International Business and Trade Module
International Business and Trade Module
International Business and Trade Module
There are number of political risk which are to be faced by international marketers. The risk,
which the marketers face from the last government are:
Expropriation – differs firms confiscating on that there is some compensation through not
necessarily just compensation, more often than not, a company whose property is being
expropriated agrees to sell its operation – not be choice but rather because of some explicit
or implied coercion.
Nationalization – involves government ownership and it is the government that operates the
business being taken over.
Example: Myanmar’s foreign trade is completely nationalized. In domestication,
foreign companies relinquish control and ownership either completely or partially to the
nationals. The result is that private entities are allowed to operate the confiscated or
expropriated properties.
Example: The French government after finding out that the state was not sufficiently
proficient to run the banking business, developed a plan to sell 36 French Banks.
SOCIAL UNREST
Social disorder is caused by such underlying conditions as economic hardship, internal
dissension and insurgency and ideological, religions, racial and cultural differences.
Example: Lebanon has experienced conflict among the Christians, Muslims, and
other religious group. The Hindu-Muslim conflict in India continuous unabated
A company may not be directly involved in local disputes, but its business can still be
severely disrupted by such conflicts.
The breakup of the Soviet Union should not come as a surprise. Human nature
involves monastery (the urge to stand alone) as well as systems (the urge to stand
together), and the two concepts provide alternative ways of utilizing resources to meet a
society’s needs. Monastery encourages competition, but system emphasize cooperation as
explained by Alderson “A competitive society tend to be a closed society, closure is
essential if the group is in some sense of act as one” not surprisingly China, although
wanting to modernize its economy does not follow embrace an open economy which is
likely to encourage dissension among the various groups for the sake of its own survival, a
cooperative society may have to obstruct the dissemination of new ideas and neutralize an
external group that posses a treat, China apparent has learned a lesson from the soviet
union’s experience.
ATTITUDE OF NATIONALS
An assessment of the political climate is not complete without the investigation of
the attitudes of the citizens and government of the host country, The nationals attitude
toward foreign enterprises and citizens can be quite inhospitable, nationals are often
concerned with foreigners intentions in regard to exploitation and colonialism and these
concerns are often linked to arise of local socialist or nationalist philosophies which may be
in conflict with the policy of the company’s home country government.
The greatest risk that any foreign company faces today is the instability of a government
due to the Terrorism in the country, though the government is stable in the country and is
running smoothly and efficiently. However, the threat of Terrorism in making the MNC’s to
avoid investing in a big way. It is therefore essential that Terrorism is cubed at all levels for
which the government must go all out to ensure the safety and integrity of the people and
the property of the country.
India after 1990 opened its economy to international institutions through modernization,
privatisation and globalisation. There is hope now that the economic growth of the country
will touch 6.5% of GDP as envisaged by the reserve e Bank of India Annual Report for the
year 2003-2004.
THINGS TO REMEMBER
Culture is a system of values and norms that are shared among a group of people and that
when taken together constitute a design for living.
The socio-cultural fabric is an important environmental factor that should be analyzed while
formulating business strategies. The cost of ignoring, customs, tradition, taboos and
preferences, etc. of people can be very high.
Society and culture influence every aspect of overseas business of an MNC and successful
MNC operation - whether it marketing, finance, production, or personnel. Have to be acutely
aware of the predominant attitude, feelings, and opinions in the local government. Given the
rapid pace of technological change, it is vital that firms carefully study different elements in
the Technological segments.
The major challenge facing the international marketers today are coping with change:
understanding complexity of the changing markets dealing with competition and performing
social responsibilities majority of the MNCs have to face complex political environment
problem because they must cope with the politics of morethan one nation. In order to
analyse the political scenario of the nation companies must know the type of political system
that exist in that nation. As there is a multiplicity political environment there are various legal
environment, domestic, foreign and international. The most important characteristic of the
international market environment is the economic dimension, it includes the analysis of the
world economic system development status of the countries, the purchasing power nations
and income of the population.
Culture: is the thought and behaviour patterns that member of society learns through
language and other forms of symbolic interaction their customs, habits, beliefs and values
the common viewpoints which bind them together is a social entity.
Gross National Product: it is the total value of all final goals and services produced within a
nation in a particular year.
Parliamentary Government: In this, citizens are consulted from the time to time to know their
opinions.
Purchasing Power Parity: It states that the exchange rate between one currency and
another is in equilibrium when their domestic purchasing powers at that rate of exchange
are equivalent
Religion: is one of the important social institutions influencing business. A few religions have
spread over large areas in the world.
TYPES OF MERGER
From the perspective of business structures there is a whole host of different mergers, Here
are few types distinguished by the relationship between the two companies that are
merging:
Horizontal merger – two companies that are in direct competition and share the
same product lines and market
Vertical merger – a customer and company or a supplier and company think of a
core supplier merging with an ice cream maker.
Market – extension merger two companies that sell the same product in different
markets.
Product extension merger – two companies selling different but related product in the
same market
Conglomeration – two companies that have no common business areas, there are
two types of merger that are distinguished by how the merger each has certain
implications for the companies involved and for investors.
Purchase merger – as the name suggest this kind of merger occurs when one
company purchases another. The purchase is made with cash or through the issue
of some kind of debt instrument, the sale is taxable. Acquiring companies often
prefer this kind of merger because it can provide them with Tax benefits. Acquired
assets can be written up to the actual purchase price and the difference between the
book value and the purchase price of the assets can depreciate annually reducing
taxes payable by the acquiring company.
Acquisitions – as you can see an acquisition may be only slightly different merger.
Infact, it may be different in name only. Like mergers acquisition are actions through
which companies seek economic of scale efficiencies and enhanced market visibility,
unlike all mergers all acquisition involve one firm purchasing another – there is no
exchange of stock or consolidation as a new company, acquisition are often
congenial and all parties feel satisfied with the deal. Other times acquisition are more
hostile. Regardless of their category or structure, all mergers and acquisition have
one common goal. They are all meant to create synergy that makes the value of the
combined companies greater than the sum of the two parts. The success of a
merger or acquisition depends on whether this synergy is achieved. Merger and
acquisition is often known to be a single terminology defined as a progress of
combining two or more companies together. The feet remains that the so –called
single terminologies are different terms used under different situations, Though there
is a thin line difference between the two the impact of the kind of completely different
in both cases.
Franchising – is basically a specialized form of licensing in which the franchiser not
only sells intangible property to the franchise, but also insists that the franchise
agree to abide by strict rules on how it does business the franchiser will also often
assist franchisee to run the business on an ongoing basis.
BENEFITS OF FRANCHISING
There are several benefits of franchising, the major benefits includes:
Branding – the first thing franchises often franchisees is a strategic identity that is not
only affective it has cumulative market impact, corporate brand identities are proven.
Advertising – can be one of the biggest expenses for any new business and for good
reason you can’t survive without effective advertisement and effective advertising is
expensive.
MEANING OF FDI
Foreign Direct Investment (FDI) is defined as an investment made by an investor of one
country to acquire an assets in another country with the intend to manage that assets (IMF
1993).The IMF definition of FDI includes as many as following elements, equity, capital,
reinvested earning of foreign companies, inter companies debt transaction including short-
term and long term loans, overseas commercial borrowing, non-cash acquisition of equity,
investment made by foreign venture capital investor, earning data of indirectly held FDI
enterprises, control premium, non-competition fee and so on…. Foreign investment and
technology play an important role in the economic development of a nation and have been
exploited by a number of developing countries.
Example: The economic health of transition countries in Eastern Europe, Russia and
Central Asia is smoother due to FDI. Even communist countries like China have welcomed
foreign investment to improved their economies. Government of developing nation are
attracting FDI along with the technology and management skills that accompany it. To
attract multinational companies. Government are offering tax holidays. Import duty
exemption subsidized land and power and many other incentives. FDI are supposed to
bring many benefits to the economy. They contribute to GDP, capital formation balance and
generate employment.
Foreign direct investment occurs when a firm invests directly in the facilities to
produce a product in a foreign country. It also occurs when a firm buys an existing
enterprise in a foreign country.
Liberalization is not the sole reason to attract FDI. There are many other
determinants of FDI. India may lag there like demand conditions, factor conditions,
supporting industries and firm strategy.
The benefits of FDI to a host country arise from resource –Transfer effects,
employments effects, balance of payment effects, and its ability to promote
competition.
The costs of FDI to a host country include adverse effects on competition and
balance of payments and a perceived loss of national sovereignty.
The benefits of FDI to the home (source) country include improvement in the balance
of payment are a result of the inward flow of foreign earnings, positive employment
effects when the foreign subsidiary create demand for home country exports and
benefits from a reverse resource – Transfer effect, a reverse resource – Transfer
effect arises when the foreign subsidiary learns valuable skills abroad that can be
transferred back to the home country.
The costs of FDI to the home country include adverse balance-of-payments effects
that arise from the initial capital outflow and from the export substituting effects of
FDI. Costs also arise when FDI exports jobs abroad.
Government of developing nations are attracting FDI along with the Technology and
management skills that accompany it. To attract multinational companies,
governments are offering tax holidays, import duty exemption, subsidized land and
power and many other incentives.
Drivers of Globalization
Two main factors seem to underlie the trend toward greater globalization. The first is the
decline in barriers to the free flow of goods, services, and capital that has occurred since the
end of World War II. The second factor is technological change, particularly the dramatic
developments in recent years in communication, information processing, and transportation
technologies.
During the 1920’s and 30’s, many of the nation-states of the world erected formidable
barriers to international trade and foreign direct investment. International Trade occurs when
a firm exports goods or services to consumers in another country. Foreign direct investment
occurs when a firm invests resources in business activities outside its home country. Many
of the barriers to international trade took the form of high tariffs on imports of manufactured
goods, the typical aim of such tariffs was to protect domestic industries from foreign
competition.
Having learnt from this experience, the advanced industrial nations of the West committed
themselves after World War II to removing barriers to the free flow of goods, services and
capital between nations. This goal was enshrined in the treaty known as the General
Agreement on Tariffs and Trade (GATT). It started in 1947 as a set of rules to ensure non-
discrimination transport procedures, the settlement of disputes and the participation of the
lesser-developed countries in international trade.
Globalization of Markets
The globalization of markets refers to the merging of historically distinct and separate
national markets into huge global marketplace. Falling barriers to cross-border trade have
made it easier to sell internationally. It has been argued for some time that the tastes and
preferences of consumers in different nations are beginning to converge in some global
norm, thereby helping to create a global market.
The most global markets are not marketing for consumers product – where national
differences in tastes and preferences are still often important enough to act as a brake on
globalization – but global markets for industrial goods and materials that serve a universal
need the world over. These include the markets for commodities such as aluminum, oil and
wheat, the markets for industrial products such as microprocessor, computer memory chips
and commercial jet aircraft. In many global markets, the same firms frequently confront each
other as competitors in nation after nation.
Example: Coca-Cola’s rivalry with Pepsi is a global one, as are the rivalries between Ford
and Toyota, Boeing and Airbus, Caterpillar and Komatsu. If one firm moves into a nation
that is not currently served by its rivals, those rivals are sure to follow to prevent their
competitor from grinning an advantage.
1. No direct foreign marketing: A company in this stage does not actively cultivate
customers outside national boundaries, however, the company’s product may reach
foreign marketing. Sales may be made to trading companies as well as foreign
customers who come directly to the firm or products may reach foreign markets via
domestic wholesalers or distributors who sell abroad without explicit encouragement
or even knowledge of the producer. As companies develop websites on the Internet,
many receive orders from international web surfers.
2. Infrequent foreign marketing: Temporary surpluses caused by variations in
production levels on demand may result in infrequent marketing overseas. the
surpluses are characterized by their temporary nature, therefore, sales to foreign
markets are made as goods are available, with little or no intention of maintaining
continuous market representation.
3. Regular foreign marketing: At this level, the firm has permanent productive capacity
devoted to the production of goods to be marketed in foreign markets. A firm may
employ foreign or domestic overseas middlemen to it may have its own sales force
or sales subsidiaries in important foreign markets. The primary focus on operations
and production is to service domestic market needs. However as overseas demand
grows production is allocated for foreign markets.
4. International Marketing: Companies in this stage are fully committed and involved in
international marketing activities, such companies seek markets all over the world
and sell products that are a result of planned production for markets in various
countries, this generally entails not only the marketing but also the production of
goods outside the home market. At this point, a company becomes an international
or multinational marketing firm.
5. Global marketing: At the global marketing level, the most profound change is the
orientation of the company toward markets and associated planning activities. At this
stage, companies treat the world, including their home market, as one market.
Market segmentation decisions are no longer focused on national borders. Instead,
market segments are defined by income levels usage patterns or other factors that
often spam countries and regions. Often, this transition international marketing to
global marketing is catalyzed by a company’s crossing the threshold of rare than half
its sales revenue coming from abroad.
WTO and Inequalities
Multilateral trade has not yielded the desired results in respect of least developing countries
(LDC’s) and the developing countries due to years of economic exploitation suffered by
them. One important objective of the WTO is to reduce inequalities by giving smaller
countries more voice. Unfortunately, these countries are still at the receiving end, despite
various ministerial meetings starting with the 1986 Uruguay Round to the latest Doha Meet.
It is time LDCs and developing countries got more favorable treatment from the advanced
nations. In fact, developed countries should realize that, by doing so, they are not conferring
any favor on LDCs, but rather mitigating the hardships being inflicted upon them.
The so-called developed countries expect other countries to come to discussion table with
an assurance that they will reduce their subsidies. Why cannot the developed countries
come forward to do the same in the interest of prior countries, which constitute the majority
membership in the WTO?
The irony is, majority makes no authority in WTO deliberations as LDCs and developing
countries are not in a position to assert their position diplomatically or get issues focused in
their favor.
Objective of WTO
In its preamble, the agreement establishing the World Trade Organization reiterates the
objectives of GATT. These are raising standards of living and incomes, ensuring full
employment, expanding production and trade and optimal use of the world’s resources. The
preamble extends these objectives to services and make them more precise.
According to WTO all the signatory countries are given the most favored nations (MFN)
status that these countries have market access to each other’s, trading areas. India has
already given a most favored nation status to Pakistan. However, Pakistan has not so far
reciprocated. India in any case, is not going to suffer because of the acrimonious attitude of
Pakistan.
Its highest authority – the ministerial conference – dominates the structure of the WTO. This
body is composed of representatives of all the WTO members. It meets at least every two
years and is empowered to make decisions on all matters under any of the multilateral trade
agreements.
The day-to-day work of the WTO is entrusted to a number of subsidiary bodies, principally,
the General Council, also composed of all WTO members, which is required to report to the
Ministerial Conference. The General Council also convenes in two particular forms – as the
Dispute Settlement Body and the Trade Policy Review Body. The former overseas the
dispute settlement procedure and the latter conducts regular reviews of trade policies of
individual WTO members.
The General Council delegates responsibility to three other bodies namely the Council for
Trade in Goods, Trade in Services and Trade-Related Aspects on Intellectual Property
Rights (TRIPS). The Council of Goodsoverseas the implementation and functioning of all
the agreements covering Trade in Goods, things many such agreements have their own
specific overseeing bodies. The latter two council have responsibility for their respective
WTO agreements and may establish their own subsidiary bodies as necessary.
The Ministerial Conference reports to the General Council which delegates responsibility to
three other bodies as mentioned above. The Committee on Trade and Development is
concerned with issues relating to the developing countries and especially to the “least
Developed” among them. The Committee on Balance of Payments is responsible for
consultations among WTO members and countries which resort to trade and restrictive
measures in order to cope with their balance of payments difficulties. Finally, a Committee
on Budget, Finance and Administration deals with issues relating to WTO’s financing and
budget. Each of the plurilateral agreement of the WTO – those on civil aircraft, government
procurement, diary products and bovine meat – establish their own management bodies
which are required to report to the General Council.
The WTO secretariat is located in Geneva. It has 155 members and is headed by its
Director General SupachiPanitchpakdi and four deputy directors. Its responsibilities include
the servicing of WTO delegate bodies with respect to negotiations and the implementation
of agreements. It has particular responsibility to provide technical support to developing
countries, and especially the least developed countries. WTO economists and statisticians
provide trade performance and trade policy analysis while its legal staff assists in the
resolution of trade disputes involving the interpretation of WTO rules and precedents. Other
secretariat work is concerned with accession negotiations for new members and providing
advice to governments considering membership.
Most WTO members were previously by GATT members who signed the final Act of the
Uruguay Round and concluded their market access negotiations on goods and services by
the Marrakech meeting in 1994. A few countries which joined the GATT later in 1994.
Signed the final act and concluded negotiations in their goods and services schedules, and
became WTO members. Other countries that had participated in the Uruguay Round
negotiations concluded their domestic ratification procedures only during the course of 1995
and became members thereafter.
Aside from these agreements, which related to “original” WTO membership, any other state
on customs territory having full autonomy in the conduct of its trade policies may accede to
the WTO on terms agreed with WTO members.
In the first stage of the accession procedures, the applicant government is required to
provide the WTO with a memorandum covering all aspects of its trade and economic
policies having a bearing on WTO agreements. This memorandum becomes the basis for a
detailed examination of the accession request in a working party.
Along side the working party’s efforts, the applicant government engages in bilateral
negotiations with interested members governments to establish its concessions and
commitments on goods and its commitments on services.
This bilateral process, among other things, determines the specific benefits for WTO
members in permitting the applicant to accede. Once both, the examination of the
applicant’s trade regime and market access negotiations, are complete the working party
draws up basic terms of accession.
Finally, the results of the working party’s deliberations contained on its report, a draft
protocol of accession, and the agreed schedules resulting from the bilateral negotiations are
presented to the General Council on the ministerial conference for adoptions. If a two-thirds
majority of WTO members vote in favor, the applicant is free to sign the protocol and to
accede the organization when necessary, after ratification in its national parliament or
legislative.
TEST I: State whether the following statement is True of False. If the answer is False, write
the word to make it correct. Write your answer on the blank provided before the number.
__________1. Foreign direct investment occurs when a firm invests resources in business
activities outside its home country.
__________4. The director general of the WTO is the highest authority of the WTO that can
dominates the structure of such.
__________5. To become a member of the WTO, new membering countries must have to
sign the Act of the Uruguay Round.
__________6. The ministerial conference is the top decision-making body of the World
Trade Organization.
__________7. The GATT, is a multilateral treaty among membering countries that lays
down agreed rules for conducting international trade.
1. Through society and culture do not appear to be a part of business situations, yet
they are actually key elements in showing how business activities being conducted.
Discuss.
2. Discuss the key economic issues that influence international business.
3. Why is it difficult for a marketer to position products in a culturally diverse nation like
India?
4. The development of new technologies helped international business. Do you agree?
Justify your answer.
5. Explain Globalization.
6. Why do companies engage in International Business?
7. Describe the structure of WTO in detail, also state the functions of WTO.
8. Explain the concept of most favoured rating.
III – Video Presentation (send to [email protected])
Make a video presentation of you: (assuming that you are in International Business,
promote your product(s) as well how to use strategies and techniques.