N

1
 ASSIGNMENT SOLUTIONS GUIDE (2015-2016)
I.B.O.-1
International Business Environment
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the
Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and Guidance
of the student to get an idea of how he/she can answer the Questions of the Assignments. We do not claim 100% accuracy
of these sample answers as these are based on the knowledge and cabability of Private Teacher/Tutor. Sample answers
may be seen as the Guide/Help Book for the reference to prepare the answers of the Question given in the assignment. As
these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied.
Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/
Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact
information, data and solution. Student should must read and refer the official study material provided by the university.

N
Answer all the questions.
Q. 1. (a) Describe the factors affecting balance of payment with suitable examples.
Ans. According to Charles P. Kindle Berger, balance of payment of a country is a systematic record of all
economic transactions between the residents of the reporting country and the residents of foreign countries during a
given period of time. In other words, balance of payments is a statement of inflow and outflow payments for a
particular country.
The main components of balance of payments are:
(i) Current account, and
(ii) Capital account
Hence, the factors affecting the balance of payments can be grouped into two:
(a) Factors affecting current account
(b) Factors affecting capital account
Factors Affecting Current Account–The factors that affect the current account are given below:
(1) Inflation Rate in the Domestic Economy–If a country is facing higher inflation relative to its trading
partner, the imports become cheaper and residents of the country will like to purchase more foreign goods. If a
country is facing higher inflation relative to its trading partner, the exports become costly and loose competitiveness
and foreign nationals will not like to purchase country’s goods. As a result, imports will increase while exports will
decline. In this way, the current account balance is adversely affected.
(2) National Income of the Economy–Impact of increase in national income is not straight forward. There are
two opinions on this. Most of the empirical studies suggest that if country’s national income rises by a higher
percentage than those of other countries, it may result into deterioration of current account balance because with the
increase in income, residents may start buying foreign products and imports would increase. But in some cases the
current account balance may improve because the production in the economy has also increased and export surplus
is generated.
(3) Government Restrictions on Imports–If government imposes taxes (tariffs) on imported goods, the prices
of imported goods will rise and imported goods will become dearer to domestic goods. As a result, imports will
decline and current account balance will improve. A part from tariff, a government may put quota restrictions on the
imported goods. Quota restrictions are quantity restrictions commonly used by developed countries. If government
fixes quota restrictions on imports, current account balance will improve due to limited imports.
(4) Exchange Rate–Exchange rate is the price of a country’s currency in terms of currencies of other countries.
Exchange rate may be manipulated by the government. Since current account is a function of real exchange rate
(RER), it may be manipulated to adjust current account balance. With higher real exchange rate, we expect fewer
exports and more imports while low real exchange rate would result in greater exports and lower imports. It implies

2
that by lowering real exchange rate, current account balance will improve. Real exchange rate may be lowered by
devaluation of currency.
Factors Affecting Capital Account–We have seen above that a government imposes controls on the flow of
trade. In the similar fashion, a government may impose controls on the free movement of capital. Apart from these
controls, there are other economic factors which also affect the movement of capital and, therefore, the capital
account balance. Following factors influence capital account:
(i) The government may impose a tax on income accrued to the local investors who invested in foreign
markets. It discourages outflow of capital.
(ii) Liberalisation of economies affect the capital accounts.
(iii) The anticipated change in exchange rate affects capital flows because it tends to change the expectation
about the rate of return on foreign investment.
(iv) Changes in interest rate also affect the international capital flows. An increase in interest rates relative to
other countries may affect capital inflows from abroad. Similarly, a reduction in domestic rates may induce
people to invest abroad.
(b) Discuss the method of correcting disequilibrium in balance of payments.
Ans. A nation’s balance of payment is said to be in disequilibrium when the nation is not in a position to pay for
its imports from its export earnings or accumulates reserve year after year. Disequilibrium occurs in the balance of
payment when there is either a surplus or deficit in the balance of payment. There are a number of factors that cause
disequilibrium in the balance of payments. These factors may be broad by categorized as under:

N
(i) Economic factors
(ii) Political factors
(iii) Social factors
Economic Factors–Disequilibrium occurs in the balance of payment due to following economic factors:
(1) Large scale development expenditure that may cause large imports.
(2) Cyclical fluctuations in general business activity such as recession or depression.
(3) Large imports as a result of high domestic prices.
(4) New sources of supply, new and better substitutes to existing products and changes in costs as a result of
technological changes.
Political Factors – Political instability may cause large capital outflows and less inflow of foreign capital.
Social Factors – Changes in tastes, preference and fashions may affect balance of payments.
Methods of Correcting the Disequilibrium
Following are the methods of correcting the disequilibrium in balance of payment:
(1) Use of past reserves
(2) Borrowings from international monetary fund
(3) Monetary policy
(4) Fiscal policy
(5) Exchange rate adjustment.
(1) Use of Past Reserves–Most of the countries particularly the members of international monetary fund
maintain reserves consisting of gold, foreign currencies and fund related assets i.e. reserve position with the
international monetary fund and holdings of special drawing rights (SDR). If such reserves are available a country
may use such reserves to finance the deficit of balance of payments.
(2) Borrowings from IMF–Members of international monetary fund may borrow funds from IMF to finance
the BOP deficit. IMF offers following borrowing facilities to its members:
(i) Stand bye loans
(ii) Extended fund facilities.
(iii) Structure adjustment facilities
(iv) Enlarged structural adjustment facilities
(v) Compensatory and contingency financing facilities
(vi) Systematic transformation facilities.
(3) Monetary Policy–Monetary policy refers to the policy of the Central Bank to make changes in money
supply to influence BOP conditions. The usual monetary policy measures are as under:

3
 (i) Change in interest rates
(ii) Change in credit policy by changing cash reserve ratio, liquidity ratio.
(iii) Open market operation i.e. issue of treasury bills bonds and securities by the government.
(iv) Changing the margin requirements
Monetary policy measures bring about the required change in the level of money supply which affects the total
demand including demand for imported goods and services. In case of deficit in BOP, monetary policy aims to
curtail money supply to reduce demand for imported goods and services. When the money with the public reduces,
the investment expenditure and consumption expenditure decline thus improving the BOP deficit. In case of surplus
of BOP, monetary policy aims to increase money with the public so that demand for imported goods and services
increases.
(4) Fiscal Policy–Fiscal policy means the expenditure policy and taxation policy of the government. The fiscal
policy is implemented through the budgets of the government. The most important tools of fiscal policy are taxation
policy and public expenditure policy. In case of deficit in BOP, indirect taxes like excise duties, sales tax etc. are
increased to curtail consumption. Direct taxes also affect the disposable income. Increase in direct taxes reduce
consumption and also the savings. From the angle of savings, indirect taxes are preferred to direct taxes. The
government may change its expenditure policy to reduce the expenditure. If the government reduces the non-productive
expenditure, it would directly help reducing the BOP deficits.
Fiscal policy measures are considered to be more effective than the monetary policy measures but efficacy and

N
effectiveness of fiscal policy measures requires political will which is generally missing.
(5) Exchange Rate adjustments–Exchange rate adjustment is used to correct the disequilibrium if the deficit
in BOP remains for a long time. Devaluation of currency i.e. a downward adjustment in exchange rate makes the
exports cheaper and imports dearer. In this way devaluation tends to reduce imports and to encourage exports.
However, devaluation may not give desired results, because of the following reasons:
(i) The competitors may revise their pricing strategies in reaction to devaluation.
(ii) Other currencies may be depreciated neutralizing the impact of domestic currency devaluation.
(iii) All the trade transactions are pre-arranged, therefore the import of goods may be immediately reduced.
(iv) There may not be substitutes for the goods imported. Therefore the goods are required to be imported
whatever be the circumstances.
(v) If the nature of goods imported is necessities, there may not be significant decline in imports as a devaluation
because their price elasticity is low. Therefore, the balance of payments may actually worsen rather than
importing.
Q. 2. What are the rationale of transfer of technology? Describe various non-equity forms of technology
transfer by TNCs and Small and Medium Enterprises.
Ans. Today, we are living in the era of technology. Technology is universally applied in all walks of life. Technology
means physical goods i.e. capital goods and transfer of tacit knowledge. With reference to production, technology
means a way of producing goods or services. It implies that technology is related to production process and production
development. Modern Concept of Technology is more comprehensive in the sense that it includes organizational,
informatory and motivatory areas.
According to the UNCTAD’ Draft TOT code “technology should be described as systematic knowledge for the
manufacture of a product, for the application of a process or for the rendering of a service and does not extend
transactions involving mere sale or lease of goods.” Technology includes the tools-both machines (hard technology)
and ways of thinking (soft technology) available to solve problems and promote progress between, among and
between societies. Technology includes not only knowledge or methods that are necessary to carry on or to improve
the existing production and distribution of goods and services buy also entrepreneurial expertise and know-how.
Transfer of Technology
Transfer of technology is the process by which commercial technology is disseminated. This will take the form
of a technology transfer transaction which may or may not be a legally binding contract but which will involve the
communication, by the transferor, of the relevant knowledge to the recipient.

4
Types of transfer of technology
The draft TOT code by UNCTAD has listed the following types of transfer of technology:
(a) The assignment, sale and licensing of all forms of industrial property, except for trade marks, service marks
and trade names when they are not part of transfer of technology transactions.
(b) The provision of know-how and technical expertise in the form of feasibility studies, plans, diagrams,
models, instructions, guides, formulae, basic or detailed engineering designs, specifications and equipment
for training, services involving technical advisory and managerial personal and personnel training.
(c) The provision of technological knowledge necessary for the installation, operation and functioning of plant
and equipment and turnkey projects.
(d) The provision of technological knowledge necessary to acquire install and use machinery, equipment,
intermediate goods and/or raw materials which have been acquired by purchase, lease or other means.
(e) The provision of technological contents of industrial and technical cooperation arrangements.
The list excludes non-commercial technology transfer such as those found in international cooperation agreements
between developed and developing states. Such agreements may relate to infrastructure or agricultural development,
or to, international, cooperation in the fields of research education, employment or transport.
Non-equity forms of technology transfer are the mechanisms of transfer of technology under which firms
making transfer of technology do not invest in firm which is recipient of technology. Following are some important
noon-equity forms of technology transfer:
(i) Strategic alliance

N
(ii) Sub-contracting
(iii) Outright sale/purchase of technology
(iv) Management contract
(v) Franchising.
Q. 3. What are the various forms of Regional Economic Gropuing. Discuss the impact of Regional Economic
Groupigs.
Ans. Forms of Regional Grouping
Regional economic cooperation groupings have achieved varying degrees of success depending on the dynamics
of political economy in the region and their bilateral and multilateral economic relation with the rest of the world.
Forms of regional groupings are diverse, involving different levels of economic integration. Following are the types
of regional groupings:
(i) Preferential Trading Arrangement–Under preferential trading arrangement member countries lower
barriers to imports of specified products from one another. For example, India may have customer’s duties at a lower
rate on tea from Sri Lanka.
(ii) Free Trade Area (FTA)–Free trade area consists of number of countries with in which trade is free in the
sense that custom duties are not leviable at the frontier on trade.
(iii) Customs Union–Like free trade area, there are no internal tariff barriers on intra-union trade. Besides, the
member countries adopt common external tariff barrier for trade with non-member countries.
(iv) Common Market–In this type of economic integration, the member nations have custom union agreement
with one another and they also agree for factor mobility across the national borders of member countries. Thus, the
common market arrangement permits free movement of labour and capital amongst the member nations.
(v) Complete Economic Union–This is the final stage of economic integration to provide the basis for complete
political integration. In this type of economic integration, member countries are part of common market and agree to
have complete unification of monetary and fiscal policies. This arrangement is akin to economic and monetary union
amongst the member nations.
Since World War II, there has been a tremendous interest among nations in economic cooperation. There are
many degrees of economic cooperation. Following are the five degrees of economic cooperation and integration:
(1) Preferential Trading Arrangement
(2) Free Trade Area
(3) Customs Union
(4) Common Market
(5) Economic Community

5
 Table
Type Lower Tariffs Abolition of Common Tariff Removal of Harmonisation
and Quotas Tariffs and and Quotas Restrictions of Economic
Quotas on Factor Policies
Movements
(1) Preferential Trading Yes No No No No
Arrangement
(2) Free Trade Area Yes Yes No No No
(3) Customs Union Yes Yes Yes No No
(4) Common Market Yes Yes Yes Yes No
(5) Economic Community Yes Yes Yes Yes Yes

Examples of Preferential Trading Arrangement

N
(3) Preferential Trade Area for Eastern and 1981 Ethopia, Kenya, Lesotho, Malawi, Mauritius,
South African States (PAT) Mozambique, Rwanda, Somalia, Swaziland, Tanzania, Uganda,
Zambia, Zimbabwe.
(4) Economic community for Ground Lakes 1978 Rwanda, Zaire, Brunei.
Countries
(5) Customs and Economic Union of Central 1978 Cameroon, Chad, Congo, Gabon, Guinea,
Africa (UDEAC) Equatorial, Central African Republic.
(6) South Asian Preferential Trade 1995 India, Nepal, Pakistan, Bhutan, Sri Lanka, Maldives,
Arrangement (SAPTA) Bangladesh.
Examples of Free Trading Area (Bloc)
Name of the Arrangement Year Member Countries
(1) Association of South East Asian Nations 1967 Brunei, Indonesia, Malasia, Philippines, Singapore,
(ASEAN) Thailand, Vietnam.
(2) European Free Trade Association 1960 Finland, Iceland, Liechtenstein, Norway, Sweden,
(EFTA) Switzerland.
(3) North American Free Trade 1991 Canada, Mexico, United States.
Agreement. (NAFTA)
(4) Australia-Newzealand Closer Economic 1983 Australia, New Zealand.
Relations Trade Agreement (ANZCERT)
Examples of Customs Union
Name of the Arrangement Year Member Countries
(1) Organisation of Eastern Caribbean States 1981 Antigua, Barbuda, Dominica, Grenda, Montserrat,
(OECS) St. Kitts-Nevis, St. Lucia, St. Vincent, Grendanes, British Virgin
Islands.
(2) Southern African Customs Union 1969 Botswana, Lesotho, Namibia, South Africa,
(SACU) Switzerland, Four South African Homelands.
(3) West African Customs Union (CEAO) 1959 Benin, Burkina, Faso, Coted’ Ivoire, Mali, Mauritania, Niger,
Senegal.
(4) Mano River Union (MRU) 1973 Guinea, Liberia, Sierra Leone.
(5) Central American Common Market 1969 Costa Rica, EL Salvador, Guatemala, Honduras,
(CACM) Nicaragua.

6
 Examples of Common Market
Name of the Arrangement Year Member Countries
(1) Andean Common Market 1969 Bolivia, Columbia, Ecuador, Peru, Venezuela.
(Andean Group)
(2) Caribbean Common Market 1973 Antigua, Barbuda, Bahamas, Belize, Barbados,
(CARICOM) Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis,
St. Lucia, St. Vincent and Grenadines, British Virgin Islands.
(3) Southern Cone Common Market 1991 Argentina, Brazil, Paraguay, Uruguay.
(MERCOSUR)
(4) Arab Common Market 1964Egypt, Iraq, Jordan, Lebanon, Libiya, Mauritania, Syria.
(5) Gulf Cooperation Council 1981Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab
Emirates.
(6) Economic Community of West African 1975 Benin, Burkina Faso, Cape Verde, Cote d’ Ivoire,
States (ECOWAS) Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania,
Niger, Senegal, Tongo, Sierra Leone.
(7) Economic Community of Central 1981 Burundi, Cameroon Central African, Republic,
African States Chad, Congo, Equatorial Guinea, Gabon, Rwanda, Sao Tome, and
Principe, Zaire.
(8) Arab Maghreb Union (AMU) 1989 Algeria, Libya, Mauritania, Morocco, Tunisia.

N
Examples of Economic Community
Name of the Arrangement Year Member Countries
Economic Union 1958 Belgium, Denmark, France, Germany, Greece, Ireland, Italy,
Luxemburg, Portugal, Spain, Netherlands, United Kingdom,
Austria, Finland, Sweden, etc.
Impact of Regional Economic Groupings
Following points highlight the impact of regional economic groupings:
(1) Trade Diversion–Trade diversion is a situation where trade with non-member countries is diverted to member
countries, consequent upon the formation of regional grouping. Trade diversion is detrimental to welfare.
Trade diversion worsens the international allocation of resources by shifting the source of supply from a low
cost producer to a high cost producer. In the case of the European Union, intra trade accounts for more than
65% of the total trade as compared to about 30% during 50s.
(2) Trade Creation–Trade creation effect refers to the beneficial effect of the regional grouping. Trade creation
results shifting supply from a high-cost domestic source to a lower-cost source of a partner. (i.e. another
member of the grouping). The formation of the regional grouping results in the creation of some new trade
for non-member countries.
(3) Competition–The regional grouping remo-ves, at least to some extent, the protection to domestic industries.
This helps to break the monopoly or oligopolistic structure. Increased competition leads to the existence of
efficient units. Thus, the opening up of the economy to increased competition ensures higher efficiency, as
well as the stimulation of research and development. Regional groupings results more competition both
from within and outside the region. From within the region, companies will have the benefit of larger size
orders leading to reduced unit cost. From outside region, large size of market will motivate the firms to enter
into regional market.
(4) Economies of Scale and Ease of Entry–The small size of the market is regarded as one of the chief
constraints in achieving the economies of scale. Hence, it is believed that economic integration will permit
the exploitation of economies internal to the firm that had previously not been forthcoming because of the
limited size of the market. It follows that such gains could not be obtained if the integrated national economies
had been large enough to exploit all sources of internal economies prior to integration. Balassa argues,
however, that, in a present day integration projects, economies of scale can be appropriated, at least in some
branches of production, in a wider market. Thus, increase in market size will have two implications:
(a) The size of export order would be large leading to benefits of increased sales and scale of economies.

7
 (b) If an exporter is able to enter one country in the region, he will be able to each his products to other
countries in the grouping.
(5) Reduction in Marketing Costs–The concept of external economies comprises all forms of intra-industry
and inter-industry relationships that contribute to reduction in cost of production as well as cost of marketing.
Reduction in marketing costs is more visible in case of homogeneous or standardized products.
(6) Impact of Foreign Direct Investment Flow–Formation of regional grouping tends to stimulate investment.
An increase in competition and technological changes lead to additional investments made to cope with the
new situation and to take advantage of the newly created opportunities. The existence of high cost producers
and technological changes may however cause some disinvestment also though the new investment are
likely to be more than the disinvestments.
The increased opportunities created by the regional grouping may accelerate foreign investment in the member
countries. A part from the foreign firms already operating in the regional grouping to take advantage of the increasing
opportunities. Some economists attribute the massive American investments in Europe after 1955 to the formation
of the European Economic Community. The EC 1992 also stimulated a lot of foreign investment in the EU.
As Balassa points out, economic integration will reduce risk and uncertainly in the economic intercourse
between the union members. In the present-day world various factors contribute to the riskiness of foreign transactions.
Uncertainties are associated with the complexity of trade regulations and with the possibility of unilateral changes in
tariffs and other forms of trade restrictions, foreign exchange regulations, and economic policies in general. Integration

N
tends to foster development by reducing such uncertainties.
However, regional grouping also results outflow of foreign direct investment along with inflow of foreign
direct investment. In a regional grouping all countries may not be at the same stage of economic development.
Hence, there is a possibility that more economically developed country will attract more FDI while FDI is needed
more in lesser economically developed country. The impact on FDI flow has its positive and negative sides.
(7) Terms of Trade Effect–Terms of trade means the rate at which a country’s exports are exchanged for
imports. Regional grouping results in trade creation which leads to increase in demand. Increase in demand
means more imports from non-member countries. Thus increase in demand may lead to better prices for the
products exported by third countries. This will have a beneficial effect on the terms of trade of those countries.
This, however, depends on the relative position of the exporting country–Whether is a monopoly supplier or
not, the price and income elasticity of import demand, etc.
(8) Mergers and Acquisitions–Merger is a situation where two or more firms join together and form a single
firm. Acquisition is a situation where one country takes over one or more companies. Since the size of the
regional grouping and the possible impact of integration on the prosperity of the grouping are likely to
motivate combination and consolidation there will be mergers and acquisitions. Formation of regional grouping
facilitates the cross border mergers and acquisitions, to take advantages of the large regional market.
Q. 4. Comment on the following:
(i) Global environment do not transcend national boundaries.
Ans. Global Environment–Global environment means the factors operating on worldwide basis or regional
basis. Global environment is not confined to just one country but entire world or a group of countries. Hence, the
impact of global environment is visible in a home country as well as foreign countries. Global environment consists
of following factors and forces:
(i) International economic conditions like worldwide economic recession.
(ii) International financial institutions and system like international financial liquidity or stability, International
Monetary Fund and World Bank.
(iii) International trade organization and agreements like World Trade Organization (WTO), United Nation
Conference on Trade and Development (UNCTAD), Agreement on Textiles and Clothing (ATC), Generalized
System of Preferences (GSP), International Commodity Agreements.
(iv) Regional economic groups and agreement like European Union (EU), North American Free Trade Association
(NAFTA) and Association of South East Asian Nations (ASEAN).
The various factors constituting international business environment may be shown as under:

8
 N
It is rightly said that business environment provides both constraints and opportunities. Particularly in
international business. Environments in foreign countries are different and also unfamiliar to a business firm. Some
of the constraints of foreign environment include economic conditions, customs, government regulations. Availability
of natural resources etc. International business environment provides numerous opportunities also which include
changing needs of customers and markets, technological progress etc. One of the example of a constraint is that
despite many initiatives foreign direct investment in India is not picking up like China in the country due to political
and bureaucratic reasons. One of the examples of an opportunity is that the growing demand for air-conditioners has
attracted many new comers, domestic being GE-Godrej and Kirloskar and multinationals like L.G. Electronics,
Whirlpool Electrolux etc. into the industry. Even though environmental forces can act as a sea that influence a
business organisation in many directions, it can also create opportunities for expansion and growth through the
opening of new markets, technological advances and the constant evolution of vital conditions such as demographics.
Hence, it is essential to forecast environmental conditions prior to entering into any international business agreement.
Further, business environment is dynamic and is undergoing fast and significant changes. A firm dealing in international
business has to be extremely careful in identifying the various environmental forces operating at the home country,
host country and global levels and should examine their influence on production, personnel, financial and marketing
operations of the firm.
(ii) When goods are gought by description from a seller, there is no implied condition that goods shall be
of merchantable quality.
Ans. When the goods have to be measured–According to Section 22, where there is a contract of the sale of
specific goods in a deliverable state but the seller is bound to weigh, measure, test or do some other thing with
reference to them, for ascertaining the price, the property does not pass till such act or thing is done and the buyer has
notice of it. The section is applicable only when, by contract, the seller has to do something mentioned therein.

9
 When goods are delivered on approval–According to Section 24, where goods are delivered to the buyer “On
approval” or “On sale or return” or on similar terms, the property therein passes to the buyer
(a) When he signifies his approval or acceptance to the seller
(b) When he does any act adopting the transaction, e.g. pledges the goods with a third party, or
(c) When he retains the goods without giving notice of rejection beyond the period fixed or a reasonable period
if no time is fixed.
In case of unascertained and future goods–According to Section 18, where there is a contract for sale of
unascertained goods, the property in the goods does not pass until the goods are ascertained. Until goods are ascertained,
there is merely an agreement to sell. According to Section 23, where there is a contract for the sale of unascertained
or future goods by description in a deliverable state are unconditionally appropriated to the contract, either by the
seller with the assent of the buyer or by the buyer with the assent of the seller.
Thus, there are two conditions for the transfer of property from the seller to buyer in case of unascertained
goods:
(1) Ascertainment of goods
(2) Unconditional appropriation of the goods to the contract.
(1) Ascertainment of Goods–Ascertainment is the process by which the identity of the goods to be delivered
under the contract is established and set apart. But a merely setting apart or selection by the seller of the goods which
he expects to use in performance of the contract is not enough. They must also be appropriated to the contract.
(2) Appropriation of Goods–The word “appropriation” has not been defined in the Act. It means doing

N
something with the intention of identifying or determining the goods in respect of which the ownership is to pass.
Selection of the goods with the exclusive intention of using them in performance of the contract and with the mutual
consent of the parties is called appropriation. Generally, the goods are appropriated by putting the goods in bags,
boxes, containers, bottles, casks etc.
(iii) Instability in export earnings of developing countries is not caused by demand and supply factors.
Ans. A substantial portion of foreign earnings of developing countries come from agricultural and mining products
consisting of following item:
(i) Food items
(ii) Agricultural raw materials
(iii) Ores and metals
(iv) Fuel.
In spite of serious efforts, developing countries have not been successful in promoting exports of above mentioned
items. Following are the major problems faced by developing countries in promoting their exports:
(1) Low income elasticity of demand
(2) Competition from substitutes
(3) Technological developments resulting in demand decline
(4) Growth of service sector
(5) In elasticity of supply
(6) Wide fluctuations in the prices
(7) Protectionism including subsidies and tariff and non-tariff barriers
(8) Managed trade
(9) Non-trade issues including child labour, environmental protection, arms spending, human rights record,
labour standards, good governance etc.
(10) Multinational corporation’s influence.
As a result of following factors, terms of trade of developing countries has deteriorated over years. The export
trade of many developing countries generally. lags behind that of the developed countries. Another notable point is
that the developing countries trade mores with countries outside their group than they do among themselves. Their
exports find a market in the developed countries because of the low level of activity in the other developing countries.
Further, they depend on developed countries for their capital goods and even raw materials and foodstuffs. The
developed countries enjoy the benefit of higher agricultural productivity and therefore, have become exporters of
food-stuffs. On the other hand, developing countries are facing the problem of rapid growth in their population and
rising tempo of industrialization and, therefore, have become importers of foodstuffs and raw materials. The relatively

10
greater success has been achieved by the developed countries in the formation and functioning of regional groupings
and of managed trade and the strong role played by multinationals. This has been the major factor responsible for
proportionately higher share of intra-trade in their global trade.
(iv) Services do not occupy an important place in Indian economy
Ans. Indian Perspective–Services are important in Indian economy too. Because of rapid growth share of
services in the country’s GDP has increased considerably over time. But India’s share in the World trade in services
is abnormally slow at just 0.8%. Since Indian firms enjoy considerable advantages over their competitors in several
areas, they can size a major share in world markets by evolving appropriate production and marketing strategies.
The Indian government is aware of the need to improve the provision of services, and that the investment
requirements is beyond the means available to the government. Hence, the government is looking forward to private
support. India has liberalized its FDI regime during the 1990s. Foreign equity up to 51 percent is now automatically
allowed in restaurants and hotels; support services for land and water transport; parts of renting and leasing; business
services including software; and health and medical services. The automatic approval provisions for foreign equity
is 74 percent in the case of mining services, non-conventional energy generation and distribution, land and water
transport, and storage and warehousing. The limit is 100 percent in the case of electricity generation, transmission
and distribution. However, foreign equity is limited to 49 per cent in telecommunications, 40 per cent in domestic
airlines and to 20 percent in banking services. Railway transport continues to remain among four industries reserved
for the public sector. The insurance sector has only recently been opened to the private sector.
India’s schedule under the GATS provides for specific commitments covering: business services;

N
communications; construction work for civil engineering; financial services; health-related and social services; and
tourism services. The extent of commitments varies across sectors, with certain restrictions on market access and
national treatments under the four modes of supply of services. India has not made any commitments on services
relating to: distribution; education; environment; recreation, culture and sporting; transport and other services not
included elsewhere. In all, India has made commitments in 33 activities, compared with an average of 23 for developing
countries (GATT, 1994). These commitments generally bind India’s existing policy framework, although in some
cases, the applied policy may be more liberal than the binding commitments. India has listed some MFN exemptions
under Article II of the GATS and reserves the right to offer more favourable treatment to some. WTO members in
communication, recreational and transport services. India further liberalized its commitments in basic
telecommunication services in early 1998. It is among 43 countries participating in the Information Technology
Agreement covering; computers; telecommunication equipment; semiconductors; manufacturing equipment for
semiconductor; software and scientific instruments. India has offered zero duty on 217 information-technology-
related tariff lines at the Harmonized System (HS) 6 digit level by 2005.
Q. 5. Write short-notes on the following:
(i) Intenational Legal Environment
Ans. Legal Environment of international business means the legal framework within which business firms
operate. From the point of view of business, not all legislations are relevant. Legislations defining property and
business organizations, laws of contracts and bankruptcy, mutual obligations of labour and management and laws
and regulations constraining the way business activities are carried out constitute legal environment of business.
Since different countries have different legal systems, a major problem faced by the international business firms in
which country’s laws—host country’s or home country’s or third country’s laws shall binding in case of a dispute.
Firms engaged in international business should also be aware of different modes of the settlement of trade disputes
and role of International Chambers of Commerce; Court of Arbitration, etc.
(ii) Areas of International Trade Disputes
Ans. Following are the areas of international trade disputes:
(1) When disputes arise due to passing of ownership of goods, passing of risks and on account of title of goods.
(2) When there is breach of conditions as well as warranties.
(3) Where there is misinterpretation of a particular clause in the contract.
(4) When stipulations on shipment including partnership, trans-shipment packing, labelling, marking etc. are
not complied with.
(5) When the contracting parties do not fulfil their contractual obligations resulting in a breach of contract.
(6) When time is considered as the essence of the contract but goods are not supplied within the stipulated time.

11
 (7) When the promisor expresses difficulty of performance due to some uncontemplated events, delays etc.
although he has undertaken an absolute obligation to perform the contract.
(8) When the promisor pleads his inability to perform his obligation due to failure of a third person on whom
the promisor relied for supply of goods.
(9) When the promisor pleads commercial impossibility like rising price of raw materials freight hike etc.
making exports unprofitable.
(10) When the promisor faces some unusual circumstances like strikes or lock-outs of his factory and it becomes
difficult for him to meet his commitment.
(11) When the overseas buyer wants to avoid the contractual obligations because the market for the goods has
dried up and there are no demand or he finds it difficult to locate buyers for the goods ordered.
(12) When the overseas buyer refuses to pay or delays payment of goods.
(13) When goods; as promised, not supplied according to description or when goods supplied though correspond
to the sample but does not correspond to the description which is the essence of the contract.
(14) When goods supplied are not fit for the purpose required and mentioned by the buyer and the buyer relied
on the skill and judgement of the seller for the goods and it is the sellers (exporter’s) business to deal in such goods.
(15) When goods supplied are not of merchantable quality i.e. goods do not have use value or exchange value.
(iii) The Basel Convention
Ans. The Basel Convention–A convention was held at Basel on the control of Transboundary Movements of
Hazardous Wastes and their Disposal. The basic objective of the convention is to control transboundary movements

N
of hazardous wastes and their disposal in other countries. According to the Basel Convention, the main obligations
of the parties are:
● to reduce to a minimum the generation of hazardous waste;
● to dispose of it adequately and within the territory of the country where the waste has been generated.
● to ensure that transboundary movement of hazardous waste only takes place if
(i) the State of export does not have the technical capacity and the necessary facilities to dispose of the
wastes in an environmentally sound manner,
(ii) the wastes in question are required as raw material for recycling or recovery industries in the State of
import,
(iii) the transboundary movement is in accordance with other criteria to be decided by the parties, provided
those criteria do not differ from the objectives of the Convention,
(iv) industrialized countries have an obligation to assist developing countries in technical matters related to
the management of hazardous wastes.
The Basel Convention regulates the international trade by insisting that companies wishing to export wastes
are required to notify the government of the country importing the waste or located enroute. The export of wastes
can be made only when the importing country gives its consent. The trade provisions of Basel Convention are as
under:
(i) The Basel Convention states that every country has the sovereign right to ban the import of hazardous
wastes or other wastes, and as a consequence, no state should allow any transborder movement of hazardous
wastes or other wastes to a state which his prohibited their import.
(ii) The export of hazardous wastes to a state which is not a partly to the Basel Convention and the imports
from a non-party state are prohibited, unless an agreement (establishing requirements no less environmentally
sound than the Basel Convention) is reached between parties and non-parties.
(iii) Exports of waste for disposal in Antarctica are prohibited.
(iv) Before permitting exports of wastes, the export country has to make sure that the importing country has
agreed in writing to the specific import. (prior informed consent procedure).
(iv) Application of Lex Causae to Sale of Goods
Ans. Lex Loci contractus means the law of the place where contract is made.
Export sales contract may be defined as a contract whereby the exporter (seller) transfers or agrees to transfer
the property in goods to the importer (buyer) for a price. An export sales contract should have following essentials:
(i) Two parties–exporter and importer
(ii) Transfer or agreement to transfer the goods

12
 (iii) Goods
(iv) Price
(v) All other essentials of a valid contract e.g. competence of the parties to make contract, free consent, etc.
The importer and exporter are related contractually to each other. The exporter-importer relationship becomes
legal and binding. Such contractual relationships are subject to the limits of various laws and regulations framed
there under. All domestic contracts are governed by or subject to domestic (national) commercial laws which
automatically apply to both parties. But in case of international contracts, importer and exporter belong to different
countries. In the absence of an acceptable international trade law applicable to international contracts, the national
laws apply either by express or implied choice or selection or in the absence of such choice by the law of the
principal place of business of the exporter whose performance is the characteristic of the contract. Proper Law of the
Contract (PLC) or Lex Causae is defined as the law which has been expressly or impliedly selected by the contracting
parties to govern their contractual velationship. In the absence of an express or implied choice of law. Proper Law of
the Contract or lex cause is defined as the law of the principal place of business of the exporter whose performance
is the characteristic of the contract. Let us take an example Ajay in India agrees to export (sell) goods to Kapil in
New York, the goods to bedelivered in New York and price to be paid in Delhi. Now Ajay and Kapil have a choice to
select the national law of any country for the purpose of governing their velations. If they decide to choose Indian
law, the proper law of the contract would be Indian law. Suppose they could not decide, proper law of the contract
will be governed by the importance of the performance. In this example, there are two performance–payment by the
importer and delivery of the goods. The mode approach is to give importance to the performance which is characteristic

N
of the contract. On this basis, the delivery obligation of the exporter is given more importance than the payment by
the importer which is a generalized obligation. So the relevant place of performance is New York and not Delhi.
Accordingly, proper law of the contract will be American law.
■■

13