
SEIS-Threshold :
For individuals and Proprietorship : Service exports of USD 10000 in last FY
For others: Service exports of USD 15000 in last FY
229
B- Promotional Schemes-III
Other Schemes
1- Interest Subvention Scheme
3% interest subvention for exports made by MSMEs. For other categories of

exporters it would be 2 %.
Merchant exporters would not be eligible
Budget available during current year (2014-15): Rs 1625 crore
2- Niryat Bandhu
More than 20000 entrepreneurs have been trained by DGFT Regional Offices
under Niryat Bandhu Scheme.
108 MSME clusters were identified and 150 outreach programmes were
conducted all over the country in MSME clusters, Towns of Excellence and
Universities/ Management Schools.
230
Ease of Doing Business and e-governance initiatives in DGFT
New FTP has brought about reduction in the number of documents required for
export and import from 7 & 10 respectively to 3 each now.
All the Regional Authorities (RA) of DGFT have been networked with high speed
internet. The applications are received and processed electronically.
DGFT has provided the facility of on line filing of applications for issuance of
Importer Exporter Code and various authorizations /scrips. Applicants can sign
applications with a digital signature and submit electronically to the concerned
Regional Authority of DGFT. Online filing has minimized the physical interface.
DGFT is one of the first digital signature enabled organisation of the Government
of India (GOI), which has introduced a higher level of Encrypted 2048 bit
digital signature.
Application fee can be paid online from linked banks. Efforts are being made to
allow payment by debit/credit cards as well.
231
Ease of Doing Business and e-governance initiatives in DGFT-2
A simplified system for issuance of Importer Exporter Code (IEC) online has been
made operational w.e.f. Feb 2015.
In order to save paper as well as cost and time of the exporters, the requirement
of filing hard copies of application forms and supporting documents for Advance
authorization scheme has been fully dispensed with and beta versions of software
to make applications for MEIS and EPCG schemes paperless have been put on the
DGFT website.
RTI online system introduced in DGFT on Feb 2015
A Complaint Resolution System for Resolution of EDI related issues has been set
up. It is being actively used by exporters.
232
Ease of Doing Business and e-governance initiatives in DGFT-3
An online system put in place to resolve complaints received through public

grievances portal of Department of Administrative Reforms & Public Grievances.
Online system for expediting issuance of authorisations for dual use items (Special
Chemicals, Organisms, Materials, Equipments and Technologies [SCOMET]) has
been developed. It will be made operational soon.
System for conducting of online concurrent audit of DGFT schemes (Chapter-3)

implemented in Feb 2015.
Use of Social Media
I-Launch of Mobile Application for Android users for DGFT related services
II-Creation of DGFT handle of Twitter-DGFT tweets all notification and Public Notice
details. DGFT has so far published 113 tweets and has 3110 followers.
233
Chapter 17
INTERNATIONAL HUMAN RESOURCE

MANAGEMENT
Globalization and HRM

The rapid globalization of business has resulted in new challenges for
cross-country management of human resources which include
HRM has become a crucial determinant to a firms success or failure in
international business.
Growing significance of trans-national experience for top management
jobs in global corporations.
Off-shoring of business operations to low-cost locations has

augmented the complexity of staffing, performance monitoring, and
differential compensations.
Human resource practices followed in the West may not be very
relevant in other countries due to differences in socio-cultural and

regulatory environments.
Human Resource Management (HRM)

All those activities undertaken by an organization to utilize its
human resources effectively. It includes activities, such as staffing,
training and development, expatriate management, performance
management, compensation, fulfillment of regulatory obligations,

such as labour relations, human welfare and safety etc., and
industrial relations.
International HRM
Comprising
diverse
requirements
of
various
subsidiaries and developing and sustaining human

resource capabilities to achieve organizational goals.
A Model of International HRM

Its an interplay among three dimensions, i.e.,
human resource activities, types of employees, and
countries of operations.
Domestic vs. International HRM

Increased functional activities
Functional heterogeneity
Increased involvement in employees personal lives
Enhanced risks
Increased influence of external environment
International Organizational Structures

Export Department
International Division Structure
Global Organizational Structure
Global Functional Division Structures

Global Product Structure
Global Geographic Structure
Global Matrix Structure

Trans-national Network Structure
Strategic IHRM Orientations

and Practices
Ethnocentric IHRM Orientation

The company tends to follow the parent companys home
country HRM practices for its employees across the world.
Key managerial and technical personnel are recruited from
the parent country nationals (PCNs). Locals are employed
only for supporting or lower level jobs with limited
opportunities to grow.
Polycentric IHRM Orientation

Different HR strategies are adopted for different countries
depending upon the need. Host country nationals (HCNs) are
often employed in foreign subsidiaries whereas the
headquarters are generally managed by the PCNs. Host
country nationals have higher opportunities for career

advancement.
Besides, performance evaluation measures
and compensation also vary considerably from subsidiary to
subsidiary.
Regiocentric IHRM Orientation

Most
HR
strategies
are
adopted
regionally.
Depending upon the nature of business and
marketing strategy, employees are transferred

within a region rather than across the region.
Geocentric IHRM Orientation

The HR policies and practices of the firm are globally
integrated leading to development of a real global
corporation. The best talented personnel are posted

throughout the MNE irrespective of their nationalities.
Managing International Human Resource

Activities
Staffing
The process of determining the organizations current and
future
human
resource
requirements
to
meet
the
organizational goals and taking appropriate steps so as to

fulfill those requirements. The process involves identifying
the human resource requirement of an organization, and
recruitment, selection, and placement of human resources
Manpower Availability
Availability of desired manpower affects a firms decision to hire locals
or expatriates. MNEs often hire locals for lower level jobs except for
some Middle East countries which import people even for labour and
other low-paid jobs. However, for most skilled and professional
assignments, quality of educational system, availability of scientists
and engineers, and quality of management schools plays an important
role in a firms decisions to hire locals or expatriates
Forms of International Assignments

- Filling up job positions
- Management development
- Organizational development
Types of International Assignments

Short-term (upto three months):
Assignments related to small project work, machinery or plant
repairing, or an interim arrangement till a suitable permanent
arrangement is made
Extended (Upto one year):
Involving similar activities as for short-term assignments for a

relatively longer duration
Long-term (one to five years):
Also referred to as traditional expatriate assignment, involve a well-
defined role in foreign operations. Assignments, such as production or

marketing manager or a managing director of a subsidiary
Sources of Human Resources for International

Staffing
Local citizens or HCNs
Local employees hired by an MNE of the host
country are known as Host Country Nationals (HCNs).

A large number of MNEs engage host country citizens
for middle and lower level jobs.
Expatriates
Employees who temporarily reside and work outside

their home country are commonly known as expatriates
or expats. Expatriates are often used as agents of direct

control, socialization, network trade, and gathering
market business intelligence.
Parent country nationals (PCNs)

Employees who are citizens of the country where
the MNE is headquartered. Historically MNEs filled

up key positions in their foreign affiliates with
PCNs.
Third country nationals (TCNs)

Employees, who are citizens of countries other than
the country in which they are assigned to work or

the country where the MNE is headquartered.
Off-shoring
Transferring jobs to foreign countries which were previously
carried out domestically.
The breakthroughs in ICT have made it possible to off-shore
various service activities too.
Recruitment and Selection

Recruitment: The process by which an organization attracts the
most competent people to apply for its job openings.
Selection: The process by which organizations fill their vacant
positions.
The process of recruitment and selection varies widely among
countries
Characteristics of Global Managers

- Global mindset
-Strategic vision and long-term perspective
- Ability to work in diverse culture

- Willingness to relocate for international assignments
- Ability to manage change and transition
Selection Criteria for International Assignments

Technical and managerial competence
Ability to perform under cross-cultural environments
Family attitude towards international assignments

Regulatory framework in host countries
Language
Managing Expatriates
People working out of their home countries, also known as
expatriates, form an integral part of a firms international
staffing strategy, especially for higher management
positions.
Beside identifying and recruiting the right personnel with
desired skills for international assignments, it is also
extremely important to provide them with a conducive
environment to get their optimum output
Reasons for Expatriate Failure

- Inability to adjust in alien cultures
- Career apprehensions on repatriation
- Relocation anxieties
- High costs of living and income gaps
- Problems related to lifestyle adjustments, such as
uncomfortable living conditions
- Family problems, such as spouse dissatisfaction,
childrens education, and safety concerns
- Health and medical concerns
- Adaptation problems to different management styles
Expatriate Adjustment Process

The series of phases expatriates undergo while adjusting to a
foreign culture that include:
Initial euphoria
Cultural shock
Adjustment
Re-entry
Repatriation
The process of returning home by an expatriate after
completion of foreign assignment that include:
Preparation
Physical relocation
Transition
Re-adjustment
Training
Training: The process by which employees acquire skills,
knowledge, and abilities to perform both their current and
future assignments in the organization.
Training aims at altering behaviour, attitude, knowledge,
and skills of personnel so as to increase the performance of
employees.
Pre-departure Training for Overseas

Assignments
Cultural sensitization programs
Preliminary visit
Language training
Practical training
Performance Management
The process that enables a firm to evaluate the performance
of its personnel against pre-defined parameters for their
consistent improvements so as to achieve organizational
goals. The system used to formally assess and measure
employees work performance is termed as performance
appraisal.
Compensation
The financial remuneration that employees receive in
exchange of their services rendered to the organization. It
includes wages, salaries, pay rise, and other monetary
benefits.
A good compensation system should be designed within
the regulatory framework of the country of operation of an
MNE and should be able to attract and retain the best
available talent
Key Components of International

Compensation Systems
Base salary:
Foreign service premium:
Allowances:
Hardship allowance
Cost of living allowance (COLA)
Housing allowance
Home leave allowances
Education allowances
Relocation allowances
Assistance for tax equalization
Strategic Approaches to International

Compensation
Home-country-based
Host-country-based
Hybrid of the above two
Regulatory Framework and Industrial

Relations
International firms are required to adhere to various
legislative provisions under the labour laws; compensation
and benefit laws; and individual rights laws related to civil
rights, immigration, discrimination, and sexual harassment
at workplace in countries of their operations which often
have considerable differences.
Chapter 15
INTERNATIONAL FINANCE
Significance of International Finance

Globalization has made understanding international
finance pertinent even to business enterprises solely
operating domestically in order to assess the impact
of movements in exchange rates, foreign interest

rates, labour costs, and inflation on the costs and
prices of their foreign competitors.
International Monetary Systems
A set of rules, regulations, policies, practices,
instruments,
institutions,
and
mechanisms
determine exchange rates between currencies.
that
Gold Standards
Gold specie standard: The currency consists of gold coins
with fix gold content
Gold bullion standard: The currency consists of paper
notes but a fix weight of gold remains the basis of money.
Any amount of paper currency can be converted into gold
and vice versa by the countrys monitory authority at a fix
conversion ratio.
Gold exchange standard: Paper currency can be converted
at a fix rate into the paper currency of the other country,
which is operating a gold specie or gold bullion standard.
Fixed Exchange Rates
In post Bretton-woods era, a fixed or pegged exchange

rate was maintained for a countrys currency vis--vis
gold or the US dollar. Since the price of each currency

was fixed in terms of gold, their values with respect to
each other were also fixed.
Floating Exchange Rate System
Currency prices are determined by market demand and

supply conditions without the intervention of the
governments.
Contemporary Exchange Rate Arrangements

Exchange rate arrangements are classified by the IMF on
the basis of degree of variability of observed exchange rate

and past official actions affecting the exchange rate over
the time period.
Floating Exchange Rate System
Allows complete flexibility of exchange rates unlike the

rigidity of currency movements under the fixed exchange
rate system.
Independent or Free Float
The exchange rates are market-determined and central

banks intervene only to moderate the speed of change
or to prevent excessive fluctuations without any
attempt to maintain it or drive it to a particular level.
Managed Float
Although currencies are allowed to fluctuate on a daily
basis with no official boundaries, national governments

intervene to prevent their currencies from moving too
far in a certain direction.
Pegged Exchange Rate System
Pegging value of home currency to a foreign currency or

a basket of currencies and it is allowed to move in line
with that currency against other currencies.
Soft Pegs
Conventional fixed peg: The currency fluctuates for at least three
months within a band of less than 2 per cent or +/-1 per cent
against another currency or a basket of currencies.
Intermediate pegs
Pegs within horizontal bands: Currencies are generally not allowed
to fluctuate beyond +_1 per cent of central parity.
Crawling Peg: A currency is pegged to a single currency or a basket

of currencies, but the peg is periodically adjusted with a range of
less than 2 per cent in response to changes in selective macroeconomic indicators.

Crawling bands: The currency is adjusted periodically at a fixed rate
or in response to changes in selective quantitative macro-economic

indicators, with a range of fluctuation of 2 per cent or more. The
degree of exchange rate flexibility is a function of the bandwidth.
Hard Pegs
Currency board arrangements: A monetary regime based on an
explicit legislative commitment to exchange domestic currency for a
specified foreign currency at a fixed exchange rate.
Arrangements with no separate legal tender: Adopting such an
exchange rate regimes implies the complete surrender to monetary
authorities independent control over domestic policies. It may be
formal or informal.
Dollarization: Replacement of a countrys local currency with US
dollars.
Foreign Exchange
Any type of financial instrument that is used to make
payments between countries, e.g. foreign currency
notes, deposits held in foreign banks, debt obligations

of foreign governments and foreign banks, monetary
gold, and SDRs.
Eurocurrency
A currency deposited in a bank outside the country of its origin. It
is used as a generic term rather than being confined to the
geographical boundary of Europe. For instance:
Eurodollars: Dollars deposited in banks outside Europe.
Euro Sterling: Sterling Pounds deposited in a bank outside the UK
Euro Mark: Detusche Mark deposited outside Germany
Euro Yen: Yen deposited outside Japan.
Determination of Exchange Rates

Purchasing Power Parity (PPP) Theory
The prices of goods sold in different countries, converted to a
common currency should be identical.
Interest Rate Theories
These theories use interest rates in determining exchange rates
unlike the price levels used under the PPP theory.
Fisher Effect (FE) Theory

The nominal interest rate r in a country is
determined by the real interest rate R and the
expected inflation rate i as follows:
r=R+i
International Fisher Effect (IFE) Theory

The exchange rate movements are caused by interest rate
differentials. If real interest rates are the same across the
country, any difference in nominal interest rates could be

attributed to differences in expected inflation.
Other Determinants of Exchange Rates

In addition to inflation, real income and interest rates,
market fundamentals that influence the exchange rates
include bilateral trade relationships, customer tastes,

investment profitability, product availability, productivity
changes and trade policies.
Foreign Exchange Market

The organizational setting within which individuals,
businesses, government, and banks buy and sell foreign
currencies and other debt instruments. It is an over-thecounter market consisting of a global network of interbank traders, primarily the banks connected by
telecommunication facilities.
Types of Foreign Exchange Markets

Inter-bank or wholesale market: Trading between the
banks where banks can obtain quotes, or they can
contact brokers who sometimes act as intermediaries.
Retail market: It consists of travellers and tourists who
exchange one currency to another in the form of
travellers cheques or currency notes. In retail markets,
transaction size of retail foreign exchange market is very
small whereas the spread between buying and selling
prices is large.
Participants in the Foreign Exchange Market

Traders use forward contract to eliminate or cover the risk of loss on
export or import orders that are denominated in foreign currencies.
Hedgers are mostly multinational firms, engage in forward contracts to
protect the home currency value of various foreign currencydenominated assets and liabilities on their balance sheets that are not to
be realized over the life of the contracts.
Arbitrageurs seek to earn risk-free profits by taking advantage of
differences in interest rates among countries. They use forward
contracts to eliminate the exchange risk involved in transferring their
funds from one nation to another.
Exchange Rate Quotations

Spot vs. Forward Quote
Spot rate: The price agreed for purchase or sale of foreign

currency with delivery and payment to take place not more than
two business days after the day the transaction has been
concluded.
Forward rate: The price at which the foreign exchange rate is

quoted for delivery at a specified later date. The date of maturity
of a forward contract is more than two business days in a future
whereas the exchange rate is fixed at the time of entering the
contract.
Direct vs. Indirect Quotes

Direct quotes: Units of the home currency per unit of a foreign currency.
For instance, Indian Rs. 39.5075 per US $ is a direct quote in India whereas Yen
106.5050 per US $ is a direct quote in Japan.
Indirect quote: Units of foreign currency per unit of home currency. It may be
arrived at by inversing the direct quote as follows:
Indirect quote = 1/direct quote
For instance, US$ 0.0253 per Indian Rupee is an indirect quote in India.
Cross Exchange Rate

Quoting exchange rates of two currencies without using
the US dollar as the reference currency.
Bid vs. Ask Quotations

Bid rate: The price that a bank is willing to pay for a
foreign currency.
Ask or offer rate: The price at which a bank is willing to

sell the currency.
Bid/ask spread = (ask rate- bid rate)/ask rate
Foreign Exchange Risks and Exposure

Trans-national operations of a company require it to deal
with multiple exchange rate regimes and cash-flows across
countries, making it vulnerable to foreign exchange
fluctuations. The impact of foreign exchange fluctuations
not only depends on how the firm reacts but also on how
the firms competitors, customers, and suppliers react.
Foreign Exchange Risk

The variance of domestic currency value of assets,
liabilities,
or
operating
income
attributable
to
unanticipated changes in exchange rates. Thus, it refers
not to the unpredictability of foreign exchange rates but

to the uncertainty of
the values of a firms assets,
liabilities, and operating income due to unanticipated
changes in exchange rates.
Foreign Exchange Exposure

The sensitivity of the real value of assets, liabilities, and
operating income to unanticipated changes in exchange

rates expressed in its functional currency.
Types of Exposures
Transaction exposure: The
effect of exchange rate
fluctuations on the value of anticipated cash-flows,

denominated in home or functional currency terms,
relating to transactions already entered into in foreign
currency terms.
Economic
exposure:
The effect of exchange rate
fluctuations on a firms future operating cash flows.
Translation exposure: Also known as accounting exposure,
translation exposure
arises due to conversion or
translation of financial statements of foreign subsidiaries

and affiliates denominated in foreign currencies into
consolidated financial statements of an MNE in
functional or home currency.
its
Managing Foreign Exchange Risks

Hedging: The avoidance of foreign exchange risk and covering an
open position.
Principal hedging techniques:
Forward Contracts: A commitment to buy or sell a specific amount
of foreign currency at a later date or within a specific time period
and at an exchange rate stipulated when the transaction is struck.
The delivery or receipt of the currency takes place on the agreed
forward value date.
Future Contracts: Standardized contracts that trade on

organized futures markets for a specific delivery dates only.
Options: An agreement between a holder (buyer) and a writer
(seller) that gives holder the right, but not the obligation, to
buy or sell financial instruments at a time through a specified

date.
Types of Foreign Currency Options
Call option gives the holder the right to buy foreign

currency at a pre-determined price.
Put option gives the holder the right to sell foreign
currency at a pre-determined price.
Swap
Agreement to exchange one currency for another at a
specified exchange rate and date. Currency swaps between
two parties are often intermediated by banks or large
investment firms.
Global Cash Management

Using a centralized system, a Cash Management Centre
(CMC) is established that nets out receivables against
payables and only the net cash flows are settled among
different units of the MNE.
Multilateral netting considerably reduces the total
number of currency conversions and results in significant
savings on transaction costs.
Modes of Payment in
International Trade
Advance Payment
The payment is remitted by the buyer in advance, either
by a draft mail or TT (telegraphic transfer). Generally,
such payments are made on the basis of a single receipt
and its approval by the importer.
Documentary Credit
Documentary
Collection:
The
payment
collection
mechanism that allows exporters to retain ownership of the

goods or reasonably ensures their receiving payments.
It is governed by
Uniform Customs and Practices of
Documentary widely known as UCPDC 600.
Documentary Credit with Letter of Credit

(L/C)
A documentary credit represents a commitment of a bank
to pay the seller of goods or services a certain amount
provided s/he presents stipulated documents evidencing

the shipment of goods or performance of services within a
specified period.
Types of L/C
Irrevocable: The issuing bank irrevocably commits itself to
make payment if the credit terms as given in the L/C are
satisfied
Revocable: Such L/C can be revoked any time without consent

of or notice to the beneficiary.
Confirmed: The confirming bank (generally a local bank in

exporters country), commits itself to irrevocably make
payment on presentation of documents.
Unconfirmed: The issuing bank asks the corresponding bank to

advise about the L/C without any confirmation on its part.
Sight: The beneficiary receives payment upon presentation

and examination of documents.
Term credits: These are used as financing instruments for

the importer.
Acceptance credit: The exporter draws a Time Draft,

either on the issuing or confirming bank or the buyer or on
another bank depending upon the terms of credit.
Deferred payment credit: The bank issues a written promise
to make the payment on due date upon presentation of the
documents.
Revolving: The amount involved is reinstated when

utilized, i.e., the amount become available again without
issuing another L/C and usually under the same terms
and conditions.
Back to Back: Used when exporter uses the L/C as a cover
for opening a credit in favour of the local suppliers.
Documentary Credit without L/C

Documents are routed through banking channels that also acts as
sellers agent alongwith Bill of Exchange. Such drafts may be
either sight or usance.
Sight draft (document against payment): The importer can take

physical possession of the goods only when s/he has made the
payment before getting documents from the bank.
Usance or time draft (document against acceptance): The

importer gets documents by the bank on his/her acceptance of the
payment obligations and can subsequently takes title of the goods
before the payment is released.
International Trade Finance

Access to adequate finance at competitive rates is crucial to
successful completion of an export transaction. Finances are
required to complete an export trade cycle right from
receiving the export order till the realization of final payment

from the importer. Export credit is extended both at preshipment and post-shipment stages.
Types of International Financing Alternatives

Bankers Acceptance: It is time draft or Bill of Exchange drawn
on and accepted by a bank. By accepting the draft, the bank
makes an unconditional promise to pay the holder of the draft the
specified amount of money on maturity.
Discounting: Exporters can convert their credit sales into cash by

way of discounting the draft even if it is not accepted by the bank.
The draft is discounted by the bank on its face value minus interest
and commissions with or without recourse.
Accounts Receivable Financing:
Banks often provide loans to the
exporter based on its credit worthiness secured by an assignment of the accounts
receivables. The exporter is responsible for repaying the loan to the bank even if
the importer fails to pay the exporter, for whatever reasons. Usually the period
of such financing is one to six months.
Factoring:
It is widely used in short-term transactions as a continuous
arrangement.
It involves purchase of export receivables by the factor at a
discounted price, i.e., generally 2 per cent to 4 per cent less than the full value.
However, the discount depends upon a number of other factors such as the type
of product, terms of the contract, etc.
Forfeiting: It refers to the exporter relinquishing his or her

rights to a receivable due at a future date in exchange for
immediate cash payment at an agreed discount, passing all
risks and responsibility for collecting the debt to the
forfeiter. Forfeiting is particularly used for medium-term

credit sales (1 to 3 years).
Letters of Credit (L/C): In a L/C the issuing bank

undertakes a written guarantee to make the
payment to the beneficiary, i.e., the exporter,
subject to the fulfillment of its specified conditions.
Terms credit is often used as financing instrument
for the importer who gets delivery of the goods
without making payment to the importer.
Counter-Trade: It is used to combine trade-financing

and price setting in one transaction. Counter-trade
finances imports in form of reciprocal commitments
from countries that have payment problems, especially
in hard currencies
Export Finance
As a part of their export promotion strategy, countries
around the world offer export credit, often at concessional
rates to facilitate exports.
Export credit in India is available both in Indian rupees and
foreign currency.
Financing to Overseas Importers

Credit is also extended to overseas buyers to facilitate import of goods
from the exporting country, mainly under two forms:
Buyers credit
Extended by a bank in exporters country to an overseas buyer enabling
the buyer to pay for import of machinery and equipment that s/he may
be importing for a specific project.
Line of credit
Extended by a bank in exporting country to an overseas bank, institution
or government for the purpose of facilitating import of a variety of listed
goods from the exporting country into the overseas country.
Credit Risk Insurance

It provides protection against both political and
commercial risks to the exporters who sell their goods
against credit terms.
Insurance policies and guarantees extended by export
credit agencies, such as ECGC can be used as collateral
for trade financing
WTO Compatibility of Trade Finance and

Insurance Schemes
WTO sets the framework for the types of subsidies that
can be provided by a country for export promotion.
The agreement on Subsidies and Countervailing
Measures (SCM) prohibits national governments to
provide subsidies that are contingent upon export
performance or upon the use of domestic goods over
the imported ones. It also constrains government
intervention in the area of export financing and
insurance.
Trade in Services
The services sector is key to economic growth, Competitiveness, and poverty alleviation. Comprising more than two
thirds of the world economy, services are now commonly
traded across borders, helped by technological progress
and the increased mobility of persons
In recent years, a number of developing countries have
looked at Trade in Services as a means to both respond to
domestic supply shortages and to diversify and boost
exports.
Any country can tap into the trade potential of services, but
not every country can become a services hub across sectors.
The sectors which normally comes under trade in services are:
Accounting,
Construction,
Distribution,
Engineering,
Environmental, Health, Information Technology, and Legal
Services
WTO and Trade in Services

WTO plays the primary role in regulating international trade in
goods, services and intellectual property.
Traditionally, international trade law and regulation has been
analyzed primarily from the trade-in-goods perspective.
Services are becoming an important competence for the WTO
through institutional, legal and regulatory influence under the
General Agreement on Trade in Services (GATS)
The growing importance of services trade to the global

economy makes the application of the GATS to trade in
services an important concern of international economic
policy. GATS governs international trade in services and its
growing impact on the regulatory practice of WTO member
states. Therefore, the major issues confronting WTO member
states by analysing the GATS and related international trade
issues from a variety of perspectives that include law, political
economy, regulation, and business.
Moreover, the role of the WTO in promoting liberalised trade

and economic development has come under serious strain
because of the breakdown of the Doha Development Round
negotiations. The issues in the Doha services debate with
some suggested policy approaches that might help to build a
more durable GATS framework.
General Agreement on Trade in Services (GATS):

Objectives
Expansion of services trade
Progressive liberalization through successive rounds of
negotiations
Transparency of rules and regulations
Increasing participation of developing countries
GATS provides Policy Flexibility

GATS is commonly said to be the most development-friendly of
WTO Agreements because of its great flexibility:
Freedom to decide the scope and pace of liberalisation, through
national schedules and bottom-up scheduling

Freedom to regulate services, and introduce new regulations, to
meet national policy objectives
Special flexibility for developing countries in scope and speed
of liberalisation
Services Trade and Development:

General Expectations
The gains from liberalizing services may be substantially

greater than those from liberalizing trade in goods, because
current levels of protection are higher and because [there
would be] spill over benefits from the required movement of
capital and labour.
Infrastructural services such as telecommunications, finance
and transport are crucial determinants of overall economic
efficiency and growth.
Services Trade and Development :

Services have been the fastest growing segment of
world trade since 1980 onwards, at an average
annual rates of over 9 per cent (vs. 8.2 per cent for
goods trade).
The share of developing countries in world services
exports increased from 20 to 26 per cent since
than.
Developing countries that liberalized telecommunications and financial services sectors grew about
1.5 per cent faster than others.
GATS: Comprehensive Scope and Coverage
Measures Affecting Trade in Services at all Government

Levels: all Services covered
(except governmental services and air traffic rights)
Four Modes of Supply
Cross-border supply (e.g. international telephony)
Consumption abroad (e.g. international tourism)
Commercial presence (e.g. establishment of foreign
bank)
Movement of natural persons (e.g. doctor working
abroad)
The Economic Importance of individual

Modes?
The share of individual modes in world services
trade has been roughly estimated at:
40 per cent each for modes 1 and 3;
20 per cent for mode 2 (mainly tourism);
less than 2 per cent for mode 4.
Mode 3 trade, mostly combined with foreign direct
investment, has been the most dynamic component
in recent years.
GATS: Sectoral Coverage
Business Services
Health-Related Services
Financial Services
Tourism
Recreation, Culture & Sport
Transport
Other Services
Communication
Construction
Distribution
Education
Environmental Services
Governmental Services Excluded

Excluded from coverage are services provided in
the exercise of governmental authority which, in
turn, are defined as services that are supplied
neither on a commercial basis, nor in competition
with one or more service suppliers. (Article I:3)
Typical examples:
Police, fire protection, monetary policy operations,
tax and customs administration, universal health and
education systems, etc.
General Provisions Applying to All

Services
Most-Favoured-Nation (MFN) Treatment (Art II): Treat
services from all trading partners equally no discrimination
Transparency(Art III):Publish relevant laws and regulations
Domestic regulation (Art VI): Administer laws reasonably,
objectively and impartially
Monopolies (Art VIII): Do not allow abuse of monopoly
position
Exceptions (Art XIV): Permit breach of rules for overriding
needs, e.g. health, security, public morals
Special Rules (GATS Annexes)

Annex on Financial Services allows prudential measures to
protect investors, depositors etc. and ensure integrity of
banking system. Excludes from GATS key operations of
governments e.g. monetary, exchange rate, social security
policy.
Annex on Telecommunications requires access to and use of
public telecoms networks by suppliers of scheduled services
on reasonable and non-discriminatory terms and conditions.
Air Transport Annex excludes traffic rights and all services
directly related to them.
Most-Favoured-Nation (MFN) Treatment
each
Exemptions may be negotiated during accession for a

period not exceeding ten years in principle.
Member shall accord immediately and

Unconditionally to services and service suppliers of any
other Member treatment no less favourable than that it
accords to like services and service suppliers of any
other country (Article II:1)
Specific Commitments
The GATS requires each Member to submit a Schedule
of Specific Commitments that lists the sectors in which it
grants Market Access and National Treatment.
There is huge variation in the coverage of Members
schedules. New Members usually have wide coverage
(more liberal than many current Members) due to
accession negotiations.
Market Access Commitments

Article XVI forbids the following types of market-access
limitations unless scheduled (no other limitations are
possible under this Article):
Number of suppliers
Value of service transactions
Number of operations or quantity of output
Number of natural persons
Type of legal entity
Foreign equity participation
National Treatment and Additional

Commitments
Article XVII - Obligation to treat foreign services and
service suppliers no less favourably than your own like
services and suppliers in scheduled sectors.
Any kind of limitation in favour of nationals can be
maintained if it is listed in the schedule.
Article XVIII - Additional commitments go beyond
market access and national treatment e.g. the
reference paper on telecommunications services.
Meaning of Limitations
Scheduling a service does not mean it must be fully
liberalized in all modes. Commitments can be made
in one, two, three or four modes.
And commitments can be limited:
unbound = no commitment in that mode
none = no limitation (full commitment)
Specific limitations can be scheduled.
Must Commitments be Respected at all

Costs?
The GATS allows Members to renegotiate their
commitments against compensation (Article XXI),
override them for health and other public policy
reasons (Article XIV) or security concerns (Article
XIVbis), and introduce restrictions to protect the
Balance of Payments (Article XII).
Relationship between Commitments and

Actual Market Conditions:
Commitments guarantee minimum levels of market
access and National Treatment.
Many Members in fact permit higher levels of market

access than those scheduled - but must observe the
MFN principle in doing so.
Commitments may be upgraded at any time to
reflect improved market-access conditions.
Measures/Policies not Affected by

Commitments
Non-discriminatory domestic regulation (standards,
licensing requirements, etc.)
Government procurement
Private commercial actions, which are beyond the
scope of GATS. There is no private recourse to
dispute settlement under the WTO.
Domestic Regulation
Existing Obligation: In committed sectors, all measures
affecting trade must be administered in a reasonable,
objective and impartial manner (Article VI:1).
Negotiating Mandate: Further disciplines to ensure that
standards, licensing requirements, etc. are:
based on objective and transparent criteria;
not more burdensome than necessary to ensure quality;
and
not in themselves a restriction on the supply of a service
(licensing procedures).
Built-in Agenda Negotiations after the

Uruguay Round
Domestic Regulation (Article VI:4)
Emergency Safeguard Measures (Article X)
Government Procurement (Article XIII)
Subsidies (Article X)
These negotiations are still under way
The New Services Round

Article XIX of GATS Basic Mandate:
Successive rounds of negotiations, starting since January 2000,
with a view to achieving a progressively higher level of liberalization
Due respect for national policy objectives and levels of development
Flexibility for developing countries to liberalize fewer sectors and
types of transactions
Article IV:1:
Facilitate increasing participation of developing countries in world
trade
Annex on Article II Exemptions:
Negotiation of existing MFN Exemptions
The Timetable
Submission of initial requests by
30 June 2002
Submission of initial offers by
31 March 2003
Conclusion not later than
1 January 2005
(Doha Ministerial Declaration)
The developing countries are still struggling to negotiate
on equal terms with the developed world
What is DDA:
Doha Development Agenda (DDA) is the current trade-negotiation
round of the WTO which commenced in November,2001with
the objective is to lower trade barriers around the world, and
thus facilitate increased global trade.
The progress in negotiations stalled after the breakdown of
the July,2008 negotiations over disagreements concerning
agriculture, industrial tariffs and non-tariff barriers, services,
and trade remedies.
The most significant differences are between developed nations

led by the European Union (EU), the United States (USA), and
Japan and the major developing countries led and represented
mainly by India, Brazil, China, and South Africa on the issue of
agricultural subsidies & other trade related issues.
An extra ordinary effort is underway in the ongoing WTO
ministerial conference in Nairobi may pave the way to resolve
long pending issues . LET US WAIT AND WATCH THE OUTCOME
IN NAIROBI
Political Economy of Foreign Direct

Investment (FDI)
(with special reference to India)
Significance of FDI
International trade and foreign direct investment (FDI)
are the two most important international economic
activities integrating the world economy. With the
increase in mobility of factors of production across

countries, FDI has become an integral part of firms
strategy to expand international business.
Concept of FDI
In simple terms, FDI means acquiring ownership in an
overseas business entity.
Foreign direct investment occurs when an investor

based in one country (the home country) acquires an
asset in another country (the host country) with the
intent to manage it.
Foreign Portfolio Investment (FPI)

An investment by individuals, firms, or a public body in
foreign financial instruments, such as foreign stocks,
government bonds, etc.
In FPI, the equity stake in the foreign business entity is
not significant enough to exert any management
control.
Benefits of FDI to Host Countries

Access to superior technology
Increased competition
Increase in domestic investment

Bridging host countries foreign exchange gaps
Negative Impacts of FDI

Market Monopoly
Crowding-out and unemployment effects
Technology dependence
Profit outflow
Corruption
National security
Factors Affecting Selection of FDI Destinations

Cost of capital input
Wage rate
Taxation regime
Cost of inputs
Cost of logistics
Market demand
Types of FDI
On the Basis of Direction of Investment
Inward FDI: Foreign firms taking control over domestic assets.
Outward FDI: Domestic firms investing overseas and taking
control over foreign assets.
On the Basis of Types of Activity

Horizontal FDI: Overseas investment in a similar activity as carried out in
the home country.
Vertical FDI: Overseas investment so as either to provide inputs for the

firms domestic operations or sell its domestic output abroad.
Backward Vertical FDI: Direct investment aimed at providing inputs for a
firms production processes.
Forward Vertical FDI: Direct investment overseas aimed to sell the
output of a firms domestic production processes.
Conglomerate FDI: Direct investment overseas aimed at manufacturing
products not manufactured by the firm in the home country.
On the Basis of Investment Objectives

Resource-seeking FDI: Direct investment
overseas so as to gain privileged access to
resources vis--vis competitor
Market-seeking FDI: Direct investment overseas
with sizeable market and growth in order to
protect existing markets, counteract competitors,
and to preclude rivals from gaining new markets
Efficiency-seeking FDI: Direct investment
overseas so as to improve efficiency and or seek
advantages of process specialization or product
rationalization
On the Basis of Entry Modes

Greenfield Investments: Overseas investment to create
new facilities or expansion of existing facilities
Merger & Acquisitions (M&As): Transfer of existing

assets of a domestic firm to a foreign firm that leads to
mergers and acquisitions.
On the Basis of Sector

Industrial FDI: Investment by a foreign firm in the
manufacturing sector.
Non-industrial FDI: Investment by a foreign firm in services

sector.
On the Basis of Strategic Modes

Export replacement
FDI is made as a substitute for exports in response to
trade barriers of the host country, such as import
restrictions and prohibitive tariff structure.
Export Platforms
In order to minimize a firms cost of production and

distribution, FDI is made so as to utilize the target
country to serve the global markets.
Domestic Substitution
FDI aimed to obtain cheap inputs to support home

production.
Theories of International Investment
Capital Arbitrage Theory

FDI takes place due to differences in the rates of return
on capital across countries.
Market Imperfection Theory

To access countries with market imperfections, such as
government policies, including import restrictions and quotas,
incentives
on
exports,
tax
regimes,
and
governments
participation in trade etc, FDI is often employed as a strategic
tool for international business expansion.
Internalization Theory
When the know-how, technology, skills, or trade secrets
available with a firm are crucial to the firms competitive
advantage, it needs to protect such knowledge base

within
the
organization.
Therefore,
it
internationally by way of FDI.
expands
Monopolistic Advantage Theory
An MNE is believed to possess monopolistic advantage,
which enables it to operate overseas more profitably
and compete with local firms.
International Product Life Cycle Theory

The theory provides an explanation as to why the
production locations are shifted across countries and
suggests that an MNE prefers
those countries for
investment as manufacturing locations that have market

size large enough to support local production.
Dunnings Eclectic Theory (OLI Paradigm)
It is a blend of macro-economic theory of

international trade (L) and micro-economic
theories of the firm (O&I).
The Ownership (O) Factor

Ownership advantages possessed by a firm enabling it
to reap profits from overseas investments.
The Location (L) Factor
Location Factors- influencing where to produce.

Country specific advantage contributing to relative
attractiveness of an investment destination
The Internalization (I) Factor
Retaining firms know-how within the organization
rather than transferring it to an unrelated firm
overseas.
Policy Framework to Promote FDI

Attracting FDI
has become a key part of national
development strategies for most countries. Such

investments are often viewed to augment domestic
capital, employment, and productivity, leading to
economic growth.
Major Regulatory Measures & Incentives to

Promote FDI
- Screening, admission, and establishment
- Fiscal incentives
- Financial incentives
-Other incentives, such as subsidized service fees,
subsidized designated infrastructure
- Performance requirements
Promotion of FDI in India

Institutional framework
The Department of Industrial Policy and Promotion
plays an active role in investment promotion through
dissemination of information on investment climate and
opportunities in India. It also advises potential investors
about
investment
policies,
procedures,
and
opportunities and helps resolve problems faced by
foreign investors.
FDI sector allocation ( as on 2015)
FDI up to 24 per cent allowed
Manufacture of items reserved for small sector

upto 24 per cent
FM broadcasting
Up-linking a news and current affairs TV channels
Publishing of news papers and periodicals
FDI upto 49 per cent allowed

- Broadcasting
Setting up hardware facilities
Cable network:
Direct to Home (DTH):
- Scheduled Air transport services
- Commodity exchanges
- Refining in case of PSUs
- Civil aviation
- Defence production
- Insurance
- Stock exchange
- Multi brand retail
- ISP with gateways, radio-paging, and end-to-end

bandwidth
- Establishment and operation of satellites
- Private sector banking
- Telecommunications services
- Non-scheduled Air transport services, ground
handling services
- Credit rating/information
Foreign direct investment up to 100 per cent allowed with

prior government approval subject to conditions:
- Trading
- Courier services
- Tea sector, including tea plantation:
- ISP without gateway, infrastructure provider, electronic
mail, and voice mail:
- Mining and mineral separation of titanium bearing
minerals and ores, its value addition
- Cigars and cigarettes manufacture
- Airports- existing projects with prior government approval
beyond 74 per cent
-
Up-linking of a non-news and current affairs TV

channels
- Investing companies in infrastructure/ services
sector (except telecom sector)
- Publishing of scientific magazines, specialty
journals and periodicals
- Tourism
- Medical devices
- Pension
- Pharma
- Railway infrastructure
Foreign Direct Investment allowed up to 100 per cent

under automatic route
- Agriculture sector
- Industrial sectors
Mining
Manufacturing activities
Petroleum sector
Power
Special Economic Zones and Free Trade Warehousing Zones
Industrial Parks
Construction development projects
- Services
Non banking finance companies
Trading
Asset reconstruction companies
Retail trading (Except single brand product retailing)

- Atomic energy
- Lottery business
- Gambling and betting sector
- Business of chit fund and nidhi company
- Plantation except tea
- Trading in Transferable Development Rights (TDR)
- Activity/ sector not opened to private sector
investment
Patterns of FDI
Flow of FDI: The amount of FDI undertaken over a given time
period (for example, a year). If the investment is made by a
foreign firm in a country, known as inflow of FDI whereas
investment made overseas is termed as outflow of FDI.
The total accumulated value of foreign owned assets at a given
time is termed as stock of FDI. FDI comprises of equity capital
and re-invested earnings as per IMF norms. Besides, capacity
expansion financed by firms of foreign origin as well as shortterm or long-term loans that form part of original packages are
also treated as FDI.
Components of FDI Flows

FDI is mainly financed by MNCs through
Equity capital
Intra-company loans
Reinvested earnings
FDI Performance Indices
For carrying out cross-country comparison of FDI

performance and FDI potential, the UNCTADs FDI
performance and potential indices serve as useful tools
Inward FDI Performance Index: Measure of the extent to
which a host economy receives inward FDI relative to its

economy size.
Outward FDI performance index: The ratio of a countrys

share in global FDI outflows to its share in the world GDP.
Equity : 74.8%
FDI Trends
in India
Re-invested Earnings:
21.8%
Other Capital: 3.4%
Sector-wise Composition of FDI Inflows

Figure : Sectorwise Composition of FDI Inflows*
S e rvic e s S e c to r
22.0%
o the rs
30.6%
C o m pute r S o ftwa re &
Ha rdwa re
11.5%
C he m ic a ls
2.3%
P e tro le um & Na tura l Ga s

3.1%
M e ta llurgic a l Indus trie s

3.7%
P o we r
4.1%
Auto m o bile Indus try
4.0%
Ho us ing & R e a l Es ta te Te le c o m m unic a tio ns

6.3%
5.8%
C o ns truc tio n Ac tivitie s

6.7%
Country wise FDI Inflows

Figure: Country-wise Composition of FDI Inflows*
others
24.6%
Mauritius
40.6%
UAE
1.1%
France
1.4%
Cyprus
1.7%
Germany
2.3%
J apan
3.1%
Netherlands
4.0%
UK
6.5%
Singapore
7.1%
USA
7.6%
Foreign Direct Investment in Retail Sector

India is the second largest market in the world after
China and it fascinates global retailers to invest. It has
opened up FDI upto 51% in retail trade to single brand
retail (100%).
Corporate Social Responsibility

(CSR)
What is Corporate Social Responsibility?

To Define CSR:
Responsible companies perceive the current

environment globalization, social demands,
transparency, broadening of markets,
environmental challenges, etc. as an
opportunity to underscore their role in
society, their potential for leadership in
sustainable development.
World Business Council for Sustainable

Development:
We define CSR as business'
commitment to contribute to sustainable
economic development, working with
employees, their families, the local
community, and society at large to
improve their quality of life.
The impact of a companys action on

society
Requires a manager to consider his acts in
terms of a whole social system and holds him
responsible for the effects of his acts at all
levels in that system
Business has an obligation to society which
extends beyond economic and legal duties
Described as one of the most important
social movements of our time
Levels of CSR
Social Obligation Meet minimum
regulations, do what is required by law,
no more
Social Responsibility Go beyond what is
required by law, mitigate negative effects
Social Responsiveness Proactive
approach, promote positive change
CSR: Different areas involved

Corporate governance and transparency
Human rights
Labour
Social environment (community links,
social action and cooperation for
development)
Environmental impact
Different labour issues

Subcontracting
Collective negotiation
Conciliation of labour and family life
Continuous training and recycling
Safety and health
Participation in benefits/capital
Labour integration
Managing diversity
Subcontracting
Companies results can be affected by the
practices of partners and suppliers
The measures of social responsibility in
companies will affect its economic partners
When subcontracting, the company will
bear extra social responsibility (sometimes
the economic welfare of a supplier will
depend totally on a company)
Collective negotiation
The CSR cannot substitute the collective

negotiation (unions)
The collective negotiation has nothing to do
with the CSR (Employers associations) the
collective agreement is binding
The collective negotiation can be a
promotional frame for this type of policies
which are not in conflict with free will
Conciliation of labour and family life

The company shall have primary
responsibility to allow its employees to
have life after work:
Active conciliation policies
Social action
Flexible working hours
Continuous training and recycling

Employees must have access to
continuous training as an element of
the human resources policy
Policies on training must include
follow-up and control
Need for public sector to give due
consideration to the companies efforts
in this field
Health and Safety

Health and Safety issues must be promoted
through supplementary methods, with a joint
action involving governments, companies and
professional organizations.
Participation in benefits/capital
An alternative to conflict
Participation means co-responsibility in the
operation of the company (tensions are possible
but do not need to lead to conflict)
Labour integration
Reference to unfavoured groups
Creation of social insertion companies
Need for criteria and definitions for
each industrial, production or services
sector.
Employee collaboration (voluntary)
Managing diversity
In the last point we discussed hiring, here we will
discuss the management.
It is an extension of a companys policies on
social integration and partnership
Requires elimination of all forms of
discrimination
Requires express acknowledgement of diversity
The adoption of socially responsible practices and
implementation positive actions to incorporate
these values provide a dynamic value and
competitively to the company
Arguments For CSR

The rise of large corporations has created social
problems and they should be responsible for
solving these problems: Allows business to be part
of the solution
Protects business self-interest
Prevents unethical conduct which can have
serious reputation and financial costs
Addresses issues by being proactive and using
business resources and expertise
Public strongly supports it
Arguments Against CSR

Social issues are not the concern of businesses
Managers do not have the expertise to make
social decisions they are oriented towards
finance and operations
Business already has enough power if given
decision making power in the social domain,
businesses will be given too much power
The ability to compete in a global market
place could be limited
Thinking about Future Business

Responsibilities
Demonstrate a commitment to societys values and
contribute to societys social, environmental and
economic goals through action
Protect society from the negative impacts of
company operations, products and services
Share benefits of company activities with key
stakeholders
Demonstrate that the company can make more
profit by doing the right thing.
Global Mergers and Acquisitions
Mergers and Acquisitions

Corporations strive to increase their earnings
per share over time.
Methods
Organic approaches:
Increase sales of existing divisions while maintaining level
operating margins
Increase operating margins with constant sales
Mergers and Acquisitions:

Seek to merge or acquire another corporation, with resulting
corporations size and earnings enhanced by combination
Mergers, Acquisitions, and Takeovers

Merger: Two firms agree to integrate their operations
on a relatively co-equal basis
Acquisition: One firm buys a controlling, 100 percent

interest in another firm with the intent of making the
acquired firm a subsidiary business within its portfolio
Takeover: Special type of acquisition strategy wherein

the target firm did not solicit the acquiring firm's bid
- Unfriendly acquisition
Reasons for Acquisitions:

Increased market power : Exists when a firm is able
to sell its goods or services above competitive levels or
when the costs of its primary or support activities are
lower than those of its competitors.
Sources of market power include:
- Size of the firm
- Resources and capabilities to compete in the market
- Share of the market
Entails buying a competitor, a supplier, a distributor,

or a business in a highly related industry
Reasons for Acquisitions:

To increase market power firms use
Horizontal Acquisitions: Acquirer and acquired companies compete
in the same industry for industry consolidation
Vertical Acquisitions: Firm acquires a supplier or distributor of one

or more of its goods or services which leads to control over additional
parts of the value chain
Related Acquisitions: Firm acquires another company in a highly

related industry which creates value through synergy and integration of
resources and capabilities
Overcoming entry barriers into:

- New product markets or industries product diversification
- New international markets geographic diversification
-Cross-border acquisitions those made between companies
with headquarters in different country
Cost of new product development and increased speed

to market:
-Internal product development is risky and has a high failure
rate
- Acquisitions can be used to gain access to new products and
to current products that are new to the firm
-Can also provide more predictable returns and faster market
entry (product and geographic)
Lower risk compared to developing new

products:
-Easier to estimate acquisition outcomes versus internal
product development
- Internal development has a very high failure rate
Increased diversification:
-Most common mode of diversification when entering
new markets with new products
- Difficult to internally develop products for markets in
which a firm lacks experience
- The more related the acquisition the higher the chances
for success
Reshaping firms competitive scope:

- Can be used to lessen a firms dependence on one
or more products or markets
Learning and developing new capabilities:

-When you acquire a firm you also acquire its skills
and capabilities
- Firms should seek to acquire companies with
different but related and complementary capabilities
in order to build their own knowledge base
A Brief History of Mergers and Acquisitions

In the 1920s, 1960s, and 1980s, M&A activity
reached historic highs and corresponded to positive
performance of the stock market.
1920s: combinations of firms within industries
1960s: conglomerate approach (e.g. LTV, ITT)
1980s: use of large amounts of debt as the means to
finance acquisitions of companies with cheaply priced
assets through leveraged buyouts
In the 2000s, Wall Street declined due to lower

asset values and increased government regulation;
strategic horizontal mergers are becoming more
common.
Strong banks are absorbing weak ones before/after FDIC
seizes them.
Chemical, pharmaceutical and commodities firms are
merging in order to increase global reach and reduce cost
per unit of production.
Leveraged buyout firms (now private equity firms) have
decreased their activity due to losses from 2007/2008
vintage investments and reduction in debt availability.
Completed deals have lower levels of debt and therefore,
either a lower price or more equity.
How Companies Can Work Together

Strategic alliance (or teaming agreement):
parties work together on a single project for a finite
period of time
Do not exchange equity
Do not create permanent entity to mark
relationship
Written memorandum of understanding (MOU):
memorializes strategic alliance and sets forth how
parties plan to work together
Joint venture: parties work together for lengthy

or indeterminate period of time
Form new, third entity
Divide ownership and control of new entity,
determine who will contribute what resources
Advantage: two entities can remain focused on their
core businesses while letting joint venture pursue the
new opportunity
Downside: governance issues and economic fairness
issues create friction and eventual disbandment
Acquisition: acquired company becomes

subsidiary of purchasing company
Most permanent
Eliminates governance and economic fairness
issues
Forms of acquisitions
Merger
Stock acquisition
Asset acquisition
Merger: two companies legally become one

All assets and liabilities being merged out of
existence become assets and liabilities of surviving
company
Stock acquisition: acquired company becomes

subsidiary of acquiring company
Asset acquisition: assets but not liabilities become

assets of acquiring firm
How and Why to do an Acquisition

If acquisition creates positive present value
when weighing outflow (acquisition price)
versus future inflow (cash flow of acquired
company plus any synergies), then transaction
makes financial sense.
Difficulty: determine what exactly are the
outflows, inflows, and synergies (both
revenue/cost synergies)
Common synergies
Cost Savings:
One has lower existing costs due to efficiency, scale, etc.

One has better cost management
Combined company has greater economies of scale
One has better credit rating/balance sheet and therefore
cheaper financing costs
Transactions costs eliminated in vertical merger
Reduction in employee costs (layoffs)
Revenue enhancements:
Use of each others distributors and other
channels
Bundling opportunities from combined product
offering makes company more attractive
Combined company can raise prices (greater
market power)
Companies will hire a group of advisors to

assist in evaluating and consummating
transaction
investment bank,
law firm with expertise in mergers and
acquisitions,
accounting firm,
valuation firm
Investment bank
Primary financial advisor
Puts together financial model to analyze cash
flows of combined company on pro forma basis
Evaluates comparable transaction in order to
render advice on price
Offers advice on tax and accounting structure for
transaction
Helps raise capital needed to complete transaction
Law firm
Responsible for drafting and negotiation of
transaction documents
Reviews
appropriate
tax,
employment,
environmental, corporate governance, securities,
real property, and other applicable international,
federal, state and local laws
Advise Board of Directors on fulfilling its fiduciary
duties of care and loyalty to shareholders
Accounting firm
Advise company on proper tax and accounting
treatment of transaction
Assist in valuing certain specific assets
Comfort letter on certain accounting issues
Consent letter needed if publicly registered
securities offering is made in connection with
transaction
The Politics and Economics of Acquisitions

Key political elements of a transaction
1. Which entity will survive or be parent company
2. What will new companys board of directors look
like
3. Who will manage company day-to-day
Smaller company will typically

subsidiary of larger company
become
Smaller company may have token representation

on Board of Directors of parent
Management of smaller company will typically
either remain at subsidiary or exit
The Politics and Economics of an Acquisition

Merger of Equals
Board positions often allocated 50/50
Office of the Chairman or Office of CEO: formed
to share management authority
Murky lines of authority or shared power can lead to
difficulty and conflict
LBOs, Hostile Takeovers and Reverse M&A

Leveraged Buy Outs (LBOs): purchases of stock of
company where a significant percentage of
purchase price is paid for with proceeds of debt
Became prominent in 1970s and 1980s with rise of
LBO shop
Debt financing to fund:
High yield (junk) bonds
Hostile takeovers: acquisition in which targets board of
directors does not consent to transaction
Tender offer: Potential buyer or raider makes cash offer
directly to shareholders, thereby bypassing board of directors
LBOs, Hostile Takeovers and Reverse M&A

Reverse M&A (add value through divestiture)
Four forms of reverse M&A:
1. Simple sale of division or subsidiary: asset sale,
stock sale, or merger
2. Spin-off: corporation issues dividend of shares of
subsidiary to be spun-off corporations shareholders
Shareholders of parent participate in spin-off on pro rata

based on their ownership percentage in parent
3. Split-off: shareholder in parent corporation elects

to take shares in subsidiary being split-off, but ends
up with fewer shares of parent corporation
4. Split-up: shareholder elects to take shares in one

part of split company or other
Less common than spin-offs and split-offs
because most shareholders like having parts of
both parent and entity divested
Ethics in International Business
Ethical Issues in International Business

Arise when a manager makes decisions
consistent
with
differing
national
environments
Political systems
Legal systems
Economic development levels
Culture
What is ethical and normal in one

environment may not be so in another

Arise most often in the context of:
Employment practices
Human rights
Environmental policy
Corruption
An MNCs perceived moral obligations to
society
Employment Practices
What standards should be applied?
Home nations
Host nations
Other
Should the MNC adapt its policies?

Standardize?
Hiring practices, labor relations, diversity
issues, employment conditions are some
specific issues that require careful thought
Human Rights
A manager can assume as universal his/her
views on freedom of:
Association
Speech
Assembly
Movement
Political repression
What is the responsibility of an MNC to

uphold different standards of human rights?
Repressive Regimes
Is it ethical for MNCs to operate in countries
with repressive regimes?
Is inward investment an agent for change?
What is the limit beyond which inward

investment would not be justified under all
circumstances?
What if competitors from other nations invest
and you dont?
Environmental Policies
Locally mandated environmental standards may be
inferior to those an MNC knows it can achieve
Tragedy of the commons: a resource held in
common by all, but owned by no one, is overused
by some, resulting in degradation.
If a decision is legal but unethical, should it be

taken?
Corruption
Government officials may ask for bribes from an MNC to get
things done
Is an MNCs manager who agrees a corrupt manager?
Should an MNC ever accede to bribery demands?
Foreign corrupt practices act (USA)
Convention on Combating Bribery of Foreign Officials in
International Business Transactions (OECD)
MNC Power and Moral Decisions:

MNCs have power over a host country
They can move production away
Along with power arise obligations (?)
Power is morally neutral
How it is used is what matters
Perceptions of how it should be used and of its
impact vary
Company view
Host country view
MNC and Social Responsibility

Social responsibility: business decisions should
be made after consideration of social
consequences of economic actions
Noblesse oblige: honorable and benevolent
behavior is the responsibility of those in power
Benevolent behavior responsibility of only
successful business?
Determinants of Ethical Behavior

Organization culture
Personal ethics
Decision making processes
Leadership
Unrealistic / realistic performance goals
Philosophical Approaches to Ethics:

Straw men: often adopted, offer
inappropriate guidelines for MNC
behavior
Friedman doctrine
Righteous moralist
Nave immoralist
Utilitarian and Kantian Ethics

Rights theories
Justice theories
Ethical Decision Making

Hiring and promotion
Organization culture and leadership
Decision-making processes
Stakeholder perspectives
Ethics officers
Codes of ethics
Moral courage:
walk away from profitable and unethical
decision
Ethics in International Business

Arise when a manager makes decisions
consistent
with
differing
national
environments
Political systems
Legal systems
Economic development levels
Culture
What is ethical and normal in one

environment may not be so in another

Arise most often in the context of:
Employment practices
Human rights
Environmental policy
Corruption
An MNCs perceived moral obligations to
society
Employment Practices
What standards should be applied?
Home nations
Host nations
Other
Should the MNC adapt its policies?

Standardize?
Hiring practices, labor relations, diversity
issues, employment conditions are some
specific issues that require careful thought
Human Rights
A manager can assume as universal his/her
views on freedom of:
Association
Speech
Assembly
Movement
Political repression
What is the responsibility of an MNC to

uphold different standards of human rights?
Repressive Regimes
Is it ethical for MNCs to operate in countries
with repressive regimes?
Is inward investment an agent for change?
What is the limit beyond which inward
investment would not be justified under all
circumstances?
What if competitors from other nations invest
and you dont?
Environmental Policies
Locally mandated environmental standards may be
inferior to those an MNC knows it can achieve
Tragedy of the commons: a resource held in
common by all, but owned by no one, is overused
by some, resulting in degradation.
If a decision is legal but unethical, should it be

taken?
Corruption
Government officials may ask for bribes from an MNC to get
things done
Is an MNCs manager who agrees a corrupt manager?
Should an MNC ever accede to bribery demands?
Foreign corrupt practices act (USA)
Convention on Combating Bribery of Foreign Officials in
International Business Transactions (OECD)
MNC Power and Moral Decisions:

MNCs have power over a host country
They can move production away
Along with power arise obligations (?)
Power is morally neutral
How it is used is what matters
Perceptions of how it should be used and of its
impact vary
Company view
Host country view
MNC and Social Responsibility

Social responsibility: business decisions should
be made after consideration of social
consequences of economic actions
Noblesse oblige: honorable and benevolent
behavior is the responsibility of those in power
Benevolent behavior responsibility of only
successful business?
Determinants of Ethical Behavior

Organization culture
Personal ethics
Decision making processes
Leadership
Unrealistic / realistic performance goals
Philosophical Approaches to Ethics:

Straw men: often adopted, offer
inappropriate guidelines for MNC
behavior
Friedman doctrine
Righteous moralist
Nave immoralist
Utilitarian and Kantian Ethics

Rights theories
Justice theories
Ethical Decision Making

Hiring and promotion
Organization culture and leadership
Decision-making processes
Stakeholder perspectives
Ethics officers
Codes of ethics
Moral courage:
walk away from profitable and unethical
decision
Corporate Governance
Corporate governance is the set of
processes, customs, policies, laws, and
institutions affecting the way a corporation is
directed, administered or controlled.
Corporate
governance
also
includes
the relationships among the many
stakeholders involved and the goals for
which the corporation is governed.
The principal stakeholders are:

the shareholders/members, management, and the board
of directors. Other stakeholders include labor (employees),
customers, creditors (e.g., banks, bond holders), suppliers,
regulators, and the community at large.
An important theme of corporate governance is to ensure
the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the
principal-agent problem.
It is a system of structuring, operating and

controlling a company with a view to achieve
long term strategic goals to satisfy
shareholders,
creditors,
employees,
customers and suppliers, and complying with
the legal and regulatory requirements, apart
from meeting environmental and local
community needs.
Why Corporate Governance?

Better access to external finance
Lower costs of capital
Improved company performance sustainability
Higher firm valuation and share performance
Reduced risk of corporate crisis and scandals
Four Pillars of Corporate Governance

Accountability
Fairness
Transparency
Independence
Accountability :
- Ensure that management is accountable to the Board
-Ensure that the Board is accountable to shareholders
Fairness :
- Protect Shareholders rights
- Treat all shareholders including minorities, equitably
- Provide effective redress for violations
Transparency:
-Ensure timely, accurate disclosure on all material matters,
including the financial situation, performance, ownership and
corporate governance
-Independence :
- Procedures and structures are in place so as to minimize, or avoid
completely conflicts of interest
- Independent Directors and Advisers i.e. free from the influence of
others
Elements of Corporate Governance

Good Board practices
Control Environment
Transparent disclosure
Well-defined shareholder rights
Board commitment
Good Board Practices:

Clearly defined roles and authorities
Duties and responsibilities of Directors understood
Board is well structured with appropriate composition and mix of
skills
Good Board procedures:

Appropriate Board procedures
Director Remuneration in line with best practice
Board self-evaluation and training conducted
Control Environment:
Internal control procedures
Risk management framework present
Disaster recovery systems in place
Media management techniques in use
Business continuity procedures in place
Independent external auditor conducts audits
Independent audit committee established
Internal Audit Function
Management Information systems established
Compliance Function established
Transparent Disclosure:
Financial Information disclosed
Non-Financial Information disclosed
Financials prepared according to International Financial
Reporting Standards (IFRS)
Companies Registry filings up to date
High-Quality annual report published
Web-based disclosure
Well-Defined Shareholder Rights:

Minority shareholder rights formalised
Well-organised shareholder meetings
conducted
Policy on related party transactions
Policy on extraordinary transactions
Clearly defined and explicit dividend policy
Board Commitment :
The Board discusses corporate governance issues and
has created a corporate governance committee
The company has a corporate governance champion
A corporate governance improvement plan has been
created
Appropriate resources are committed to corporate
governance initiatives
Policies and procedures have been formalised and
distributed to relevant staff
A corporate governance code has been developed
A code of ethics has been developed
The company is recognised as a corporate governance
leader
Need for Corporate Governance

There were several frauds and scams in the
corporate history of the world. It was felt that the
system for regulation is not satisfactory and it was
felt that it needed substantial external regulations.
There were several changes brought out by
governments, shareholder activism and large
institutional investors. All these measures have
brought about a metamorphosis in the corporate
world that realized that investors and society are
serious about corporate governance.
In the beginning of the new millennium, several companies in the

USA particularly after Watergate scandal collapsed because of
corporate mis-governance and unethical practices they indulged in.
The then existing regulatory framework seemed to be inadequate to
deal with the gigantic business corporations that committed
deliberate frauds.
The Tradway Commission was formed to identify the main cause of
misrepresentation in financial reports and to recommend ways of
reducing incidence thereof. The Tradway Report published in 1987
highlighted the need for a proper control environment, independent
audit committees and an objective internal audit function and
called for published reports on the effectiveness of internal control
The commission also requested thesponsoring organizations to
develop an integrated set of internal control criteria to enable
companies to improve their control.
Developments in UK
In England, the seeds of modern corporate governance were
sown by the Bank of Credit and Commerce International (BCCI)
Scandal. The Barings Bank was another landmark. It heightened
peoples awareness and sensitivity on the issue and resolve that
something ought to be done to stem the rot of corporate
misdeeds. These couple of examples of corporate failures
indicated absence of proper structure and objectives of top
management. Corporate Governance assumed more
importance in light of these corporate failures, which was
affecting the shareholders and other interested parties.
As a result of these corporate failures and lack of regulatory
measurers, the Committee of Sponsoring Organizations (COSO)
was born. The report produced in 1992 suggested a control
framework and was endorsed a refined in four subsequent UK
reports: Cadbury, Ruthman, Hampel and Turbull.
Cadbury committee on Corporate Governance

1992
The stated objectives of the Cadbury Committee was To help
raise the standards of corporate governance and the level of
confidence in financial reporting and auditing by setting out
clearly what it sees as the respective responsibilities of those
involved and what it believes his expected of them. The
committee investigated the accountability of the board of
directors to shareholders and to society. It spelt out the
methods of governance needed to achieve a balance between
the essential power of the board of directors and their proper
accountability. The stress in the Cadbury committee report is
on the crucial role of the board and the need for it to observe
the Code of Best Practices. Its important recommendations
include the setting up of an audit committee with independent
members.
The Organization for Economic Co-operation

and Development (OECD) were trend setters as
the Code of Best practices are associated with
Cadbury report. The OECD principles in
summary include the following elements.
i) The rights of shareholders
ii) Equitable treatment of shareholders
iii) Role of stakeholders in corporate governance
iv) Disclosure and Transparency
v) Responsibilities of the board
Corporate governance in India

In India, the governance of most of the countrys industrial
and business organizations thrived on unethical practices at

the market place and showed little regard for the human and
organizational values while dealing with their shareholders,
employees and other stakeholders.
The Indian corporate scenario was more or less stagnant till
the early 90s. The position and goals of the Indian corporate
sector has changed a lot after the liberalisation of 90s.
Indias economic reform programme made a steady progress
in 1994. India with its 20 million shareholders, is one of the
largest emerging markets in terms of the market
capitalization.
An overwhelmingly large number of Indian corporations

used several illegal tactics such as restricting of industrial
licenses with a view to keeping away competitors, using
import licenses to make a quick profit, illegally holding
money aboard, and indulging into corruption and other
unethical practices with impunity.
The reasons for the corporate mis-governance in India
were many: A closed economy, a sheltered market, limited
need and no access to global business, lack of competitive
spirit and an inefficient regulatory framework. These were
responsible for poor governance of companies in India for
well over 40 years, between 1951 and 1991.
There have been several major corporate

governance initiatives launched in India since the
mid-1990s. The first was by the Confederation of
Indian Industry (CII), Indias largest industry and
business association, which came up with the first
voluntary code of corporate governance in 1998. The
second was by the SEBI, now enshrined as Clause 49
of the listing agreement. The third was the Naresh
Chandra Committee, which submitted its report in
2002. The fourth was again by SEBI the Narayana
Murthy Committee, which also submitted its report
in 2002.
Kumar Mangalam Birla committee report and Clause 49

While the CII code was well-received and some progressive companies
adopted it, it was felt that under Indian conditions a statutory rather
than a voluntary code would be more purposeful, and meaningful.
Consequently, the second major corporate governance initiative in the
country was undertaken by SEBI. In early 1999, it set up a committee
under Kumar Mangalam Birla to promote and raise the standards of
good corporate governance. In early 2000, the SEBI board had
accepted and ratified key recommendations of this committee, and
these were incorporated into Clause 49 of the Listing Agreement of the
Stock Exchanges. The committees recommendations have looked at
corporate governance from the point of view of the stakeholders and
in particular that of shareholders and investors.
At the heart of committees report is the set of recommendations,

which distinguish the responsibilities, and obligations of the boards
and the management in instituting the systems for good Corporate
Governance. Many of them are mandatory. These recommendations
are expected to be enforced on listed companies for initials
disclosures. This enables shareholders to know, where the companies
are in which they are involved. The committee recognized that India
had in place a basic system of corporate governance and that SEBI
has already taken a number of initiatives towards raising the existing
standards.
The committee also recognized that the Confederation of Indian
Industries (CII) had published a code entitled Desirable code of
corporate of Governance and was encouraged to note that some of
the forward looking companies have already reviewed their annual
report through complied with the code.
The Naresh Chandra committee was appointed in August

2002 by the Department of Company Affairs (DCA) under the
Ministry of Finance and Company Affairs to examine various
corporate governance issues. The Committee submitted its report
in December 2002. It made recommendations in two key aspects
of corporate governance: financial and non-financial disclosures:
and independent auditing and board oversight of management.
The committee submitted its report on various aspects
concerning corporate governance such as role, remuneration, and
training etc. of independent directors, audit committee, the
auditors and then relationship with the company and how their
roles can be regulated as improved. The committee stingily
believes that a good accounting system is a strong indication of
the management commitment to governance.
Good accounting means that it should ensure optimum disclosure and

transparency, should be reliable and credible and should have
comparability. According to the committee, the statutory auditor in a
company is the lead actor in disclosure front and this has been
amply recognized sections 209 to 223 of the companies act.
The fourth initiative on corporate governance in India is in the form of
the recommendations of the Narayana Murthy committee. The
committee was set up by SEBI, under the chairmanship of Mr. N. R.
Narayana Murthy, to review Clause 49, and suggest measures to
improve corporate governance standards. Some of the major
recommendations of the committee primarily related to audit
committees, audit reports, independent directors, related party
transactions, risk management, directorships and director
compensation, codes of conduct and financial disclosures.
Corporate governance: Recent Developments in

India
It is observed that the scale and scope of economic reform and
development in India over the past 25 years has been
impressive. The country has opened up large parts of its
economy and capital markets, and in the process has produced
many highly regarded companies in sectors such as
information technology, banking, autos, steel and textile
manufacturing. These companies are now making their
presence felt outside India through global mergers and
acquisitions. The Satyam fraud of late 2008 led to renewed
reform efforts by Indian authorities and regulators. SEBI
brought out new rules in February 2009 requiring greater
disclosure by promoters (i.e., controlling shareholders) of their
shareholdings and any pledging of shares to third parties.
Corporate Governance voluntary guidelines 2009

in December 2009, the Ministry of Corporate Affairs (MCA)
published a new set of Corporate Governance Voluntary
Guidelines 2009, designed to encourage companies to adopt
better practices in the running of boards and board committees,
the appointment and rotation of external auditors, and creating a
whistle blowing mechanism.
The guidelines are divided into the following six parts:
i) Board of Directors
ii) Responsibilities of the Board
iii) Audit Committee of the Board
iv) Auditors
v) Secretarial Audit
vi) Institution of mechanism for Whistle Blowing
Corporate Governance Objectives

Corporate Governance has several claimants shareholders,
suppliers, customers, creditors, the bankers, employees of
company and society. The committee for SEBI keeping view has
prepared primarily the interests of a particular class of
stakeholders namely the shareholders this report on corporate
governance. It means enhancement of shareholder value keeping
in view the interests of the other stack holders. Committee has
recommended Corporate Governance as companys principles
rather than just act. The company should treat corporate
governance as way of life rather than code.
Clause 49 of SEBI is a regulation that

strengthens the role of independent
directors serving on corporate boards.
On August 26, 2003, SEBI announced an
amended Clause 49 of the listing agreement
which every public company listed on an
Indian stock exchange is required to sign.
The amended clauses come into immediate
effect for companies seeking a new listing.
The major changes to Clause 49:

1.Independent Directors 1/3 to depending
whether the chairman of the board is a nonexecutive or executive position.
2.Non-Executive Directors ----The total term of
office of non-executive directors is now limited
to three terms of three years each.
3.Board of Directors-----The board is required to
frame a code of conduct for all board members
and senior management and each of them have
to annually affirm compliance with the code.
4.Audit Committee----Financial statements

and the draft audit report/reports of
management discussion and analysis of
financial
condition
and
result
of
operations/reports of compliance with laws
and risk management/management letters
and letters of weaknesses in internal controls
issued
by
statutory
and
internal
auditors/appointment, removal and terms of
remuneration of the chief internal auditor
definition of Independent Director: who, in the opinion of the

Board, is a person of integrity and possesses relevant expertise
and experience & who is or was not a promoter of the
company or its holding, subsidiary or associate company. who
is not related to promoters or directors in the company, its
holding, subsidiary or associate company.
SEPARATE MEETING OF INDEPENDENT DIRECTORS: at least one meeting in a
year. All the independent directors of the company shall strive
to be present at such meeting to review the performance of
non- independent directors and the Board as a whole. to
review the performance of the Chairperson of the company. to
assess the quality, quantity and timeliness of flow of
information between the company management and the
Board that is necessary for the Board to effectively and
reasonably perform their duties
5.Whistleblower Policy ----This policy has to be

communicated
to
all
employees
and
whistleblowers should be protected from unfair
treatment and termination.
6.COMPOSITION OF BOARD: At least one Women
Director . & at least fifty percent of the Board
should be comprised of Non- Executive Directors.
If the chairman of the Board is Executive Director
or Promoter, then at least half of the Board should
be comprised of Independent Directors. If the
Chairman of the Board of Board is Non Executive
Director then at least one third of the Board
should be comprised of Independent Director.
7.Disclosures----Contingent liabilities./Basis of
related party transactions./Risk management/
. Proceeds from initial public offering/
.Remuneration of directors.
8.Certifications----reviewed the necessary
financial statements and directors'report;
established and maintained internal controls,
disclosed to the auditors and informed the
auditors and audit committee of any
significant changes in internal control and/or
of accounting policies during the year.
The Role of Independent Directors:

Independent directors are those directors who apart from
receiving directors remuneration do not have any other material
pecuniary relationship with company. Further, all pecuniary
relationship or transactions of the non executive directors should
be disclosed in the annual report. The committee recommended
that the board of a company have an optimum combination of
executive and non-executive directors with not less than fifty
percent of the board comprising the non-executive directors. In
case a company has a non-executive chairman, at least one third
of board should comprise of independent directors and in case a
company has an executive chairman at least half of board should
be independent.

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International Business Theories

Laissez-Faire versus Interventionist Approaches

Theories of Trade Patterns

What the major trade theories Do and Dont

Theory of Absolute Advantage

Theory of Comparative Advantage

Trade Pattern Theories

Theory Of Country Size

Product Life Cycle (PLC) Theory

Life Cycle of the International Product

The Porter Diamond

Limitations of the Porter Diamond Theory

The Relationship between Trade and Factor

Capital and labor move internationally to gain

Theories & Current Practices of International

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Theories of why trade occurs:

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Sources of differences across countries that

Comparative Advantage and

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For example, a limited number of workers

The opportunity cost of producing roses is the

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Suppose that in the U.S. 10 million roses could

Colombia has a lower opportunity cost of

The U.S. has a lower opportunity cost of producing computers.

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A country has a comparative advantage in

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Suppose initially that Colombia produces

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Comparative Advantage and Trade

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One-Factor Ricardian Model

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The assumptions are:

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6. Two are only two countries & two goods.

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Therefore, What is the Gains From

Without trade, a country has to allocate

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Consumption possibilities expand beyond the

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What are Relative Wages?

The home wage relative to the foreign wage will settle in

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Do Wages Reflect Productivity?

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Other evidence shows that wages rise as

However, as South Koreas labor productivity rose

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However, there are certain Misconceptions about Comparative

1. Free trade is beneficial only if a country is more productive

But even an unproductive country benefits from free trade by avoiding

High costs derive from inefficient use of resources.

The benefits of free trade do not depend on absolute advantage,

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Consumers benefit because they can purchase goods more cheaply.