International Business and EXIM

Module 1 – Introduction to
Globalization

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

Wednesday, August 30, 2023 1
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 Globalization
• Globalization refers to the shift toward a more integrated and interdependent
world economy. Globalization has several facets, including the globalization of
markets and the globalization of production.
• The globalization of markets refers to the merging of historically
distinct and separate national markets into one huge global marketplace.
• The globalization of production refers to the sourcing of goods and
services from locations around the globe to take advantage of national
differences in the cost and quality of factors of production (such as labor,
energy, land, and capital).

• E.g. Boeing is an American Passenger Aircraft manufacturer. For Boeing's 777, a

commercial jet airliner, Eight Japanese suppliers make parts for the fuselage,
doors, and wings; a supplier in Singapore makes the doors for the nose landing
gear; three suppliers in Italy manufacture wing flaps; and so on.

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Globalization and its Drivers
Decline in • 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 General
barriers to the Agreement on Tariffs and Trade.
free flow of
goods, services, • In late 2001, the WTO launched a new round of talks aimed at further liberalizing the global
and capital that trade and investment framework.
has occurred • According to the United Nations, some 90 percent of the 2,700 changes made worldwide
since the end of between 1992 and 2009 in the laws governing foreign direct investment created a more
World War II. favorable environment for FDI.

Dramatic • Development of the microprocessor, which enabled the explosive growth of high-power, low-
cost computing, vastly increasing the amount of information that can be processed by
developments in individuals and firms. The microprocessor also underlies many recent advances in
recent decades in telecommunications technology.
communication,
information • Between 1930 and 1990, the cost of a three-minute phone call between New York and
London fell from $244.65 to $3.32. By 1998, it had plunged to just 36 cents for consumers,
processing, and and much lower rates were available for businesses. Indeed, by using the Internet, the cost of
transportation an international phone call is rapidly plummeting toward zero.
technologies.
• WWW is an equalizer, rolling back constraints of location, time and space.

• Transportation-wise the most important drivers are probably the development of commercial
Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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transshipment from one mode of transport to another.
 Factors affecting Internationalization(Luostarinen)

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Impact of Globalization
• According to WTO data, the volume of world merchandise
trade has grown faster than the world economy since 1950.
From 1970 to 2010, the volume of world merchandise trade
expanded more than 30-fold, outstripping the expansion of
world production, which grew close to 10 times in real
terms.
• (World merchandise trade includes trade in manufactured
goods, agricultural goods, and mining products, but not
services.)
• Since the mid-1980s, the value of international trade in
services has also grown robustly. Trade in services now
accounts for about 20 percent of the value of all
international trade.

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Impact of Globalization
• At least 82,000 parent companies had 810,000
affiliates in foreign markets that collectively
employed more than 77 million people abroad
and generated value accounting for about 11
percent of global GDP.
• The world has become significantly wealthier
since 1950, and the implication is that rising
trade is the engine that has helped to pull the
global economy along.

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Impact of Globalization

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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International Business Contrasted with
Domestic Business
Domestic Business International Business
Area of Operation Restricted to in-country Involves a wider geographical area
Ease of Business Manageable because Several challenges, and these
only one country is challenges vary from nation to nation
involved
Environmental Significant, but relates to Significant and complex, and relates
Influence cultural, social, legal and to cultural, social, legal and economic
economic influence from influence in multiple countries, also
within one country global trading environment

Mobility in Factors Predictable Restricted and Conditional

of Production
Risk Involved Usual Business Risk Usual Business Risk plus Cross-
Cultural Risk, Country Risk, Currency
Risk and Commercial Risk

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 The chicken feet problem
In 2004, when China appeared to be free of avian
flu, some chickens in the United States came down
with bird flu. China imposed a ban on imports of
poultry products from the United States. At that
time, 16 metric tons of chicken feet were en route
from the United States (where they are a waste
product) to China (where they are a delicacy). There
appeared to be no options other than to try to find
storage space in a frozen food warehouse until
China’s ban might be lifted, to try to sell them to
the much smaller markets in Africa, or to reship
them to a place where they could be destroyed.
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 Complexities of International Business

Several • International Company Structure

Factors • Foreign Laws and Regulations
• International Accounting
Contribute to • Cost Calculation and Global Pricing Strategy
• Payment Methods (including global payment
Complexity methods)

of • Currency Rate Fluctuation

• Communication Difficulties and Cultural Differences
International • Political Risks
• Supply Chain Complexity and Risk of Labour
Business, Exploitation
• Worldwide Environmental Concerns
such as
Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Basic Strategies for International
Market
GLOBAL
PRESSURES FOR COST REDUCTION

TRANSNATIONAL
HIGH STANDARDIZATION
STRATEGY
STRATEGY

INTERNATIONAL LOCALIZATION
LOW
STRATEGY STRATEGY

LOW HIGH

PRESSURES FOR LOCAL RESPONSIVENESS

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Basic Strategies for International
Market (Bartlett and Ghoshal)
Organizational Multinational Global International Transnational
Characteristics
Configuration Decentralization Centralized and Sources of core Dispersed,
of assets and and nationally scaled globally abilities centralized; interdependent
capabilities self sufficient others and specialized
decentralized
Role of Sensing and Implementing Adapting and Differentiated
overseas exploiting local parent- exploiting parent contributions by
operations opportunities company’s company’s abilities national units to
strategies integrated
worldwide
operations
Development Knowledge Knowledge Knowledge Knowledge
and diffusion developed and developed and developed at centre developed jointly
of knowledge retained within retained at and transferred to and shared
each unit centre overseas units worldwide.
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 The production, marketing, and R&D activities of firms pursuing a
global standardization strategy are concentrated in a few favorable
locations. Firms pursuing a global standardization strategy try not
GLOBAL to customize their product offering and marketing strategy to local
conditions because customization involves shorter production runs
STANDARDIZATION and the duplication of functions, which tend to raise costs.
STRATEGY Instead, they prefer to market a standardized product worldwide
so they can reap the maximum benefits from economies of scale
and learning effects.

Simultaneously achieve low costs through location economies,

economies of scale, and learning effects; differentiate their
product offering across geographic markets to account for local
differences; and foster a multidirectional flow of skills between
TRANSNATIONAL different subsidiaries in the firm’s global network of operations. As
STRATEGY attractive as this may sound in theory, the strategy is not an easy
one to pursue since it places conflicting demands on the company.
Differentiating the product to respond to local demands in
different geographic markets raises costs, which runs counter to
the goal of reducing costs.

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Taking products first produced for their domestic market and
selling them internationally with only minimal local
customization. The distinguishing feature of many such firms
INTERNATIONAL is that they are selling a product that serves universal needs,
but they do not face significant competitors, and thus unlike
STRATEGY firms pursuing a global standardization strategy, they are not
confronted with pressures to reduce their cost structure.

Localization is most appropriate when there are substantial

differences across nations with regard to consumer tastes
and preferences, and where cost pressures are not too
intense. By customizing the product offering to local
demands, the firm increases the value of that product in the
LOCALIZATION local market. On the downside, because it involves some
duplication of functions and smaller production runs,
STRATEGY customization limits the ability of the firm to capture the cost
reductions associated with mass-producing a standardized
product for global consumption. The strategy may make
sense, however, if the added value associated with local
customization supports higher pricing

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Modes of Entry into International
Business

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

Wednesday, August 30, 2023 16
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 Modes of Entry into International
Business
Mode of Entry Explanation
Exporting  The most traditional route
 Is often the first stage in internationalization
 Attractive when underutilized capacity exists
 There can be discrimination by the importing country
 Levels of exporting
Level 1: Export of surplus. The firm is interested only in overseas sales of
surplus products, or is without resources to fill overseas orders for most
products on a continuing basis.
Level 2: Export marketing. The firm actively solicits overseas sales of existing
products and is willing to make limited modifications in its products and
marketing procedures to accommodate overseas buyers’ requirements.
Level 3: Overseas market development. The firm makes major modifications in
products for export and in marketing practices in order to be better able to
reach buyers in other countries.
Level 4: Technology development. The firm develops new products for existing
or new overseas markets.
Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Modes of Entry into International
Business
Mode of Entry Explanation
Licensing/Franchising International Licensing – firm permits the licensee of a foreign
country to use intellectual property (e.g. trade marks, technology,
marketing skill etc) in exchange for fees or royalty.
There can also be cross licensing.
Franchising – licensing where the parent company grants another
independent entity the right to do business in a prescribed
manner which can include selling of the franchisor’s products,
using its name, production and marketing techniques, or the
general business approach.
https://www.scmp.com/tech/big-tech/article/3140200/huawei-
volkswagen-supplier-enter-4g-licensing-deal-us-sanctions-hit
https://www.gizmochina.com/2021/10/08/sharp-and-oppo-sign-
cross-license-agreement-end-global-patent-disputes/

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Modes of Entry into International
Business
Mode of Entry Explanation
Contract Manufacturing Contract with firms in foreign countries to
manufacture or assemble the products while retaining
the responsibility of marketing the product.
e.g.
(https://www.fiercepharma.com/manufacturing/sams
ung-biologics-inks-81m-first-time-deal-novartis) June
7, 2022
Management Contracting Firm providing the management know-how may not
have any equity stake in the enterprise being
managed. E.g. Tata Tea have contracts to manage
certain plantations in Sri Lanka
https://www.theledger.com/story/news/2022/06/02/l
akeland-exploring-independent-management-rp-
funding-center/7458653001/

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Modes of Entry into International
Business
Mode of Entry Explanation
Turnkey Contracts Common for oil refineries, steel mills, cement and fertilizer
plants; agreement by the seller to supply a buyer with a
facility fully equipped and ready to be operated by the
buyer’s personnel, who will be trained by the seller; can
also mean when the franchiser agrees to select a store site,
build the store, equip it, train the franchisee and
employees, and even arrange financing.
https://www.pv-magazine.com/press-releases/sungrow-to-
supply-a-480-mw-pv-project-in-chile-with-turnkey-inverter-
solutions-and-solar-panel-cleaning-solutions/
Fully owned Preferred by those who have long term and substantial
manufacturing facilities interest in the foreign market;
https://www.wsj.com/articles/plug-power-bets-on-green-
hydrogen-production-11654675200

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Modes of Entry into International
Business
Mode of Entry Explanation
Assembly Operations Cross of exporting and overseas manufacturing; here parts and
components are manufactured in one market and shipped to another
country where labour is cheap. (e.g. Coca Cola Shipping Syrup to
India, assembled here for retail supply)
https://timesofindia.indiatimes.com/business/india-business/lexus-
starts-exploratory-work-for-getting-electrics-to-
india/articleshow/90108962.cms
Joint Venturing Essential feature: ownership and management are shared between a
foreign firm and a local firm; brought about by a foreign investor
showing interest in a local company, a local company acquiring interest
in a foreign firm, or both parties setting up a new firm jointly.
(https://www.p2pfinancenews.co.uk/2022/05/20/shojin-launches-
joint-venture-in-india/)

Life Cycle of JV –
EXPLORATORY PHASE, PARTNERS REAP GAINS, GAINS PLATEAU,
Dr. Shilpa Sankpal / SVKM's (Dr.
RENEGOTIATE/TERMINATE NMIMSS Indore
Raghunath)
Wednesday, August 30, 2023 21
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 Modes of Entry into International
Business
Mode of Entry Explanation
Third Country Location When there is no commercial transactions between
two nations due to political reasons, one of the firms
operates from a third country. E.g. Taiwanese
businessmen using Hong Kong as base to have
commercial transactions with entrepreneurs in China.
Mergers and Acquisitions Automobiles, Pharmaceuticals, Banking and Telecom
have been majors in cross border mergers and
acquisitions. Mergers is the combination of two
companies to form one, while Acquisitions is one
company taken over by the other.
(https://www.fiercehealthcare.com/health-
tech/clearwater-buys-rival-cybersecurity-firm-
cynergistek-177m-cash)

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 Modes of Entry into International
Business
Mode of Entry Explanation
Strategic Alliance Also called coalition and entente; enhance long term competitive
advantage of the firm by forming alliance with its competitors.
Magsaysay on the basis of what was suggested by Porter and Fuller,
says that alliances can be technological development alliance (joint
development/research consortia), marketing, sales and services
alliance (allowing foreign firm use marketing infra in another
country) and multiple activity alliance (combination of two or more
types of alliance). Strategic Alliances can also be equity based or
non-equity based (e.g. technology based alliance).
https://www.forbes.com/sites/katevitasek/2020/03/28/the-
increasing-need-for-strategic-alliances/?sh=4607b4c67941
Countertrade https://www.rbth.com/business/327568-pepsi-first-russia (A very
famous case of counter trade, American Pepsi Vs Vodka and
Submarines); Countertrade means exchanging goods or services
which are paid for, in whole or part, with other goods or services,
rather Dr.
than with /money;
Shilpa Sankpal Can
SVKM's NMIMS solve issues related to foreign
Indore
Wednesday, August 30, 2023 23
exchange when countries Campus are unable to pay for imports.
 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 EPRG Model/Framework

Developed by Wind, Douglas, and Perlmutter.

Focuses on the international marketing operations of the company and the different
attitudes towards the company's involvement on the front of international marketing
processes and environment.

Ethnocentric Polycentric Regiocentric Geocentric

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 Additional Resource
• https://www.youtube.com/watch?v=291DlKa7
iIU (How Xiaomi broke out of China to go
global | CNBC Reports)
• https://www.youtube.com/watch?v=LCmXDO
WII7c (Wall Street Journal)

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 International Business and EXIM

Module 2 – Multinational Enterprises

from Emerging Markets

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Definition of Emerging Markets
• Emerging Markets are developing economies
that have achieved substantial
industrialization, modernization and rapid
economic growth since the 1980s.
• Some 35 countries are considered emerging
markets and they are found mainly in Asia,
Latin America, and Eastern Europe.
• Largest of these are Brazil, Russia, India and
China.

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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Definition of Emerging Markets
• The World Bank defines developing countries as those with per
capita income of less than $4,035.
• Emerging markets, also known as emerging economies are
nations that are investing in more productive capacity.
• They are moving away from their traditional economies that
have relied on agriculture and the export of raw materials.
• Leaders of developing countries want to create a better quality
of life for their people. They are rapidly industrializing and
adopting a free market or mixed economy.
• Video Resource:
https://www.youtube.com/watch?v=lHX_56RWtSw&t=101s

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 Characteristics of Emerging Economies
• Lower-Than-Average Per Capita Income: Low income is the first
important criteria because this provides an incentive for the second
characteristic which is rapid growth. To remain in power and to help
their people, leaders of emerging markets are willing to undertake the
rapid change to a more industrialized economy.
• Economic Growth: In 2018, the economic growth of most developed
countries, such as the United States, Germany, Mexico, and Japan, was
less than 3%. Growth in Egypt, Poland, Bolivia, and Malaysia, was 4% or
more. China, Vietnam, and India saw their economies grow by around
7%.
• High Volatility: Rapid social change leads to high volatility. That can
come from three factors: natural disasters, external price shocks, and
domestic policy instability. Traditional economies that are traditionally
reliant on agriculture are especially vulnerable to disasters, such
as earthquakes in Haiti, Dr.
tsunamis
Shilpa Sankpal /in Thailand,
SVKM's NMIMS Indoreor droughts in Sudan.
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 Characteristics of Emerging Economies
• Currency Swings: Emerging markets are more susceptible to volatile currency swings,
such as those involving the U.S. dollar. They are also vulnerable to commodities swings,
such as those of oil or food. That's because they don't have enough power to influence
these movements. For example, when the United States subsidized corn ethanol
production in 2008, it caused oil and food prices to skyrocket. That caused food riots in
Mexico.[https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/04-
08-ethanol.pdf] (https://www.youtube.com/watch?v=CQBw9JsBnI4)
• Potential For Growth: The capital markets are less mature in these countries than the
developed markets. They don't have a solid track record of foreign direct investment. It's
often difficult to get information on companies listed on their stock markets. It may not
be easy to sell debt, such as corporate bonds, on the secondary market. All these
components raise the risk.
• Higher-than-average return for investors: Many of these countries focus on an export-
driven strategy. They don't have the demand at home, so they produce lower-cost
consumer goods and commodities for developed markets.

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 Emerging Market Global Challengers

Country Example of Multinational Firm Representative Industry

Brazil Natura Cosmeticos Cosmetics
India Tata Motors Automobiles
Russia Severstal Steel and Mining
China Alibaba E-Commerce

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Attractiveness of Emerging Markets for
International Business
Emerging Markets as Target Markets (25
percent of Mexican population is as affluent as
the American Middle Class; Fastest growing
markets for power tools are in Asia, Latin
America and Africa)

Emerging Markets as Manufacturing Bases (e.g. South

Africa for diamonds, Brazil for Bauxite, Taiwan and
Malaysia for Personal Computers. Samsung is world’s
largest electronics company.)
https://www.youtube.com/watch?v=LZn1EKE7lXo /
https://www.youtube.com/watch?v=p89OE8oJAQk

Emerging Markets as Sourcing

Destinations (e.g. call centres in India,
Philippines and East Europe;
Testing/Design/Coding Centres in India)

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 Emerging Market Potential
• Per Capita Income as an Indicator of Market Potential
For China, the Per-Capita GDP converted using market exchange rates
is 7,589 USD, but when the same is converted through PPP, it is
actually 12,880 USD. A lot of caution has to be exercised while
evaluating market potential.
a. Official data may not be accurate. Countries lack sophisticated
taxation system and businesses under-report to save on taxes.
b. Mean or Average does not always indicate a normal distribution.
In emerging markets, median income is a better representation
than mean income.
c. Household income is larger than per capita income because the
same household has multiple wage earners.
d. Governments in these countries underreport national income so
they can qualify for low-interest loans and grants from
international aid agencies and development banks.

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 Emerging Market Potential
• Middle Class as an Indicator of Market Potential
Middle class represents the segment between the
wealthy and the poor. These households have
access to disposable income, and spend on
education, housing, furniture, necessities as well as
discretionary consumption. Asia is expected to
account for half the world’s middle class by the year
2020.

China has a staggering 300 million consumers in the

middle class and India has about 250 million.
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 Risk and Challenges – Four Basic Risks
of Internationalization

Cross
Cultural Currency
Risk Risk

Commercial Country
Risk Risk

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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Video Resources -
• Commercial Risk
(https://www.youtube.com/watch?v=AT-E_eMiwgk)
• Cross Cultural Risk
(https://www.youtube.com/watch?v=iQI9Dnfmo-E)
• Country Risk
(https://www.youtube.com/watch?v=bE28Rg7HJ-I)
• Currency
Risk(https://www.youtube.com/watch?v=a_ON0h6B5l
Q /https://www.youtube.com/watch?v=FTonxC91fGc)

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 Risk and Challenges of Emerging
Markets

Political Instability Weak Intellectual Property

(https://www.youtube.com/watch?v=yJSsq2fW5ZE) Protection

Bureaucracy, Red Tape and

Poor Physical Infrastructure
Lack of Transparency

Likely Resistance Family

Partner Availability and Conglomerates (Reliance in
Qualifications India, Hyundai in South Korea,
Sabanci Holding in Turkey)

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 Success Strategies for Emerging
Markets
Customize Offerings to Unique Emerging Market Needs – e.g. GE developed a
lightweight ECG machine for India retailing at just 1500 USD, much cheaper than
what it retails in advanced economies.

Partner with Family Conglomerates

Target Governments in Emerging Markets e.g. ABB, GE, Siemens, Voith worked in
the Three Gorges Dam on the Yangtze River in China, and the mega project
costed more than 37 billion USD.

Skillfully challenge Emerging Market Competitors

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 Resources

• https://www.thebalance.com/gdp-per-capita-
formula-u-s-compared-to-highest-and-lowest-
3305848

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 International Business and EXIM

Module 3 – International Business

Environment

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Video Resources
• https://www.youtube.com/watch?v=2cHYQLC
e1VE

• https://www.youtube.com/watch?v=esvycD1
O3cM

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 PESTEL Analysis
• https://opentext.wsu.edu/mktg360/chapter/6
-2-how-markets-are-segmented/

• Three Steps of PESTEL

i. consider relevance of each of the PESTEL factors
to the context.
ii. identify and categorize the information that
applies to these factors.
iii. analyze the data and draw conclusions.

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 PESTEL ANALYSIS

TECHNOLOGICAL

LEGAL
ENVIRONMENTAL
POLITICAL

SOCIAL
ECONOMIC

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 National and Foreign Environments
and Their Components

• Domestic Environment
• Foreign Environment
An international marketer
experiences three kinds of
• Global Environment
external environment –

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 Comprises – Economic Environment

• nature and level of development of the economy,

• economic resources,
• size of the economy, economic system and economic
policies,
• economic conditions,
• trends in the GNP growth rate and per capita income,
• nature of and trends in foreign trade,
• domestic supply and demand conditions.

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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 Economic Environment
Developing Countries Developed Countries

Low Income Middle Income most of the high income

Countries Countries economies are industrial
economies, some of them, like
Kuwait and Saudi Arabia, are oil
GNI per capita of $ GNI per capita of more than $
exporters
1,035 or less in 2012 1,035 but less than $ 12,616
in 2012.

lower middle income (with

United Nations: least developed countries,
GNI per capita between $
suffer from one or more of the following
1,035 and $ 4,085) and upper
constraints: a very low GNI per capita,
middle income (with GNI per
landlocked, remote insularity, desertification
capita between $ 4,086 and $
and exposure to natural disasters. There
12,616).
were 32 low income economies in 2013.
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 Economic Environment
• In the developing countries, particularly in the low income
economies, the demand for many categories of goods and
services is limited because of the low levels of income.
• Even products which are regarded as essential in advanced
economies are regarded as luxuries in these countries, like,
for example, refrigerator, TV, or even an electric fan. Import
or production of such items may not be allowed or
encouraged by the governments of these countries.
• The price and consequently the demand for them may be
affected by high taxes on them because of their
categorisation as luxuries. Many developing countries
suffer from severe balance of payments problems.
Therefore, their import policies, in general, are very
restrictive.
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 Economic Environment
• A number of developing countries, however, hold out very good
prospects for business in future because of three reasons, viz.,
(i) A steady increase in population, (ii) Increase in income, (iii)
Growing democratization and individual freedom
• Economic growth rates of several developing countries, like the
newly industrializing countries (NICs) like South Korea, Taiwan,
Hong Kong and China have been enviable
• Developed economies are characterized by high levels of
income and consumption and business competition. Foreign
trade is more liberal in comparison with that of most of the
developing countries. The markets for many products in these
economies are nearing saturation or have already saturated or
are even declining mostly because of the population trends.

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 Economic Environment
• Differences in the income levels may necessitate
product and price modifications. The Aero Shoes’
Woodland range of shoes, the replica of the well-
known US brand Timberland, has been introduced in
India for less than one-third of the US price, although
the Indian target is the upper segment of the market.
(https://www.livemint.com/Industry/NflULbpgmD76ah
koRF7dsI/Woodland-forces-Timberland-out-of-
India.html)
• In some of the very populous low income countries,
there exists significant demand for high value items.
For example, although India is a low income economy,
there is a good market for many high value products.
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 Economic Environment
• In many developing countries, the demand for
several products is limited by, among other
things, the absence or inadequacy of use
facility characteristics.

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 Social/Cultural Environment
• the religious aspects;
• language;
• customs, traditions and beliefs;
Encompasses • tastes and preferences;
• social stratification;
• social institutions;
• buying and consumption habits etc.

One of the most important reasons for the failure of a

number of companies in foreign markets is their failure
to understand the cultural environment of these
markets and to suitably formulate their business
strategies.
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 Social/Cultural Environment
• For a business to be successful, its strategy should be
the one that is appropriate in the sociocultural
environment.
• The marketing mix will have to be so designed as best
to suit the environmental characteristics of the market.
In Thailand, Helene Curtis switched to black shampoo
because Thai women felt that it made their hair look
glossier.
• https://www.youtube.com/watch?v=_pHWZ_XNij8
• https://www.youtube.com/watch?v=Wn-PV82k2gs

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 Social/Cultural Environment
• Even when people of different cultures use the same basic product,
the mode of consumption, conditions of use, purpose of use or the
perceptions of the product attributes may vary widely so that the
product attributes, method of presentation, positioning, or method
of promoting the product may have to be varied to suit the
characteristics of different markets.

• The values and beliefs associated with colour vary significantly

between different cultures. Blue, considered feminine and warm in
Holland, is regarded as masculine and cold in Sweden. Green is a
favourite colour in the Muslim world; but in China, men don’t wear
green hats, and in part of South America it symbolizes death. White
indicates death and mourning in China and Korea; but in some
countries, it expresses happiness and is the colour of the bridal
dress. Red is a popular colour in the communist countries, but
many African countries have a national distaste for red colour.
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 Social/Cultural Environment
• Social inertia and associated factors come in the way of
the promotion of certain products, services or ideas.
There are such social stigmas in the marketing of family
planning ideas, use of biogas for cooking etc.
• There are also a number of demographic factors, such
as the age and sex composition of population, family
size, habitat, religion, etc. which influence the business.
• Also consider the social environment of the business
which encompasses its social responsibility and the
alertness or vigilance of the consumers and of society
at large.

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 Social/Cultural Environment
• Business “traditionally has been held responsible for
quantities — for the supply of goods and jobs, for costs,
prices, wages, hours of works, and for standards of living.
Today, however, business is being asked to take on
responsibility for the quality of life in our society. The
expectation is that business — in addition to its traditional
accountability for economic performance and results — will
concern itself with the health of the society, that it will
come up with the cure for the ills that currently beset us
and, indeed, will find ways of anticipating and presenting
future problems in these areas.”
R F Barker
https://www.youtube.com/watch?v=fFPMUIT9seg

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 Political Environment

INCLUDES

Characteristics and policies of the

political parties,

the nature of the constitution and

government system and

the government environment

encompassing the economic and
business policies and regulations
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 Political Environment
• In the past, public sector was assigned a very important
role in many non-communist, particularly the developing
countries too.
• While there are not radical differences in the philosophies
of major political parties in some countries, the situation is
quite different in some others. The government system in a
number of countries, including several countries which are
making rapid economic progress and having liberal policies
towards foreign capital and technology, is not very
democratic.
• Further, in the past, foreign firms in many developing
countries were under the fear of nationalisation
(https://www.youtube.com/watch?v=-EJ8TZYvadE).

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 Political Environment
• Privatisation has progressed at an amazing speed. More
than 8,500 state owned enterprises (SOEs) in over 80
countries were privatised in the 12 years ending in 1991
and the trend continues.
• As against the past suspicion of and antagonism against
foreign capital and technology, a large number of the
developing countries, including the former communist
ones, are in a competition to woo foreign capital and
technology. As a result, there has been an influx of foreign
investment to these countries.
• Hostilities between some countries affect business of firms
even in third countries. Arab nations, for example, did not
do business with firms having dealings with Israel.

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 Political Environment
• Many governments specify standards for products to
be marketed in the country. Marketing of certain
products are even banned in some countries. Policy or
regulations regarding quality control and inspection
vary considerably between nations. Such is the case
with packaging and labelling.
• In most of the countries, product promotion is subject
to various types of controls. In some countries,
product comparison advertisements and use of
superlatives like best, better etc. are not allowed. Use
of children to endorse products is banned in some
countries.

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 Additional Reading
• https://hbr.org/2020/08/the-tiktok-ban-
should-worry-every-company (The TikTok Ban
Should Worry Every Company, August 28,
2020, HBR)

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 Global Trading Environment
• The international trading environment affects
international business.
• The trading environment affects not only the
exports and imports but also other factors such
as international investment and financial flows.
• The international trading environment includes
important factors such as trade barriers, trade
agreements, trading blocs, cartels and
multinational trade negotiations.
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 Global Trading Environment
Trade Barriers
• The main objectives of imposing trade barriers are to
protect domestic industries from foreign competition,
to promote indigenous research and development, to
conserve the foreign exchange resources of the
country, to make the balance of payments position
favourable, to curb conspicuous consumption, to
mobilise revenue for the government and to
discriminate against certain countries.
• There are, broadly, two types of trade barriers, viz.,
tariff barriers and non-tariff barriers.

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 Global Trading Environment
• Tariffs in international trade refer to the duties or taxes
imposed on internationally traded goods when they
cross the national borders. Non-tariff barriers (NTBs), are
of two categories.
• The first category includes import licensing, import
quotas, foreign exchange regulations and canalisation of
imports.
• The second category of NTBs are those which are mostly
used by developed economies to protect domestic
industries which have lost international competitiveness
and/or which are politically sensitive for governments of
these countries [e.g. voluntary export restraint (VER)].

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 Global Trading Environment
International Commodity Agreements
• International Commodity Agreements are
inter-governmental arrangements concerning
the production of, and trade in, certain
primary products with a view to stabilising
their prices.
• Commodity Agreements may take any of the
four forms, namely, quota, buffer stock,
bilateral contract, or multilateral contract.

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 Global Trading Environment
• Under the quota agreement, export quotas are determined and
allocated to participating countries according to some mutually
agreed formula, and they undertake to restrict the export or
production by a certain percentage of the basic quota decided by
the central committee or council. For instance, Coffee
Agreement among the major producers of Latin America and
Africa limited the amount that could be exported by each
country.
• Buffer stock agreements stabilise the price by increasing the
market supply by the sale of the commodity when the price
tends to rise and by absorbing the excess supply to prevent a fall
in the price. The buffer stock plan, thus, requires an international
agency to set a range of prices and to buy the commodity at the
minimum and sell at the maximum. The buffer pool method has
already been tried in case of tin, cocoa, and sugar.
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 Global Trading Environment
• Bilateral contract to purchase and sell certain quantities of a
commodity at agreed prices may be entered into between a major
importer and exporter of the commodity. In such an agreement, an
upper price and a lower price are specified.
• If the market price, throughout the period of the agreement,
remains within these specified limits, the agreement becomes
inoperative. But if the market price rises above the upper limit
specified, the exporting country is obliged to sell to the importing
country a certain specified quantity of the commodity at the upper
price fixed by the agreement.
• On the other hand, if the market price falls below the lower limit
specified, the importer is obliged to purchase the contracted
quantity at the specified lower price. (International Wheat
Agreement)

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 Global Trading Environment
Cartels
• International cartels are agreements between producers
located in different countries or between governments of
different countries to restrict competition.
• Although the main aim of a cartel is to control prices, this is
often accompanied by output and investment quotas for
making the price control effective.
• Wilson: firms tacitly collude to keep out potential
competitors and to reduce the degree of competition
between themselves. Although these firms do not formally
agree on these policies, they carry them out implicitly
because it is in their mutual interest to do so.

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 Global Trading Environment
• While domestic cartels are often prohibited or controlled
by the respective governments, international cartels are
often sponsored or sanctioned by the governments of the
countries concerned. Examples include the Organisation of
Petroleum Exporting Countries (OPEC) and International Air
Transport Association (IATA), a cartel of major airlines
established to set up air fares and restrict competition.
• Cartels should be distinguished from International
Commodity Agreements. The cartel is basically a unilateral
decision by producers to cooperate while a commodity
agreement, in principle, includes consumers in the
negotiations, although in practice consumers (as opposed
to consuming governments) have little direct say in their
operation
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 Video Resource
• https://www.youtube.com/watch?v=ENpLEtQ
MWHA (Russia-Ukraine war, pandemic: How
much trouble is the global economy in? | DW
News)

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 Video Resource
• Summarizes Syrian Conflict
(https://www.youtube.com/watch?v=K5H5w3_QTG0)

• Cost of Syrian War

(https://www.youtube.com/watch?v=8pNPhxIpuoo)

• How Syrian War Impacts its

neighbours?(https://www.youtube.com/watch?v=NhnOFLU5Z8M/
https://www.youtube.com/watch?v=VMhxmmyq-dk)
• https://www.bbc.com/news/world-middle-east-35806229 (March,
2021)
• https://www.youtube.com/watch?v=Ksk7O6EQvr8
• https://www.youtube.com/watch?v=5Fs7zA5xW7o
• https://www.youtube.com/watch?v=b7ZH9Wz8ErA

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 COST OF WAR
• Refugee Crisis
• Strain on Economies – Sheltering Neighbours and Conflicting
Countries
• Loss of Productivity
• Increased Demand for Aid
• Militarization of groups that lack accountability
• Increased Civil Unrest
• Sustained Animosity
• Puts diplomatic pressure on other countries, companies and
governments to choose, invest and divest from the warring countries
• Loss of ecological and historical treasures
• And…
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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Case: Movies
In recent years, studies have found that film industry has
become a new dynamic industry in the world trade. The
increasing importance of this sector to the economy has
been widely mentioned. However, despite the potential
economic contributions of the film industry, little
attention has been given by scholars other than those
from culture and media studies. Furthermore, studies on
film industry focus only on major global film industry like
Hollywood in the USA and Bollywood in India. Film
industry has moved beyond merely the issue of
circulation of film product around the world. The recent
trend in film production is the shifting away of production
location from producers’ country to foreign location.
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 Case: Movies
With the emergence of responsive countries, many foreign
producers are motivated to shoot films in foreign land to
capitalize on, among other things, cheaper production costs.
For example, US film producers have been shooting films in
countries like Canada and Mexico to take advantage of lower
labor costs and other attractive incentives provided by the
host government. In response to this trend, many countries
are moving towards attracting foreign producers to shoot at
their country to benefit from the externalities and spill over
associated with foreign operations. Among factors that
influence foreign film producers to shoot in foreign location
are the availability of cheap labor, beneficial exchange rates,
attractive location, attractive tax incentives and other
favorable terms offered by host countries

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 Case: Movies
(a) What benefits can a host country realize
from foreign movie producers using their
country as a production base for a flick?
(b) What measures must countries take to
make their country attractive to foreign
producers? Does the cultural and social
environment of a nation makes any difference in
this decision of foreign producers?

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 International Business and EXIM

Module 4 – International Trade

Patterns and Balance of Payments

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 Theories of International
Trade

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 Theories
Porter’s Diamond

New Trade Theory

Product Life Cycle

Heckscher – Ohlin Theory

Theory of Comparative Advantage

Theory of Absolute Advantage

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Mercantilism
Wednesday, August 30, 2023 83
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 Mercantilism
• Emerged in England in the mid-16th century.

• The principal assertion of mercantilism was that gold and

silver were the mainstays of national wealth and essential
to vigorous commerce.

• Gold and silver were the currency of trade between

countries;

• A country could earn gold and silver by exporting goods.

Conversely, importing goods from other countries would
result in an outflow of gold and silver to those countries.

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 Mercantilism
• The main tenet of mercantilism was that it was in
a country’s best interests to maintain a trade
surplus, to export more than it imported.

• The flaw with mercantilism was that it viewed

trade as a zero-sum game, in which a gain by one
country results in a loss by another.

• Critics argue that many nations have adopted a

neo-mercantilist strategy that is designed to
simultaneously boost exports and limit imports.
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 Additional Reading
• https://www.bnamericas.com/en/interviews/i
s-china-the-bully-in-the-wto-system

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 Theory of Absolute Advantage
• In his landmark 1776 book The Wealth of Nations, Adam Smith
(https://www.youtube.com/watch?v=ejJRhn53X2M) attacked the
mercantilist assumption that trade is a zero-sum game. Smith
argued that countries differ in their ability to produce goods
efficiently. In his time, the English, by virtue of their superior
manufacturing processes, were the world’s most efficient textile
manufacturers.

• Due to the combination of favorable climate, good soils, and

accumulated expertise, the French had the world’s most efficient
wine industry. The English had an absolute advantage in the
production of textiles, while the French had an absolute advantage
in the production of wine. Thus, a country has an absolute
advantage in the production of a product when it is more efficient
than any other country in producing it.

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 Theory of Absolute Advantage
• According to Smith, countries should specialize in the
production of goods for which they have an absolute
advantage and then trade these for goods produced by
other countries. In Smith’s time, this suggested that the
English should specialize in the production of textiles while
the French should specialize in the production of wine.

• England could get all the wine it needed by selling its

textiles to France and buying wine in exchange. Similarly,
France could get all the textiles it needed by selling wine to
England and buying textiles in exchange. Smith’s basic
argument, therefore, is that a country should never
produce goods at home that it can buy at a lower cost from
other countries.
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 Theory of Comparative Advantage
• David Ricardo (https://www.youtube.com/watch?v=E_KaL6KpCy4)
took Adam Smith’s theory one step further by exploring what
might happen when one country has an absolute advantage in the
production of all goods. Smith’s theory of absolute advantage
suggests that such a country might derive no benefits from
international trade.
• In his 1817 book Principles of Political Economy, Ricardo showed
that this was not the case. According to Ricardo’s theory of
comparative advantage, it makes sense for a country to specialize
in the production of those goods that it produces most efficiently
and to buy the goods that it produces less efficiently from other
countries, even if this means buying goods from other countries
that it could produce more efficiently itself.

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 Video Resource
• https://www.youtube.com/watch?v=4rUfoU0
4QJM

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 Heckscher-Ohlin Theory
• Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin
(in 1933) put forward a different explanation of comparative
advantage. They argued that comparative advantage arises
from differences in national factor endowments.
• By factor endowments they meant the extent to which a
country is endowed with such resources as land, labor, and
capital. Nations have varying factor endowments, and
different factor endowments explain differences in factor
costs; specifically, the more abundant a factor, the lower its
cost.
• The Heckscher-Ohlin theory predicts that countries will
export those goods that make intensive use of factors that
are locally abundant, while importing goods that make
intensive use of factors that are locally scarce.
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 Heckscher-Ohlin Theory
• Like Ricardo’s theory, the Heckscher-Ohlin theory argues
that free trade is beneficial. Unlike Ricardo’s theory,
however, the Heckscher-Ohlin theory argues that the
pattern of international trade is determined by differences
in factor endowments, rather than differences in
productivity.
• United States has long been a substantial exporter of
agricultural goods, reflecting in part its unusual abundance
of arable land. In contrast, China excels in the export of
goods produced in labor-intensive manufacturing
industries, such as textiles and footwear.
• This reflects China’s relative abundance of low-cost labor.
The United States, which lacks abundant low-cost labor, has
been a primary importer of these goods.
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 Product Life Cycle
• Raymond Vernon initially proposed the product life-
cycle theory in the mid- 1960s.
• Vernon’s theory was based on the observation that for
most of the 20th century a very large proportion of the
world’s new products had been developed by U.S.
firms and sold first in the U.S. market (e.g., mass-
produced automobiles, televisions, instant cameras
(https://petapixel.com/2015/06/11/the-history-and-
magic-of-instant-photography/), photocopiers,
personal computers, and semiconductor chips).

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 Product Life Cycle
• Vernon argued that most new products were initially produced in
America. Apparently, the pioneering firms believed it was better
to keep production facilities close to the market and to the firm’s
center of decision making, given the uncertainty and risks
inherent in introducing new products.
• Also, the demand for most new products tends to be based on
non-price factors. Consequently, firms can charge relatively high
prices for new products, which obviates the need to look for low-
cost production sites in other countries.
• Vernon went on to argue that early in the life cycle of a typical
new product, while demand is starting to grow rapidly in the
United States, demand in other…

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 Product Life Cycle
• advanced countries is limited to high-income groups. The limited initial
demand in other advanced countries does not make it worthwhile for
firms in those countries to start producing the new product, but it does
necessitate some exports from the United States to those countries.
• Over time, demand for the new product starts to grow in other advanced
countries (e.g., Great Britain, France, Germany, and Japan). As it does, it
becomes worthwhile for foreign producers to begin producing for their
home markets. In addition, U.S. firms might set up production facilities in
those advanced countries where demand is growing. Consequently,
production within other advanced countries begins to limit the potential
for exports from the United States.
• As the market in the United States and other advanced nations matures,
the product becomes more standardized, and price becomes the main
competitive weapon. As this occurs, cost considerations start to play a
greater role in the competitive process.

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 Product Life Cycle
• Producers based in advanced countries where labor costs are
lower than in the United States (e.g., Italy, Spain) might now be
able to export to the United States.

• If cost pressures become intense, the process might not stop there.
The cycle by which the United States lost its advantage to other
advanced countries might be repeated once more, as developing
countries (e.g., Thailand) begin to acquire a production advantage
over advanced countries.

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 Product Life Cycle
• Thus, the locus of global production initially switches from the
United States to other advanced nations and then from those
nations to developing countries.

• The consequence of these trends for the pattern of world trade is

that over time the United States switches from being an exporter
of the product to an importer of the product as production
becomes concentrated in lower-cost foreign locations.

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 Additional Reading - PLC
The photocopier was first developed in the early 1960s by Xerox
in the United States and sold initially to U.S. users. Originally
Xerox exported photocopiers from the United States, primarily to
Japan and the advanced countries of Western Europe. As
demand began to grow in those countries, Xerox entered into
joint ventures to set up production in Japan (Fuji-Xerox) and
Great Britain (Rank-Xerox). In addition, once Xerox’s patents on
the photocopier process expired, other foreign competitors
began to enter the market (e.g., Canon in Japan, Olivetti in Italy).
As a consequence, exports from the United States declined, and
U.S. users began to buy some of their photocopiers from lower-
cost foreign sources, particularly Japan.
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 Additional Reading - PLC
More recently, Japanese companies have found that
manufacturing costs are too high in their own country, so they
have begun to switch production to developing countries such as
Singapore and Thailand.

Thus, initially the United States and now other advanced

countries (e.g., Japan and Great Britain) have switched from
being exporters of photocopiers to importers. This evolution in
the pattern of international trade in photocopiers is consistent
with the predictions of the product life-cycle theory that mature
industries tend to go out of the United States and into low-cost
assembly locations.
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 Additional Resource
• https://www.npr.org/2013/10/23/239241106
/happy-birthday-copy-machine-happy-
birthday-copy-machine

• https://www.youtube.com/watch?v=G0RxVT5
pmhA

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 New Trade Theory
• Emerged in the 1970s when a number of economists
pointed out that the ability of firms to attain
economies of scale might have important implications
for international trade.
• Economies of scale are unit cost reductions associated
with large-scale output.
• Economies of scale have a number of sources,
including the ability to spread fixed costs over a large
volume and the ability of high-volume producers to
utilize specialized employees and equipment that are
more productive than less specialized employees and
equipment.

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 New Trade Theory
• New trade theory makes two important points: First,
through its impact on economies of scale, trade can
increase the variety of good available to consumers
and decrease the average costs of those goods.
• Second, in those industries when the output required
to attain economies of scale represents a significant
proportion of total world demand, the global market
may only be able to support a small number of
enterprises.
• Thus, world trade in certain products may be
dominated by countries whose firms were first movers
in their production.

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 Implications of New Trade Theory
• The theory suggests that nations may benefit from trade
even when they do not differ in resource endowments or
technology.
• Trade allows a nation to specialize in the production of
certain products, attaining scale economies and lowering
the costs of producing them, while buying products that it
does not produce from other nations that specialize in the
production of these products.
• A country may predominate in the export of a good simply
because it was lucky enough to have one or more firms
among the first to produce that good. Because they are
able to gain economies of scale, the first movers in an
industry may get a lock on the world market that
discourages subsequent entry.
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 Implications of New Trade Theory
• New trade theorists argue that the United States is a major
exporter of commercial jet aircraft not because it is better
endowed with the factors of production required to
manufacture aircraft, but because one of the first movers in
the industry, Boeing, was a U.S. firm.
• With regard to first-mover advantages and international
trade, a study by Harvard business historian Alfred
Chandler suggests the existence of first-mover advantages
is an important factor in explaining the dominance of firms
from certain nations in specific industries.
• New trade theorists stress the role of luck,
entrepreneurship, and innovation in giving a firm first-
mover advantages.

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 Porter’s Diamond
• In 1990 Michael Porter of the Harvard
Business School underlined through a
research attempt to determine why some
nations succeed and others fail in
international competition.

• Porter and his team looked at 100 industries in

10 nations.

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 Dr. Shilpa Sankpal / SVKM's NMIMS Indore
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 Porter’s Diamond
Four broad attributes of a nation shape the environment in which local
firms compete, and these attributes promote or impede the creation
of competitive advantage

• Factor endowments—a nation’s position in factors of production

such as skilled labor or the infrastructure necessary to compete in a
given industry.
• Demand conditions—the nature of home demand for the industry’s
product or service.
• Relating and supporting industries—the presence or absence of
supplier industries and related industries that are internationally
competitive.
• Firm strategy, structure, and rivalry—the conditions governing how
companies are created, organized, and managed and the nature of
domestic rivalry.

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 Porter’s Diamond
• Two additional variables can influence the
national diamond in important ways: chance
and government. Chance events, such as
major innovations, can reshape industry
structure and provide the opportunity for one
nation’s firms to supplant another’s.
Government, by its choice of policies, can
detract from or improve national advantage.

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 Commercial Policy
Instruments/Instruments of Trade
Policy

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 TARIFFS
• A tariff is a tax levied on imports (or exports).
Tariffs fall into two categories. Specific tariffs are
levied as a fixed charge for each unit of a good
imported (for example, $3 per barrel of oil).
• Ad valorem tariffs are levied as a proportion of
the value of the imported good. In most cases,
tariffs are placed on imports to protect domestic
producers from foreign competition by raising the
price of imported goods.
• However, tariffs also produce revenue for the
government.
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• https://www.business-standard.com/article/economy-
policy/google-tax-us-imposes-tariffs-on-india-but-with-
six-month-delay-121060201669_1.html
• https://indianexpress.com/article/business/economy/n
ew-delhi-to-examine-proposal-plan-suitable-measures-
digital-tax-india-among-nations-likely-to-face-
retaliatory-us-tariff-7248664/
• https://www.globalcompliancenews.com/2021/07/17/
south-africa-high-court-rules-that-samsung-device-is-a-
telephone-not-a-machine-for-tariff-purposes-
29062021-2/

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 Tariffs
A tariff is a duty or tax imposed by the government of a country upon the
traded commodity as it crosses the national boundaries. Tariff can be levied
both upon exports and imports.

Export Duty - The tariff or duties imposed upon the goods originating in the home
country and scheduled for abroad are called as the export duties.

Import Duty - The import duties or import tariffs are levied upon the goods
originating from abroad and scheduled for the home country.

Transit Duty - Imposed upon the goods originating in the foreign country and
scheduled for a third country crossing the borders of the home country. If India
imposes tariffs on goods that Bangladesh exports to Pakistan through the Indian
Territory, these will be called as transit duties. Such duties are usually a matter of
much concern for the land-locked countries.

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 Tariffs
• Revenue Tariff - The tariff, which is imposed primarily for generating more
revenues for the government is called as the revenue tariff. In advanced countries,
the introduction and diversification of direct taxes has reduced the importance of
tariff as a source of government revenues. But in the less developed countries,
there is still much reliance of the governments on this source of revenue.

• Protective Tariff - The tariff may be imposed by the government to protect the
home industries from the cut-throat competition from the foreign produced
goods. The higher the tariff, greater may be the protective effect of tariff. A perfect
protective tariff is likely to prohibit completely the import from abroad.

• In practice, the perfect protective tariff may not exist. If the domestic demand for
import remains strong, there can be the possibility of smuggling imported goods.
In addition, such a tariff will not yield any revenue to the government. A high rate
of protective tariff can make the domestic producers more lethargic and inefficient
and unable to face foreign competition even in the long run.

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 Tariffs
• Specific Tariff - Specific tariff is the fixed amount of money per
physical unit or according to the weight or measurement of the
commodity imported or exported. Such duties can be levied on
goods like wheat, rice, fertilisers, cement, sugar, cloth etc. Specific
duties are quite easy to administer, as they do not involve the
evaluation of the goods.

• Combination/Compound Tariff - compound tariff is a combination

of specific and ad valorem tariff. The structure of compound tariff
includes specific duty on each unit of the commodity plus a
percentage of ad valorem duty. The compound tariffs not only
impart a greater elasticity to revenues but also assure a more
effective protection to the home industries.

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 Tariffs
• Single Window Tariff (Policy) - A single window is defined as a facility that allows
parties involved in trade and transport to lodge standardized information and
documents with a single entry point to fulfill all import, export, and transit related-
related regulatory requirements.
• (Additional Information:
https://www.unece.org/fileadmin/DAM/trade/ctied7/ece_trade_324e.pdf)

• Multiple Column Tariff - The multiple column tariff consists of three different rates
of tariff – a general rate, an international rate and a preferential rate. The general
and international tariff rates can be considered equivalent to the maximum and
minimum tariff rates. The preferential tariff is generally applied by a subject
country to the products originating from specified countries.
• The preferential tariff rate is kept lower than the general rate of tariff. For instance,
the goods imported by India from Britain before independence were subjected to
a lower tariff or duty free on account of Imperial Preferences. On the other hand,
the goods imported from other countries such as Japan, Germany and others were
subject to higher rates of tariff.

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 SUBSIDIES
• A subsidy is a government payment to a domestic
producer.
• Subsidies take many forms, including cash grants, low-
interest loans, tax breaks, and government equity
participation in domestic firms.
• By lowering production costs, subsidies help domestic
producers in two areas: (1) competing against foreign
imports and (2) gaining export markets.
• According to the World Trade Organization, in the mid
2000s countries spent some $300 billion on subsidies,
$250 billion of which was spent by 21 developed
nations.

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• Agriculture tends to be one of the largest
beneficiaries of subsidies in most countries.

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• https://www.livemint.com/news/india/india-
said-to-oppose-immediate-scrapping-of-
fishing-subsidy-at-wto-11626309323358.html
• https://scroll.in/article/1001563/while-
promoting-clean-energy-india-has-been-
cutting-subsidies-for-the-sector

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 IMPORT QUOTAS AND VOLUNTARY
EXPORT RESTRAINTS
• An import quota is a direct restriction on the quantity of
some good that may be imported into a country. The
restriction is usually enforced by issuing import licenses to
a group of individuals or firms.
• For example, the United States has a quota on cheese
imports. The only firms allowed to import cheese are
certain trading companies, each of which is allocated the
right to import a maximum number of pounds of cheese
each year.
• A common hybrid of a quota and a tariff is known as a tariff
rate quota. Under a tariff rate quota, a lower tariff rate is
applied to imports within the quota than those over the
quota.

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• https://www.bloombergquint.com/onweb/me
xico-willing-to-use-import-tools-to-fight-food-
inflation
• https://www.hellenicshippingnews.com/privat
e-refineries-in-chinas-shandong-to-sign-
commitments-to-crude-import-quota-rules-
sources/

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 Voluntary Export Restraint
• A voluntary export restraint (VER) is a quota on
trade imposed by the exporting country, typically
at the request of the importing country’s
government.
• Foreign producers agree to VERs because they
fear more damaging punitive tariffs or import
quotas might follow if they do not. Agreeing to a
VER is seen as a way to make the best of a bad
situation by appeasing protectionist pressures in
a country.
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 Additional Reading - VER
One of the most famous historical examples is the
limitation on auto exports to the United States enforced
by Japanese automobile producers in 1981. A response to
direct pressure from the U.S. government, this VER
limited Japanese imports to no more than 1.68 million
vehicles per year.
The agreement was revised in 1984 to allow 1.85 million
Japanese vehicles per year. The agreement was allowed
to lapse in 1985, but the Japanese government indicated
its intentions at that time to continue to restrict exports
to the United States to 1.85 million vehicles per year.

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 Additional Reading - VER
The automobile industry VER increased the price
of the limited supply of Japanese imports.
According to a study by the U.S. Federal Trade
Commission, the automobile VER cost U.S.
consumers about $1 billion per year between
1981 and 1985. That $1 billion per year went to
Japanese producers in the form of higher prices.
The extra profit that producers make when
supply is artificially limited by an import quota is
referred to as a quota rent.
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 LOCAL CONTENT REQUIREMENTS
• A local content requirement is a requirement
that some specific fraction of a good be
produced domestically.
• The requirement can be expressed either in
physical terms (e.g., 3 out of 8 parts for this
product must be produced locally) or in value
terms (e.g., 75 percent of the value of this
product must be produced locally).

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 LOCAL CONTENT REQUIREMENTS
• Developing countries have widely used local
content regulations to shift their
manufacturing base from the simple assembly
of products whose parts are manufactured
elsewhere into the local manufacture of
component parts.
• Developed countries have also used them to
try to protect local jobs and industry from
foreign competition.

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 LOCAL CONTENT REQUIREMENTS
• Local content regulations provide protection
for a domestic producer of parts in the same
way an import quota does: by limiting foreign
competition.
• The aggregate economic effects are also the
same; domestic producers benefit, but the
restrictions on imports raise the prices of
imported components.

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 LOCAL CONTENT REQUIREMENTS
• In turn, higher prices for imported
components are passed on to consumers of
the final product in the form of higher final
prices.
• So as with all trade policies, local content
regulations tend to benefit producers and not
consumers.

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• https://www.reuters.com/business/aerospace
-defense/china-quietly-sets-new-buy-chinese-
targets-state-companies-us-sources-2021-08-
02/
• https://www.business-
standard.com/article/companies/suppliers-
may-be-fined-10-if-they-fail-to-meet-local-
content-needs-121053100009_1.html

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 ADMINISTRATIVE POLICIES
• Administrative trade policies are bureaucratic
rules designed to make it difficult for imports to
enter a country.
• The Japanese are the masters of this trade
barrier. In recent decades Japan’s formal tariff
and nontariff barriers have been among the
lowest in the world.
• However, critics charge that the country’s
informal administrative barriers to imports more
than compensate for low formal barriers.
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 ADMINISTRATIVE POLICIES
• For example, at one point the Netherlands exported tulip
bulbs to almost every country in the world except Japan.
• In Japan, customs inspectors insisted on checking every
tulip bulb by cutting it vertically down the middle, and
even Japanese ingenuity could not put them back
together.
• Federal Express also initially had a tough time expanding
its global express shipping services into Japan because
Japanese customs inspectors insist on opening a large
proportion of express packages to check for
pornography, a process that delayed an “express”
package for days.
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 Antidumping Policies
• Dumping - selling goods in a foreign market at
below their cost of production or as selling goods
in a foreign market at below their “fair” market
value.
• The fair market value of a good is normally
judged to be greater than the costs of producing
that good because the former includes a “fair”
profit margin. Dumping is viewed as a method by
which firms unload excess production in foreign
markets.
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 Antidumping Policies
• Some dumping may be the result of predatory
behavior, with producers using substantial
profits from their home markets to subsidize
prices in a foreign market with a view to
driving indigenous competitors out of that
market.
• Once this has been achieved, so the argument
goes, the predatory firm can raise prices and
earn substantial profits.

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 Antidumping Policies
• Antidumping policies are designed to punish
foreign firms that engage in dumping. The
ultimate objective is to protect domestic
producers from unfair foreign competition.
• The antidumping duties are also called
countervailing duties.

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 Health and Product Standards
• Many governments have long had regulations
to protect consumers from unsafe products.
The indirect effect of such regulations often is
to limit or ban the importation of such
products.

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• https://www.azernews.az/business/181941.ht
ml

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 Additional Reading – A Beef to Ban
In 2003 several countries, including Japan and South
Korea, decided to ban imports of American beef after a
single case of mad cow disease was found in Washington
state. The ban was motivated to protect consumers from
what was seen to be an unsafe product. Together, Japan
and South Korea accounted for about $2 billion of U.S.
beef sales, so the ban had a significant impact on U.S.
beef producers. After two years, both countries lifted the
ban, although they placed stringent requirements on U.S.
beef imports to reduce the risk of importing beef that
might be tainted by mad cow disease (for example, Japan
required that all beef must come from cattle under 21
months of age).
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 Additional Reading – A Beef to Ban
Similarly, the European Union banned the sale and
importation of hormone-treated beef. The ban was
motivated by a desire to protect European consumers
from the possible health consequences of eating meat
from animals treated with growth hormones. The conflict
over the importation of hormone-treated beef into the
EU may prove to be a taste of things to come. In addition
to the use of hormones to promote animal growth and
meat production, biotechnology has made it possible to
genetically alter many crops so that they resist common
herbicides, produce proteins that are natural insecticides,
grow dramatically improved yields, or withstand
inclement weather conditions.
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 Additional Reading – A Beef to Ban
A new breed of genetically modified tomatoes has an
antifreeze gene inserted into its genome and can thus be
grown in colder climates than hitherto possible. Another
example is a genetically engineered cotton seed produced by
Monsanto. The seed has been engineered to express a protein
that protects against three common insect pests: the cotton
bollworm, tobacco budworm, and pink bollworm. Use of this
seed reduces or eliminates the need for traditional pesticide
applications for these pests. As enticing as such innovations
sound, they have met with intense resistance from consumer
groups, particularly in Europe. The fear is that the widespread
use of genetically altered seed corn could have unanticipated
and harmful effects on human health and may result in
“genetic pollution.”

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 Other Measures
• Import Prohibitions - If any import of goods adversely affects the
health of human, animal, plants and other species, such goods also
may be prohibited to import by the government of importing
country.

• Safeguard Duties - A safeguard is a form of temporary relief. They

are used when imports of a particular product, as a result of tariff
concessions or other WTO obligations undertaken by the importing
country, increase unexpectedly to a point that they cause or
threaten to cause serious injury to domestic producers of “like or
directly competitive products”. Safeguards give domestic producers
a period of grace to become more competitive vis-à-vis imports.
Safeguard measures shall not be applied against a product
originating in a developing country.

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 Other Measures
• Unilateral - a unilateral measure is defined as a
retaliatory measure which is imposed by a
country without invoking the WTO dispute
settlement procedures or other multilateral
international rules and procedures, and which is
based solely upon the invoking country's own
criteria.

• Bilateral – a measure applied by two countries

retaliating against each other. E.g. US and China
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 Other Measures
Mixing Regulation - Describes two kinds of
practices:

a) Regulation specifying the proportion of

domestically produced content in products offered
for sale on the domestic market;
b) Regulation specifying, for any imports of a given
product, the quantity of a domestically produced like
product that must be purchased by the importer.
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 Impact of Trade Barriers
Distortion of Natural Flow of Goods and Services
Reduced Efficiency
Compromised Export Competitiveness
Increased Costs
Reduction in Consumer Choice
Prospect of animosity and Trade War
Stifles Innovation
Loss of Economies of Scale
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 BALANCE OF PAYMENT
• The International Monetary Fund – “the balance of
payments is a statistical statement that systematically
summarises for a specific time period, the economic
transactions of an economy with the rest of the world.
Transactions, for the most part between residents and
nonresidents, consists of those involving goods, services,
and income; those involving financial claims on, and
liabilities to, the rest of the world; and those (such as gifts)
classified as transfers, which involve offsetting entries to
balance – in an accounting sense - one sided transaction.”

• COMPONENTS OF BOP -
https://www.youtube.com/watch?v=YlQgeyKV-QM

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 adjustment measures to correct disequilibrium in BOP
(A) Automatic Adjustment (B) Policy Induced or Deliberate Measures
The burden of adjustment is deliberate measures are undertaken by the government to
on the economy and market correct disequilibrium in BOP
forces and not on the
government

1) Monetary & Fiscal Policy (Expenditure Changing Policies) An

expansionary monetary policy will increase the money supply
and decrease interest rates. While a contractionary monetary
policy will decrease the money supply and increase interest
rates.

2) Devaluation (Expenditure Switching Policy) switches

expenditure from imported goods to domestic goods & services.
(https://www.investopedia.com/articles/investing/090215/3-
reasons-why-countries-devalue-their-currency.asp)
3) Exchange Control recipients of foreign exchange like exporters
are required to surrender foreign exchange to the exchange
control authority in exchange for domestic currency.
4) Trade Policy Measures [(a) Import controls, (b) Export
promotion]
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 Effective Rate of Protection
• https://www.youtube.com/watch?v=VdqWSx3A5us&t=122s
• Major work on the concept was done by Clarence Barber and Max
Corden.
• Effective Rate of Protection is a commonly used measure of net
effect of trade policies on the incentives facing domestic producers.
• Economic concept used to measure the level of protection that
domestic industries receive from tariffs (taxes on imported goods).
• Measurement of effective rate of protection is a two stage process
–
– a) determining the nominal rate of protection
– b) analyzing the implications for effective protection

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 Effective Rate of Protection
• An effective rate of protection (ERP)
calculation takes into account the fact that
domestic value added might be less than total
value added – i.e., there is substantial
imported value added in the final good.

• ERP = (VAd – VAw)/ VAw x 100

• VAd – Value addition for domestic market
• VAw – Value addition for world market
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 Effective Rate of Protection
• Positive ERP: domestic industry is receiving additional protection beyond
the direct tariff on the final product. In other words, the domestic
producers are benefiting from tariff protection at multiple stages of
production, including the intermediate inputs.
• Negative ERP: domestic industry is actually facing greater competition
from imported goods when considering the entire production process.
This might occur when the tariffs on intermediate inputs are higher than
the tariffs on the final product.
• Zero ERP: tariffs on the final product and its intermediate inputs are
balanced, resulting in no additional protection or disadvantage to the
domestic industry. This could indicate a situation where the government is
aiming for a neutral trade policy that neither favors nor disadvantages
domestic production through the tariff structure.
• [By reducing the cost of inputs, domestic industries may become more
competitive on the global market. This could stimulate export growth and
contribute to overall economic expansion.]

Dr. Shilpa Sankpal / SVKM's NMIMS Indore

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Campus