Q.1 What is WTO? What is GATT? Explain both.

[10 Marks]

Answers:

The World Trade Organization (WTO) is an organization that intends to supervise

and liberalize international trade. The organization officially commenced on January 1,
1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and
Trade (GATT), which commenced in 1948. The organization deals with regulation of trade
between participating countries; it provides a framework for negotiating and formalizing
trade agreements, and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements which are signed by representatives of member
governments and ratified by their parliaments. Most of the issues that the WTO focuses on
derive from previous trade negotiations, especially from the Uruguay Round (1986–1994).

The organization is currently endeavoring to persist with a trade negotiation called

the Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance
equitable participation of poorer countries which represent a majority of the world's
population. However, the negotiation has been dogged by "disagreement between
exporters of agricultural bulk commodities and countries with large numbers of subsistence
farmers on the precise terms of a 'special safeguard measure' to protect farmers from
surges in imports. At this time, the future of the Doha Round is uncertain."

The WTO has 153 members, representing more than 97% of total world trade and
30 observers, most seeking membership. The WTO is governed by a ministerial
conference, meeting every two years; a general council, which implements the
conference's policy decisions and is responsible for day-to-day administration; and a
director-general, who is appointed by the ministerial conference. The WTO's headquarters
is at the Centre William Rappard, Geneva, Switzerland.

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 Among the various functions of the WTO, these are regarded by analysts as the
most important:

It oversees the implementation, administration and operation of the covered

agreements.

It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national trade policies,
and to ensure the coherence and transparency of trade policies through surveillance in
global economic policy-making. Another priority of the WTO is the assistance of
developing, least-developed and low-income countries in transition to adjust to WTO rules
and disciplines through technical cooperation and training.

The WTO is also a center of economic research and analysis: regular assessments
of the global trade picture in its annual publications and research reports on specific topics
are produced by the organization. Finally, the WTO cooperates closely with the two other
components of the Bretton Woods system, the IMF and the World Bank

The WTO establishes a framework for trade policies; it does not define or specify
outcomes. That is, it is concerned with setting the rules of the trade policy games. Five
principles are of particular importance in understanding both the pre-1994 GATT and the
WTO:

Non-Discrimination. It has two major components: the most favoured nation (MFN)
rule, and the national treatment policy. Both are embedded in the main WTO rules on
goods, services, and intellectual property, but their precise scope and nature differ across
these areas. The MFN rule requires that a WTO member must apply the same conditions
on all trade with other WTO members, i.e. a WTO member has to grant the most favorable
conditions under which it allows trade in a certain product type to all other WTO members.
"Grant someone a special favour and you have to do the same for all other WTO
members." National treatment means that imported goods should be treated no less
favorably than domestically produced goods (at least after the foreign goods have entered

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the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical
standards, security standards et al. discriminating against imported goods).

Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise
because of the MFN rule, and a desire to obtain better access to foreign markets. A related
point is that for a nation to negotiate, it is necessary that the gain from doing so be greater
than the gain available from unilateral liberalization; reciprocal concessions intend to
ensure that such gains will materialize.

Binding and enforceable commitments. The tariff commitments made by WTO

members in a multilateral trade negotiation and on accession are enumerated in a schedule
(list) of concessions. These schedules establish "ceiling bindings": a country can change its
bindings, but only after negotiating with its trading partners, which could mean
compensating them for loss of trade. If satisfaction is not obtained, the complaining country
may invoke the WTO dispute settlement procedures.

Transparency. The WTO members are required to publish their trade regulations, to
maintain institutions allowing for the review of administrative decisions affecting trade, to
respond to requests for information by other members, and to notify changes in trade
policies to the WTO. These internal transparency requirements are supplemented and
facilitated by periodic country-specific reports (trade policy reviews) through the Trade
Policy Review Mechanism (TPRM).The WTO system tries also to improve predictability and
stability, discouraging the use of quotas and other measures used to set limits on quantities
of imports.

Safety valves. In specific circumstances, governments are able to restrict trade.

There are three types of provisions in this direction: articles allowing for the use of trade
measures to attain no economic objectives; articles aimed at ensuring "fair competition";
and provisions permitting intervention in trade for economic reasons. Exceptions to the
MFN principle also allow for preferential treatment of developed countries, regional free
trade areas and customs unions

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 The General Agreement on Tariffs and Trade (typically abbreviated GATT) was
negotiated during the UN Conference on Trade and Employment and was the outcome of
the failure of negotiating governments to create the International Trade Organization (ITO).
GATT was signed in 1947 and lasted until 1993, when it was replaced by the World Trade
Organization in 1995. The original GATT text (GATT 1947) is still in effect under the WTO
framework, subject to the modifications of GATT 1994. In 1993, the GATT was updated
(GATT 1994) to include new obligations upon its signatories. One of the most significant
changes was the creation of the World Trade Organization (WTO). The 75 existing GATT
members and the European Communities became the founding members of the WTO on 1
January 1995. The other 52 GATT members rejoined the WTO in the following two years
(the last being Congo in 1997). Since the founding of the WTO, 21 new non-GATT
members have joined and 29 are currently negotiating membership. There are a total of
153 member countries in the WTO. The original GATT member, Syria and the SFR
Yugoslavia has not rejoined the WTO. Since FR Yugoslavia, (renamed to Serbia and
Montenegro and with membership negotiations later split in two), is not recognized as a
direct SFRY successor state; therefore, its application is considered a new (non-GATT)
one. The General Council of WTO, on 4 May 2010, agreed to establish a working party to
examine the request of Syria for WTO membership. The contracting parties who founded
the WTO ended official agreement of the "GATT 1947" terms on 31 December 1995.
Serbia and Montenegro are in the decision stage of the negotiations and are expected to
become the newest members of the WTO in 2012 or in near future. Whereas GATT was a
set of rules agreed upon by nations, the WTO is an institutional body. The WTO expanded
its scope from traded goods to trade within the service sector and intellectual property
rights. Although it was designed to serve multilateral agreements, during several rounds of
GATT negotiations (particularly the Tokyo Round) plurilateral agreements created selective
trading and caused fragmentation among members. WTO arrangements are generally a
multilateral agreement settlement mechanism of GATT.

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Q.2 What is MNC? Explain the 3 stages of evolution. [10 Marks]

Answers:

A multinational corporation (MNC) or enterprise (MNE), is a corporation or an

enterprise that manages production or delivers services in more than one country. It can
also be referred to as an international corporation. The International Labour Organization
(ILO) has defined an MNC as a corporation that has its management headquarters in one
country, known as the home country, and operates in several other countries, known as
host countries.

The Dutch East India Company was the first multinational corporation in the world
and the first company to issue stock. It was also arguably the world's first megacorporation,
possessing quasi-governmental powers, including the ability to wage war, negotiate
treaties, coin money, and establish colonies.

The first modern multinational corporation is generally thought to be the East India
Company. Many corporations have offices, branches or manufacturing plants in different
countries from where their original and main headquarters is located.

Some multinational corporations are very big, with budgets that exceed some
nations' GDPs. Multinational corporations can have a powerful influence in local
economies, and even the world economy, and play an important role in international
relations and globalization.

It may seem strange that a corporation can decide to do business in a different

country, where it does not know the laws, local customs or business practices. Why is it not
more efficient to combine assets of value overseas with local factors of production at lower
costs by renting or selling them to local investors?

One reason is that the use of the market for coordinating the behaviour of agents
located in different countries is less efficient than coordinating them by a multinational
enterprise as an institution. The additional costs caused by the entrance in foreign markets
are of less interest for the local enterprise. According to Hymer, Kindleberger and Caves,
the existence of MNCs is reasoned by structural market imperfections for final products. In

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Hymer's example, there are considered two firms as monopolists in their own market and
isolated from competition by transportation costs and other tariff and non-tariff barriers. If
these costs decrease, both are forced to competition; which will reduce their profits. The
firms can maximize their joint income by a merger or acquisition, which will lower the
competition in the shared market. Due to the transformation of two separated companies
into one MNE the pecuniary externalities are going to be internalized. However, this does
not mean that there is an improvement for the society.

This could also be the case if there are few substitutes or limited licenses in a
foreign market. The consolidation is often established by acquisition, merger or the vertical
integration of the potential licensee into overseas manufacturing. This makes it easy for the
MNE to enforce price discrimination schemes in various countries. Therefore Hymer
considered the emergence of multinational firms as "an (negative) instrument for restraining
competition between firms of different nations".

Market imperfections had been considered by Hymer as structural and caused by

the deviations from perfect competition in the final product markets. Further reasons are
originated from the control of proprietary technology and distribution systems, scale
economies, privileged access to inputs and product differentiation. In the absence of these
factors, market are fully efficient. The transaction costs theories of MNEs had been
developed simultaneously and independently by McManus (1972), Buckley & Casson
(1976) Brown (1976) and Hennart (1977, 1982). All these authors claimed that market
imperfections are inherent conditions in markets and MNEs are institutions that try to
bypass these imperfections. The imperfections in markets are natural as the neoclassical
assumptions like full knowledge and enforcement do not exist in real markets

Three Stages of Evolution

(i) initial inquiries result in first exports.

Export Stage (ii) Initially, firms rely on export agents. expansion of export sales
(iii) foreign sales branch or assembly operations are established
(to save transport cost)

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 Why?
(i) There is a limit to foreign exports, due to tariffs, quotas and
transportation costs.
Foreign production (ii) Wage rates may be lower in LDCs.
stage (iii) Environmental regulations may be lax in LDCs (e.g., China).
Itai-Itai disease in Japan since the 1920s was caused by cadmium
poisoning. Contaminated effluents flowed into rice paddies and
water source.) Watch the movie, Erin Brochovich.
(iv) meet Consumer demands in the foreign countries

DFI versus Licensing

Once the firm chooses foreign production as a method of
delivering goods to foreign markets, it must decide whether to
establish a foreign production subsidiary or license the technology
to a foreign firm.

Licensing is usually first experience (because it is easy)

e.g.: Kentucky Fried Chicken in the U.K.

Licensing does not require any capital expenditure
Licensing Financial risk is zero.
royalty payment = a fixed % of sales
Problem: the mother firm cannot exercise any managerial control
over the licensee (it is independent)
The licensee may transfer industrial secrets to other independent
firms, thereby creating rivals.

It requires the decision of top management because it is a critical

step.
(i) it is risky (lack of information, large capital requirement)
US firms tend to establish subsidiaries in Canada first. Singer
Manufacturing Company established its foreign plants in Scotland
Direct Investment and Australia in the 1850s.
(ii) plants are established in several countries
(iii) licensing is switched from independent producers to its
subsidiaries.
(iv) export continues (exports and FDI may be substitues or
complements)

The company becomes a multinational enterprise when it begins to

Multinational Stage plan, organize and coordinate production, marketing, R&D,
financing, and staffing.
For each of these operations, the firm must find the best location.

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 A company whose foreign sales are 25% or more of total sales.
This ratio is high for small countries, but low for large countries,
e.g. Nestle (98%: Dutch), Phillips (94%: Swiss).
Examples: Manufacturing MNCs
How to tell whether a
24 of top fifty firms are located in the U.S.
firm is multinational?
9 in Japan
Rule of Thumb
6 in Germany.
Petroleum companies: 6/10 located in the U.S.
Food/Restaurant Chains. 10/10 are headquartered in the U.S.
US Multinational Corporations: Exxon, GM, Ford, etc.

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Q.3 Mention the differences between currency markets and exchange rate markets in the
context of international business environment. [10 Marks]

Answers:

The currency markets - also called foreign exchange or forex - are the largest in the
world. Regardless of economic conditions, when one currency falls, another must rise. So
there are always opportunities to make money - and it’s becoming easier to trade.

The currency market includes the Foreign Currency Market and the Euro-currency
Market. The Foreign Currency Market is virtual. There is no one central physical location
that is the foreign currency market. It exists in the dealing rooms of various central banks,
large international banks, and some large corporations. The dealing rooms are connected
via telephone, computer, and fax. Some countries co-locate their dealing rooms in one
center. The Euro-currency Market is where borrowing and lending of currency takes place.
Interest rates for the various currencies are set in this market.

Trading on the Foreign Exchange Market establishes rates of exchange for

currency. Exchange rates are constantly fluctuating on the forex market. As demand rises
and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous
rate quotes are available from a service provided by Reuters. A rate of exchange for
currencies is the ratio at which one currency is exchanged for another.

The foreign exchange market has no regulation, no restrictions or overseeing board.

Should there be a world monetary crisis in this market; there is no mechanism to stop
trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange
trading. In their "Guidelines for Foreign Exchange Trading", they outline 50 best practices
for trading on the forex market.

Spot Exchange

The spot exchange is the simplest contract. A spot exchange contract identifies two
parties, the currency they are buying or selling and the currency they expect to receive in
exchange. The currencies are exchanged at the prevailing spot rate at the time of the

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contract. The spot rate is constantly fluctuating. When a spot exchange is agreed upon, the
contract is defined to be executed immediately. In reality, a series of confirmations occurs
between the two parties. Documentation is sent and received from both parties detailing the
exchange rate agreed upon and the amounts of currency involved. The funds actually
move between banks two days after the spot transaction is agreed upon.

Forward Exchange

The forward exchange contract is similar to the spot exchange. However, the time
period of the contract is significantly longer. These contracts use a forward exchange rate
that differs from the spot rate. The difference between the forward rate and the spot rate
reflects the difference in interest rates between the two currencies. This prevents an
opportunity for arbitrage. If the rates did not differ, there would be a profit difference in the
currencies. That is, investing in one currency for a year and then selling it should be the
same profit or loss as setting up a forward contract at the forward rate one year in the
future. Investing in one currency would be more profitable than investing in the other. Thus
there would exist an opportunity for arbitrage. Forward exchange contracts are settled at a
specified date in the future. The parties exchange funds at this date. Forward contracts are
typically custom written between the party needing currency and the bank, or between
banks.

Currency Futures and Swap Transactions

Currency futures are standardized forward contracts. The amounts of currency, time
to expiry, and exchange rates are standardized. The standardized expiry times are specific
dates in March, June, September, and December. These futures are traded on the Chicago
Mercantile Exchange (CME). Futures give the buyer an option of setting up a contract to
exchange currency in the future. This contract can be purchased on an exchange, rather
than custom negotiated with a bank like a forward contract.

A currency swap is an agreement to two exchanges in currency, one a spot and one
a forward. An immediate spot exchange is executed, followed later by a reverse exchange.
The two exchanges occur at different exchange rates. It is the difference in the two

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exchange rates that determines the swap price. There is also something called a currency
swap. This is a method to exchange an income stream of one currency for another.

Currency Options

A currency option gives the holder the right, but not the obligation, either to buy (call)
from the option writer, or to sell (put) to the option writer, a stated quantity of one currency
in exchange for another at a fixed rate of exchange, called the strike price. The options can
be American, which allows an option to be exercised until a fixed day, called the day of
expiry, or European, which allows exercise only on the day of expiry, not before. The option
holder pays a premium to the option writer for the option.

The option differs from other currency contracts in that the holder has a choice, or
option, of whether they will exercise it or not. If exchange rates are more favorable than the
rate guaranteed by the option when the holder needs to exchange currency, they can
choose to exchange the currency on the spot exchange rather than use the option. They
lose only the option premium. Options allow holders to limit their risk of exposure to
adverse changes in the exchange rates.

Hedging

It is also common for currency options to be used to hedge cash positions.

Companies are not typically in the business of gambling with their profits on deals. It is in
the company's best interest to lock in an exchange rate they can count on. They are
motivated to insure that their profits are as expected. Two ways they might do this are to
enter forward contracts or to buy options.

They would select an exchange rate that would be acceptable but not too expensive.
They might choose to buy a slightly out-of-the-money call option to cover them if the
currency exchange rate falls. If it stays the same or rises, they will exchange at the spot
exchange rate at the time the payment is due. The exchange rates (also known as the
foreign-exchange rate, forex rate or FX rate) between two currencies specify how much
one currency is worth in terms of the other. It is the value of a foreign nation’s currency in
terms of the home nation’s currency. For example an exchange rate of 91 Japanese yen

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(JPY, ¥) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD
1. The foreign exchange market is one of the largest markets in the world. By some
estimates, about 3.2 trillion USD worth of currency changes hands every day.

The spot exchange rate refers to the current exchange rate. The forward exchange
rate refers to an exchange rate that is quoted and traded today but for delivery and
payment on a specific future date.

An exchange system quotation is given by stating the number of units of "quote

currency" (price currency, payment currency) that can be exchanged for one unit of "base
currency" (unit currency, transaction currency). For example, in a quotation that says the
EUR/USD exchange rate is 1.2290 (1.2290 USD per EUR, also known as EUR/USD; see
foreign exchange market), the quote currency is USD and the base currency is EUR.

There is a market convention that determines which is the base currency and which
is the term currency. In most parts of the world, the order is: EUR – GBP – AUD – NZD –
USD – others. Thus if you are doing a conversion from EUR into AUD, EUR is the base
currency, AUD is the term currency and the exchange rate tells you how many Australian
dollars you would pay or receive for 1 euro. Cyprus and Malta which were quoted as the
base to the USD and others were recently removed from this list when they joined the euro.
In some areas of Europe and in the non-professional market in the UK, EUR and GBP are
reversed so that GBP is quoted as the base currency to the euro. In order to determine
which is the base currency where both currencies are not listed (i.e. both are "other"),
market convention is to use the base currency which gives an exchange rate greater than
1.000. This avoids rounding issues and exchange rates being quoted to more than 4
decimal places. There are some exceptions to this rule e.g. the Japanese often quote their
currency as the base to other currencies.

Quotes using a country's home currency as the price currency (e.g., EUR 0.735342 = USD
1.00 in the euro zone) are known as direct quotation or price quotation (from that country's
perspective) and are used by most countries.

Quotes using a country's home currency as the unit currency (e.g., EUR 1.00 = USD
1.35991 in the euro zone) are known as indirect quotation or quantity quotation and are
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used in British newspapers and are also common in Australia, New Zealand and the
eurozone.

• direct quotation: 1 foreign currency unit = x home currency units

• indirect quotation: 1 home currency unit = x foreign currency units

Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or
becoming more valuable) then the exchange rate number decreases. Conversely if the
foreign currency is strengthening, the exchange rate number increases and the home
currency is depreciating.

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Q.4 a) Explain the role of privatization in international business. [05 Marks]

Answers:

Privatization is the transfer of government owned assets to the private sector. As a

result of changing economic policies, privatization took place at a significant pace around
the world during the last decade of the 20th century. Ranging from the desire to downsize
government in developed countries, to the demise of communism in Eastern and Central
Europe, and to the opening of the economies of various Latin American countries,
privatization has significant direct and indirect effects on international business and
international law.

Reasons for privatization vary and depend on the history, politics, and needs of each
country involved. It is helpful, however, to look at whether a country is developed or
undeveloped. In addition, its history as a capitalistic, communist, or closed economy affects
the decision to privatize.

Although privatization is most frequently discussed with respect to developing

countries, it is also taking place in developed, democratic, market-oriented countries.
Privatization was conceived by Great Britain's Thatcher government, and it has many
advocates in other developed countries such as the United States. In the United States,
privatization is seen as a mechanism to be used to "downsize" government, cut costs for
government, cut taxes for citizens, and promote balanced government budgets. Thus, in
the United States, on a federal level, there is pressure on government from some parties
(not including environmentalists) to sell oil drilling rights to federal lands and on offshore
fields. In addition, there are proposals that the federally run air traffic control system be
privatized. On the state and local levels, in some states and municipalities there has been
privatization of garbage collection, health care, and ambulance services, usually under
contracts between the government and a privately owned business. In some states, the
government contracts to place prisoners in privately owned and operated detention
facilities. Schools have been another target for privatization in the 1990s. Demand for
spaces in public schools decreases when government-subsidized vouchers are given to
students who, in turn, use them at private schools. Or, for example, privately run charter
schools in Michigan receive government funding under the theory that they can provide
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more choice and better education to students than that which is offered through the public
schools.

In developing countries, privatization is creating unprecedented opportunities for

investment by businesses and businesspeople from around the world including, but not
limited to, those based in the United States. In formerly communist countries of Eastern
and Central Europe, conversion to a market-based economy, with privately owned and
operated businesses, has resulted in massive privatization programs. There are multiple
benefits of such privatization, including the following eight. First, sale of government-owned
businesses can generate cash for the government. Second, following sale of an
unprofitable business, the government can discontinue subsidies to it. A third, related
benefit is that the government gets rid of inefficient labor and "hidden" unemployment.
Communist governments were obliged to retain nonproductive workers and operate
inefficient facilities in order to provide employment, but privately owned businesses have
incentives and opportunities to release nonproductive workers. Fourth, privatized
businesses can provide employment for workers released from inefficient state-owned
businesses. Fifth, privatized businesses can become tax-paying entities, which, in turn,
generate sorely needed funds for local and national governments. Sixth, privatized
businesses promote competition. Seventh, as government-owned monopolies are
privatized and competition increases, the public gains access to higher quality goods and
services at lower prices. Eighth, privatization can facilitate foreign investment and trade.
(Or, in the alternative, through laws allowing the sale of formerly government owned
businesses, privatization can be used to promote domestic investment and restrict the
inflow of foreign business.)

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Q.4 b) Mention the relevance of these international commercial terms: FCA, EXW, DES,
CIF and DDP . [05 Marks]

Answers:

Free Carrier (named places)

The seller hands over the goods, cleared for export, into the custody of the first
carrier (named by the buyer) at the named place. This term is suitable for all modes of
transport, including carriage by air, rail, road, and containerised / multi-modal sea transport.
This is the correct "freight collect" term to use for sea shipments in containers, whether LCL
(less than container load) or FCL (full container load). The FCA has attained some
credibility, by e.g. taking part in public drug policy discussions and debates, and
occacionally co-operating governmental health sector organisations as well as with other
harm reduction groups. However, a long-standing problem for the association has been
that it is not always taken seriously, and instead is dismissed by many as a "bunch of
drugged-out hippies".

EXW – Ex Works (named place)

The seller makes the goods available at his premises. The buyer is responsible for
all charges.

This trade term places the greatest responsibility on the buyer and minimum obligations on
the seller. The Ex Works term is often used when making an initial quotation for the sale of
goods without any costs included.

EXW means that a seller has the goods ready for collection at his premises (Works,
factory, warehouse, plant) on the date agreed upon.

The buyer pays all transportation costs and also bears the risks for bringing the goods to
their final destination.

Delivered Ex Ship (named port)

Where goods are delivered ex ship, the passing of risk does not occur until the ship
has arrived at the named port of destination and the goods made available for unloading to
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the buyer. The seller pays the same freight and insurance costs as he would under a CIF
arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but
also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the
goods and any duties, taxes, etc… are for the Buyer. A commonly used term in shipping
bulk commodities, such as coal, grain, dry chemicals - - - and where the seller either owns
or has chartered, their own vessel.

CIF stands for A trade term requiring the seller to arrange for the carriage of goods
by sea to a port of destination, and provide the buyer with the documents necessary to
obtain the goods from the carrier. Contracts involving international transportation often
contain abbreviated trade terms that describe matters such as the time and place of
delivery, payment, when the risk of loss shifts from the seller to the buyer and who pays the
costs of freight and insurance. The most commonly known trade terms are Incoterms,
published by the International Chamber of Commerce (ICC). These are often identical in
form to domestic terms (such as the American Uniform Commercial Code), but have
different meanings. As a result, parties to a contract must expressly indicate the governing
law of their terms.

It's important to realize that because this is a legal term, its exact definition is much
more complicated and differs by country. Contact an international trade lawyer before using
any trade term.

Delivered Duty Unpaid (named destination place)

This term means that the seller delivers the goods to the buyer to the named place
of destination in the contract of sale. The goods are not cleared for import or unloaded from
any form of transport at the place of destination. The buyer is responsible for the costs and
risks for the unloading, duty and any subsequent delivery beyond the place of destination.
However, if the buyer wishes the seller to bear cost and risks associated with the import
clearance, duty, unloading and subsequent delivery beyond the place of destination, then
this all needs to be explicitly agreed upon in the contract of sale.

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Q.5 Give short notes on Letter of credit and Bill of Lading [10 Marks]

Answers:

A standard, commercial letter of credit (LC) is a document issued mostly by a

financial institution, used primarily in trade finance, which usually provides an irrevocable
payment undertaking.

The letter of credit can also be source of payment for a transaction, meaning that
redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for deals between a supplier in one
country and a customer in another. In such cases the International Chamber of Commerce
Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest
version). They are also used in the land development process to ensure that approved
public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a
letter of credit are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is a client.
Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without
prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In
executing a transaction, letters of credit incorporate functions common to giros and
Traveler's cheques. Typically, the documents a beneficiary has to present in order to
receive payment include a commercial invoice, bill of lading, and documents proving the
shipment was insured against loss or damage in transit.

A bill of lading (BL - sometimes referred to as BOL or B/L) is a document issued by a

carrier to a shipper, acknowledging that specified goods have been received on board as
cargo for conveyance to a named place for delivery to the consignee who is usually
identified. A through bill of lading involves the use of at least two different modes of
transport from road, rail, air, and sea. The term derives from the verb "to lade" which
means to load a cargo onto a ship or other form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading
is evidence of the contract of carriage of goods and it serves a number of purposes:

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It is evidence that a valid contract of carriage, or a chartering contract, exists, and it may
incorporate the full terms of the contract between the consignor and the carrier by
reference (i.e. the short form simply refers to the main contract as an existing document,
whereas the long form of a bill of lading (connaissement intégral) issued by the carrier sets
out all the terms of the contract of carriage);

It is a receipt signed by the carrier confirming whether goods matching the contract
description have been received in good condition (a bill will be described as clean if the
goods have been received on board in apparent good condition and stowed ready for
transport); and

It is also a document of transfer, being freely transferable but not a negotiable

instrument in the legal sense, i.e. it governs all the legal aspects of physical carriage, and,
like a cheque or other negotiable instrument, it may be endorsed affecting ownership of the
goods actually being carried. This matches everyday experience in that the contract a
person might make with a commercial carrier like FedEx for mostly airway parcels, is
separate from any contract for the sale of the goods to be carried; however, it binds the
carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the
goods, may be at a specific moment.

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Q.6 Discuss the entry methods in international business with relevant examples.

[10 Marks]

Answers:

A mode of entry into an international market is the channel which your organization
employs to gain entry to a new international market. This lesson considers a number of key
alternatives, but recognizes that alteratives are many and diverse. Here you will be
consider modes of entry into international markets such as the Internet, Exporting,
Licensing, International Agents, International Distributors, Strategic Alliances, Joint
Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider
the Stages of Internationalization.

It is worth noting that not all authorities on international marketing agree as to which
mode of entry sits where. For example, some see franchising as a stand alone mode, whilst
others see franchising as part of licensing. In reality, the most important point is that you
consider all useful modes of entry into international markets - over and above which
pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view.

The Internet

The Internet is a new channel for some organizations and the sole channel for a
large number of innovative new organizations. The eMarketing space consists of new
Internet companies that have emerged as the Internet has developed, as well as those pre-
existing companies that now employ eMarketing approaches as part of their overall
marketing plan. For some companies the Internet is an additional channel that enhances or
replaces their traditional channel(s). For others the Internet has provided the opportunity for
a new online company. More

Exporting

There are direct and indirect approaches to exporting to other nations. Direct
exporting is straightforward. Essentially the organization makes a commitment to market
overseas on its own behalf. This gives it greater control over its brand and operations
overseas, over an above indirect exporting. On the other hand, if you were to employ a
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home country agency (i.e. an exporting company from your country - which handles
exporting on your behalf) to get your product into an overseas market then you would be
exporting indirectly. Examples of indirect exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics
of another business.

Export Management Houses (EMHs) that act as a bolt on export department for your
company. They offer a whole range of bespoke or a la carte services to exporting
organizations.

Consortia are groups of small or medium-sized organizations that group together to

market related, or sometimes unrelated products in international markets.

Trading companies were started when some nations decided that they wished to
have overseas colonies. They date back to an imperialist past that some nations might
prefer to forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist
as mainstream businesses that use traditional business relationships as part of their
competitive advantage.

Licensing

Licensing includes franchising, Turnkey contracts and contract manufacturing.

Licensing is where your own organization charges a fee and/or royalty for the use of its
technology, brand and/or expertise.

Franchising involves the organization (franchiser) providing branding, concepts, expertise,

and infact most facets that are needed to operate in an overseas market, to the franchisee.
Management tends to be controlled by the franchiser. Examples include Dominos Pizza,
Coffee Republic and McDonald's Restaurants.

Turnkey contracts are major strategies to build large plants. They often include a the
training and development of key employees where skills are sparse - for example, Toyota's
car plant in Adapazari, Turkey. You would not own the plant once it is handed over.

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International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are
individuals or organizations that are contracted to your business, and market on your behalf
in a particular country. They rarely take ownership of products, and more commonly take a
commission on goods sold. Agents usually represent more than one organization. Agents
are a low-cost, but low-control option. If you intend to globalize, make sure that your
contract allows you to regain direct control of product. Of course you need to set targets
since you never know the level of commitment of your agent. Agents might also represent
your competitors - so beware conflicts of interest. They tend to be expensive to recruit,
retain and train. Distributors are similar to agents, with the main difference that distributors
take ownership of the goods. Therefore they have an incentive to market products and to
make a profit from them. Otherwise pros and cons are similar to those of international
agents.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between
companies that market internationally. Sometimes the relationships are between
competitors. There are many examples including:

Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.

Research and Development (R&D) arrangements.

Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.

Marketing agreements.

Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain
independent and separate.

Joint Ventures (JV)

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 Joint Ventures tend to be equity-based i.e. a new company is set up with parties
owning a proportion of the new business. There are many reasons why companies set up
Joint Ventures to assist them to enter a new international market:

Access to technology, core competences or management skills. For example, Honda's

relationship with Rover in the 1980's.

To gain entry to a foreign market. For example, any business wishing to enter China needs
to source local Chinese partners.

Access to distribution channels, manufacturing and R&D are most common forms of Joint
Venture.

Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually
owning an overseas manufacturing plant i.e. the organization invests in plant, machinery
and labor in the overseas market. This is also known as Foreign Direct Investment (FDI).
This can be a new-build, or the company might acquire a current business that has suitable
plant etc. Of course you could assemble products in the new plant, and simply export
components from the home market (or another country). The key benefit is that your
business becomes localized - you manufacture for customers in the market in which you
are trading. You also will gain local market knowledge and be able to adapt products and
services to the needs of local consumers. The downside is that you take on the risk
associated with the local domestic market. An International Sales Subsidiary would be
similar, reducing the element of risk, and have the same key benefit of course. However, it
acts more like a distributor that is owned by your own company.

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