International Business Environment
IBO 01 Free Solved Assignment
IBO 01 Free Solved Assignment July 2021 & Jan 2022
Q. 1. (a) How can the study of the International Business Environment be useful for Managers? Give your arguments.
Ans. It is rightly said that the business environment provides both constraints and opportunities. Particularly in international business.
Environments in foreign countries are different and also unfamiliar to a business firm. Some of the constraints of the foreign environment include economic conditions, customs, government regulations.
Availability of natural resources etc. The international business environment provides numerous opportunities also which include changing needs of customers and markets, technological progress etc.
One example of a constraint is that despite many initiatives foreign direct investment in India is not picking up like China in the country due to political and bureaucratic reasons.
One of the examples of? opportunity is that the growing demand for air-conditioners has attracted many newcomers, domestic being GE-Godrej a 2 Kirloskar and multinationals like LG Electronics, Whirlpool Electrolux, etc. into the industry.
Even though environmentai forces can act as a sea that influence a business organisation in many directions,
it can also create opportunities for expansion and growth through the opening of new markets, technological advances and the constant evolution of vital conditions such as demographics.
Hence, it is essential to forecast environmental conditions prior to entering into any international business agreement. IBO 01 Free Solved Assignment
Further, business environment is dynamic and is undergoing fast and significant changes.
A firm dealing in international business has to be extremely careful in identifying the various environmental forces operating at the home country, host country and global levels and should examine their influence on production, personnel, financial and marketing operations of the firm.
International business comprises all comerical transactions (private and government, sales, investments, logistics and transportation) that take place between two or more regions, countries and nations beyond their political boundaries.
Usually private companies undertake such transactions for profit, governments undertake them for profit as well as political reasons.
As trade barriers recede and businesses in developed economies increasingly pursue market upport unities abroad, competency and effectiveness in international management are paramount skill at many companies.
The issues involved in international management span the whole gamut of those concerning management in general but there are several areas of special interest, including.
• International finance and currency matter.
• Cross-Cultural communication and understanding.
• Foreign legal requirements and accounting practices.
• International competition.
To ignore such issues in an international business is to open doors to risk like inappropriate marketing approaches, poor labor-management relations, adverse currency fluctuation and other problems. IBO 01 Free Solved Assignment
Contemporary international managers will need to demonstrate a higher level of skill than those exhibited by the traditional managers in the past.
They must be multilingual sensitive to cultural differences and knowledge about current gobal managem( 3, theory, philosophy, psychology and their practical application.
Equally important is the manager’s ability to choose the right strategy and organisation applicable to individual companies operating in the international management.
They include globalization, rationalization national responsivness and the multifocal approach,
whether or not these strategies are implemented depend’s upon a countries size and the number of countries in which it operates competent international managers must be able to analyze the business and political environments endemic to the countries in which they are operating and adapt the strategies either individually or in combination, that best suit their needs.
(b) Briefly explain the Economic and Financial Environment of International Business.
Ans. Economic environment refers to all economic factors or forces affecting business and external to and often beyond the control or influence of individual business enterprises.
Business is an economic activity and it conducts its activities in the market system. Hence, a business is greatly influenced by the economic environment.
It is the economic environment of a business which is the primary consideration in the decision-making of a firm. IBO 01 Free Solved Assignment
Economic environment consists of the following factors:
(i) Economic Development
(ii) Gross national Product and its Distribution
(iii) Expenditure Pattern
(1) Economic Development-The development of marketing in a country depends on its economic development. A highly developed economy offers a large sized market of a variety of products.
Besides, a highly developed economy has a better infrastructure and more developed marketing systems. IBO 01 Free Solved Assignment
Hence, it is more feasible to do business in such nations. On the other hand, a less developed economy does not have much market potential because it offers a low demand for variety of products and poor infrastructure.
Hence, it may be concluded that a business firm will like to enter into international business with a developed economy, if other factors remain constant.
In this way, economic development is directly related to the development of marketing in a country.
(ii) Gross National Product and its Distribution-Gross national product and its distribution have a lot of implications for foreign market decisions. It has a significant bearing on the nature and size of demand, government policies affecting business etc.
Countries with high gross national product have more demand for industrial goods and capital equipment because they are characterized by the widespread use of modern and sophisticated technology, continuous innovations,
low share of the primary sector, market friend by economic policies and democratic rights. The demand for consumer products depends on per capita income.
Sectoral distribution of the gross national product determines the kind of goods in demand in a foreign country.
It the majority of a country’s gross national product comes from the primary sector (mainly agriculture), it implies that it shall have great market potential for agricultural inputs such as fertilizer, pesticides, agricultural tools and machinery, seeds etc.
A country having a predominant secondary sector (manufacturing sector) shall have a good market for raw materials, plants and machinery and also for consumer goods.
Distribution of National Income (GNP) is also an important factor of the economic environment influencing the foreign market decisions. IBO 01 Free Solved Assignment
Low-income countries are also suffering from uneven distribution of national income. Due to uneven distribution of national income.
Only a small portion of the population accounts for about 70% of the gross national product of the country and limited while there will be tremendous market potential for low priced products and essential products.
In an economy having more or less even distribution of national income, demand for high priced products will be more.
(iii) Expenditure Pattern-The market potential of a product depends on expenditure pattern of the people of a country.
Expenditure pattern of a country determines how the disposable income is being spent on different products.
Some products are given more weightage than other products. Expenditure pattern of a country has non-economic i.e., cultural dimension also.
Soft drinks, beer, wine are consumed much more in America and European countries rather than in India though people can afford it in India.
People believe in ‘simple living, and like to spend on traditional items. Data on expenditure patterns are useful in judging as to how the money is spent on different items and which products receive more weightage. IBO 01 Free Solved Assignment
(iv) Infrastructure-Literally infrastructure means structure below i.e., foundation. With reference to business, infrastructure means the supporting services.
Economic infrastructure includes transportation, telecommunications, advertising, marketing research, warehousing, insurance, credit and banking facilities.
Infrastructure not only helps the agriculture industry and other productive activities but also facilitates the distribution of products.
A developed economy has a developed and better infrastructi 4 which makes it convenient to reach various market segments.
In a developing economy, there is absence of adequate infrastructu. which increases the firm’s costs and reduces its capacity to reach various market segments.
International business operations have received a tremendous boost in the areas where good communication systems and transportation facilities are available.
Companies find it difficult to coordinate and control their business in the countries, which have poor transportation and communication systems.
Following are the various factors constituting financial environment influencing the foreign market decisions: IBO 01 Free Solved Assignment
Monetary Policy-Monetary policy refers to the policy of central bank of the country (say Reserve Bank of India in India) to regulate and control money supply and credit in the economy.
The main components of monetary policy are as under.
(a) Bank rate
(b) Open market operations
(c) Cash reserve ratio
(d) Margin requirements.
Monetary policy controls the availability of credit and money and its cost. Monetary policy affects the savings, investments and consumer spending in the economy.
In this way monetary policy affects business operations in foreign market. Monetary in an economy.
poorly also affects exchange rate of currency. A decision for foreign market will be taken if there is price stability.
Price stability does not mean absence of any increase in prices. An inflation rate of 3-4 percent creates a good environment for business.
Hence, monetary policy should aim to control the inflation up to 4%. Monetary policy also affects the rate of interest prevailing in an economy
(ii) Fiscal Policy-Fiscal policy refers to the policy of the government regarding its revenue, expenditure and borrowing Thus, fiscal policy relates to financial activities of the government. IBO 01 Free Solved Assignment
Fiscal policy of a country influences the nature and directi 4 of various economic activities in the country. Under fiscal policy, following measures are taken:
(a) Public expenditure
(c) Public borrowings.
The fiscal situation of most of the developing economies is unsatisfactory due to increasing non-developmental expenditure.
As a result, fiscal deficit is very high. Since fiscal deficit has to be financed by public borrowing which has a tendency to push up interest rates, credit is not cheap.
The high cost of finance, thus, puts home country’s business at a great disadvantage in international markets vis-à-vis other countries where interest rates are relatively low.
High rates of interest also attract foreign portfolio investment which, in turn, gives us an overbalanced exchange rate.
This undermines the competitiveness of exports. The government often use tax incentives or disincentives to encourage or discourage foreign business operations.
(iii) Commercial or Trade Policy –Commercial or trade policy means the government’s policy with regards to its trade with other countries.
There may be two types of trade policies, inward oriented trade policy and outward oriented trade policy. An inward oriented trade policy is biased in favour of domestic market.
Protection is the principal instrument of inwardoriented trade policy. An outward oriented trade policy does not discriminate between production for domestic market and exports.
It is also non-discriminatory between purchase of domestic goods and foreign goods. In this environment, firms have the freedom to decide whether they wish to produce for exports or for domestic markets. IBO 01 Free Solved Assignment
As a part of global liberalisation almost all the countries have substantially liberalised imports.
Domestic firms now face increasing competition from imports.
A firm should study in detail what tariff and non-tariff barriers the host country uses to protect its domestic industry from foreign competition.
(iv) Foreign Investment Policy-Foreign investment policy is related to government’s policy towards investment other countries.
Foreign investment policy is apart of industrial policy. A government may have a liberal or controlled foreign investmer policy.
Now-a-days there is an era of liberalisation and globalisation. As a result, industrial licensing has been abolished a 5 role of public sector has been minimized. There is liberal import of foreign capital and technology.
In India, in case of high investment priority industries, approval of foreign investment is automatic. As a result, foreign direct investment is increasing.
Each country has its own foreign investment policy which must be studied in detail to ascertain the openness to investment with other countries.
This will enable in ascertaining the degree and nature of controls in respect of foreign investment.
(v) Balance of Payments Account-The balance of payments account means a record of all the economic transactions between residents of a country and the rest of the world.
The balance of payments account is divided into two parts-Current account and capital account. IBO 01 Free Solved Assignment
The current account is a record of all of the recurring trade in goods and services, private gifts and public aid transactions between countries.
The capital account is a record of all long-term direct investment, portfolio investment and other short-term and long-term capital flows.
In general a country accumulates resources when the net of its current and capital account transactions shows a surplus; it gives up reserves when the net shows a deficit.
A firm intending to do international business should carefully ascertain the balance of payment situation of foreign countries because it will give the information about the country’s foreign currency reserves.
A country having deficit in its balance of payment account generally impose restrictions on the movement of foreign exchange. As a result an international firm has to prepare its strategy accordingly.
Q2. (a) How does disequilibrium occur in the balance of payments? Deseribe the methods of correcting the disequilibrium with examples.
Ans. A nation’s balance of payment is said to be in disequilibrium when the nation is not in a position to pay for its imports from its export earnings or accumulates reserve year after year.
Disequilibrium occurs in the balance of payment when there is either a surplus or deficit in the balance of payment.
There are a number of factors that cause disequilibrium in the balance of payments. These factors may be broad by categorized as under: IBO 01 Free Solved Assignment
(i) Economic factors
(ii) Political factors
(ii) Social factors
(*) Economic Factors-Disequilibrium occurs in the balance of payment due to following economic factors:
(1) Large scale development expenditure that may cause large imports.
(2) Cyclical fluctuations in general business activity such as recession or depression.
(3) Large imports as a result of high domestic prices.
(4) New sources of supply, new and better substitutes to existing products and changes in costs as a result of technological
(*) Political Factors – Political instability may cause large capital outflows and less inflow of foreign capital.
Methods of Correcting the Disequilibrium Following are the methods of correcting the disequilibrium in balance of payment:
(1) Use of past reserves
(2) Borrowings from International Monetary Fund
(3) Monetary Policy
(4) Fiscal Policy
(5) Exchange rate Adjustment.
(1) Use of past reserves-Most of the countries particularly the members of international monetary fund maintain reserves consisting of gold, foreign currencies and fund related assets i.e. reserve position with the international monetary fund and holdings of Special Drawing Rights (SDR).
If such reserves are available a country may use such reserves to finance the deficit of balance of payments. IBO 01 Free Solved Assignment
(2) Borrowings from International Monetary Fund-Members of international monetary fund may borrow funds from IMF to finance the BOP deficit.
IMF offers following borrowing facilities to its members:
(i) Stand bye loans
(ii) Extended fund facilities.
(iii) Structure adjustment facilities
(iv) Enlarged structural adjustment facilities
(V) Compensatory and contingency financing facilities
(vi) Systematic transformation facilities
(3) Monetary Policy-Monetary policy refers to the policy of the Central Bank to make changes in money supply to influence BOP conditions. The usual monetary policy measures are as under:
(i) Change in interest rates
(ii) Change in credit policy by changing cash reserve ratio, liquidity ratio.
(iii) Open market operation i.e. issue of treasury bills bonds and securities by the government.
(iv) Changing the margin requirements
Monetary policy measures bring about the required change in the level of money supply which affects the total demand including demand for imported goods and services.
In case of deficit in BOP, monetary policy aims to eurtail money supply to reduce demand for imported goods and services.
When the money with the public reduces, the investment expenditure and consumption expenditure decline thus improving the BOP deficit.
In case of surplus of BOP, monetary policy aims to increase money with the public so that demand for imported goods and services increases.
(4) Fiscal Policy-Fiscal policy means the expenditure policy and taxation policy of the government. The fiscal policy is implemented through the budgets of the government.
The most important tools of fiscal policy are taxation policy and public expenditure policy. In case of deficit in BOP, indirect taxes like excise duties, sales tax etc., are increased to curtail consumptic Direct taxes also affect the disposable income.
Increase in direct taxes reduce consumption and also the savings. From the ang of savings, indirect taxes are preferred to direct taxes.
The government may change its expenditure policy to reduce the expenditure. If the government reduces the non-productive expenditure, it would directly help reducing the BOP deficits. IBO 01 Free Solved Assignment
Fiscal policy measures are considered to be more effective than the monetary policy measures but efficacy and effectiveness of fiscal policy measures requires political will which is generally missing.
(5)Exchange rate Adjustments-Exchange rate adjustment is used to correct the disequilibrium if the deficit in BOP remains for a long time.
Devaluation of currency i.e., a downward adjustment in exchange rate makes the exports cheaper and imports dearer.
In this way devaluation tends to reduce imports and to encourage exports. However, devaluation may not give desired results, because of the following reasons:
(i) The competitors may revise their pricing strategies in reaction to devaluation.
(ii) Other currencies may be depreciated neutralizing the impact of domestic currency devaluation.
(iii) All the trade transactions are pre-arranged, therefore the import of goods may be immediately reduced. IBO 01 Free Solved Assignment
(iv) There may not be substitutes for the goods imported. Therefore the goods are required to be imported whatever be the circumstances.
(v) If the nature of goods imported is necessities, there may not be significant decline in imports as a devaluation because their price elasticity is low. Therefore, the balance of payments may actually worsen rather than importing.
(b) Illustrate the advantages and disadvantages of FDI. Discuss the role of FDI in the economic development of the host country.
Ans. Following are the advantages of FDI:
(*) Supplier of Capital-Developing countries suffer from shortage of capital required for economic development.
FDI goes directly into investible resources of the host country. Foreign direct investment results in capital formation and helps in pushing up the rate of growth of the economy.
(*) Foreign Exchange-Most of the developing countries face adverse balance of payment position because their imports exceed their exports.
Developing countries need foreign exchange to meet their development needs. FDI helps the host countries to increase their foreign exchange reserves by bringing their resources in foreign exchange.
FDI reduces the dependence of economy on the imports of raw materials, technology etc. Further, FDI helps to increase the exports of the developing countries.
As a result balance of payment of host countries improves. FDI is better than the external borrowings.
External borrowings create a fixed liability and are repayable after sometime. External borrowings need payment of interest regularly FDI does not require payment of principal and interest thereon.
(*) Vehicle of Technology Transfer-Developing countries are technologically backward. Developing countries do not have sufficient resources to carry on research and development FDI brings modern technology and efficient management methods.
FDI promotes inventions and innovations in developing economies. As a result of advanced technology, developing countries speed up the process of economic development.
(*) Promoter of Exports-FDI acts as a promoter of exports of host developing country.
Foreign enterprises enjoy a number of market superiorities over the national firms in promoting the exports IBO 01 Free Solved Assignment
They possess a more reliable and upto date market information system. They enjoy global network of marketing.
(*) Provider of Employment-Developing countries face a serious problem of unemployment.
When FDI comes to an underdeveloped country, there is an increase in the investment level. In this way FDI results in large scale employment opportunities.
FDI promotes employment indirectly also. Foreign enterprises stimulate the growth of local enterprises to support them in their operations.
Foreign enterprises offer excellent pay scales and career opportunities to their employees.
(*) Higher Wages-FDI results in higher wages of employees particularly of skilled employees.
FDI promotes mode , management techniques and trained managers. Foreign enterprises help to professionalise management in host countric Relatively higher skilled jobs receive higher wages.
(*) Competitive Environment-FDI facilitates entry of foreign enterprises in domestic market.
This creates a competitive environment. Thus, FDI increases competition and thereby break domestic monopolies.
Foreign enterprises compel the domestic firms to improve their efficiency or withdraw from the market. IBO 01 Free Solved Assignment
Competitive environment is beneficial to consumers. Consumers will have a wider choice of products at lower prices. Disadvantages or limitations of FDI
Following are the disadvantages or limitations of FDI:
(*) Dependence on Domestic Capital-It has been observed that foreign enterprises do not bring much capital. In spite of bringing capital, they raise capital through borrowings from domestic capital markets and banks.
Thus, there is not much increase in the capital resources of the host countries. Foreign enterprises compete effectively with the domestic enterprises for scarce capital available in the domestic capital markets.
Thus, national firms are deprived of needed financial resources.
(*) Balance of Payments Constraint in the long-run-FDI provides inflow of foreign exchanges resource and removes the constraints on balance of payment in the initial stages.
But a large sum of money flows out of the country in terms of payment of dividends, profits, royalties, technical fees land interest to the foreign investors further, many foreign enterprises take recourse to loan finance rather than equity Finance Loan finance is a fixed liability and involves payment of interest regularly and repayment of principal amount.
This puts a constraint on the balance of payments in long run. Further there is a heavy strain on foreign exchange reserves when foreign enterprises decide to move their capital out of the country.IBO 01 Free Solved Assignment
(*) Absence of Effective Transfer of Technology-Foreign enterprises often transfer outdated technology to their collaborators in host countries.
In a number of cases, technology transferred by foreign enterprises has been found unsuitable causing waste of scare capital.
In many cases, foreign enterprises do not engage in R and D activities within host countries. Their R and D activities continue to be centralized in the home country or in other industrialized country.
In many cases the technology transferred is of a capital-intensive nature which is not useful for a developing economy which is generally labour surplus economy.
In fact, continued insistence on the import of such technology can have serious consequences for the econom of the host country since unemployment will increase.
Foreign enterprises have failed to develop local skills and technolo 8/ suitable for host country.
(*) Not a Provider of Additional Employment-It is wrong to say that FDI creates additional employment opportunities.
In fact, FDI is not a provider of additional employment particularly when FDI substitutes national investment.
When FDI substitutes national investment, there will be no addition to existing employment opportunities. IBO 01 Free Solved Assignment
Another point to be noted is that foreign enterprises bring capital-intensive technology, which fails to generate sufficient employment opportunities.
Some foreign enterprises prefer to employ skilled personnel belonging to home country of foreign enterprises.
(*) Special Concessions-The government of the developing countries have to provide special facilities and concessions to the foreign investors to attract them.
These may include tax concessions provision of subsidized inputs, financial assistance, freedom to remit profits in foreign exchange etc.
Measures such as import quotas, tariffs, exchange restrictions etc., may suppress the demand for imports, but they do so at the cost of productivity and efficiency.
(*) Elitist Orientation of Production-Foreign investment is more interested in quick profit yielding consumer goods sector.
The emphasis of FDI is on producing goods for the cash-rich but small elite sector of the developing countries like cosmetics, toiletary items, televisions, music system, mobile phones, luxury cars etc., this results in the inversion of scarce economic resources to the production of non-essential items.
(*) Bad Business Ethies-The activities of many foreign enterprises often tall outside the domain of proper business ethics and the legal system of the host countries.
For example, some American TNCs have paid bribes to influence people to get things done. Further, foreign enterprises have gained necessary strength to influence the decision-making processes in the developing countries.
The governments of developing countries are threatened by the direct and indirect interference of foreign enterprises in their internal affairs.
Thus, autonomy and sovereignity of the host countries is in danger.
Role of FDI in the economic development of the host country
If we see consider the advantages and disadvantages of FDI, we can conclude that FDI has an important role to play in the economic development of the host country.
Private foreign investment goes directly into capital a formation and thus constitutes a net addition to investible resources in the host country.
The most important contribution of FDI is the spread of modern technology and efficient management methods. Further foreign investment induces more domestic investment in the form of ancillary domestic units. IBO 01 Free Solved Assignment
FDI encourages the growth of skills. FDI results in a pattern of growth favourable to host country sin new products are introduced and marketed, new tastes are created and specific needs of the host country are met.
However, F. has its role in the initial stages of development of host country. Excessive dependence on FDI is harmful in terms of economic cost and political interference.
One has to be selective in seeking FDI. Further, the government of the host country should have sufficient regulations to monitor the activities of foreign enterprises.
FDI is like a medicine and should be used when required. There are a number of countries which have developed without FDI.
These countries include Japan and South Korea. On the other hand, there are a number of countries which are developing as a result of FDI.
To sum up, FDI brings four “Es efficiency, equity, experience and expertise. In return there is fifth “E”-Expatriation of profits.IBO 01 Free Solved Assignment
Distinguish between the following:
(a) Micro and Macro Business Environment.
Ans. International business environment refers to totality of all the factors viz., geographic, economic, financial, sociocultural, political, legal, technological and ecological which are external to and beyond the control of individual business enterprises.
International business environment is more complex than the business environment because international business environment consists of foreign and global factors, which are external to domestic environment.
A firm is generally familiar with the factors operating at the national level but a firm has to be aware of various factors operating in a country of tradio partner.
Thus, international business environment is sum total of domestic, foreign and global environments. A firm has to through the foreign country environment.
Broadly environment of business may be classified into two groups:
(i) Micro-environment-Micro-environment refers to such factors in the firm’s immediate environment whose decisions and actions have a direct bearing on an enterprise.
Since a business broadly has two aspects viz., production and selling,
the Micro-environment includes the following:
(i) Input suppliers
(ii) Workers and their unions
(iv) Market intermediaries
Generally the players in micro-environment do not affect all the companies in an industry in the same way. IBO 01 Free Solved Assignment
Their decisions and actions vis-a-vis individual enterprise often differ in accordance with the size, capability and strategies of each enterprise.
Sometimes micro-environment of the various enterprises operating in an industry is almost the same.
But responses of these enterprises to their micro-environment will differ as each enterprise will attempt to achieve a higher success level.
(ii) Macro-environment-Macro-environment on the other hand, consists of larger societal and physical forces which affect the company and also the players in the company’s micro-environment.
Macro-environment of a company refers to all those factors which exercise their influence on the business activity in general. IBO 01 Free Solved Assignment
The role of macro-environment may be positive and negative. Macro-environment of business can be broadly classified into economic and non-economic environment.
Economic environment (including financial environment) includes the following:
(1) Economic development
(ii) Income and expenditure pattern
(iv) Monetary and fiscal policies
(v) Balance of payments
Non-economic environment includes the following:
(i) Political environment
(ii) Geographic environment
(iii) Socio-cultural environment
(iv) Legal environment
(v) Ecological environment
Now it may be concluded that micro-environmental factors are more intimately linked with the business firm than the macro-environmental factors Further,
micro-environment factors need not affect all the firms in a particular industry in the same way but macro environment factors affect all the firms in the same way.
Besides, macro-environmental forces are more uncontrollable than the micro-environmental factors.
(b) Flexible and Fixed Exchange Rate.
Ans. Flexible Exchange Rate-Flexible exchange rate means an exchange rate which is determined by demand for and supply of foreign exchange.
Thus, there is no intervention by Central Bank and value of currency is allowed to adjust freely. 11 foreign exchange market is busy at all times by changes in the exchange rates.
Following are the advantages of flexible exchange rate:
(i) Flexible exchange rates eliminate the need for central banks to hold international reserves. IBO 01 Free Solved Assignment
(ii) Flexible exchange rates are helpful to do away with barrier to trade and capital movements.
(iii) Flexible exchange rate enhances the efficiency in the economy by achieving optimum resources allocation.
(iv) Flexible exchange rate may encourage stabilizing speculation, which limits the size of exchange rate fluctuations.
(v) Flexible exchange rates facilitate domestic economic autonomy by removing external constraints on balance of payment equilibrium.
Following are the disadvantages of flexible exchange rate:
(i) The temporary or cyclical exchange rate stability will transmit price instability which may discourage trade and,hence, reduce economic welfare.
The more elastic the demand and supply of foreign exchange, the greater will be
exchange rate volatility.
(ii) Destabilizing speculation may increase volatility by pushing exchange rate progressively farther.
(iii) The absence of balance of payments constraints might foster the pursuit of domestic economic policies inimical to long-run maximisation.
According to purchasing power parity theory, under the flexible exchange rate system, the rate at which currency of home country will depreciate, will be equal to the difference between the home country’s inflation rate and the inflation rate in the rest of the world.
After the currency of home country depreciation. The currency of importables rise relative to the currency of exportable causing a depreciation in the commodity terms of trade.
Fixed Exchange Rate-Fixed exchange rate means an exchange rate which is officially declared and fixed. IBO 01 Free Solved Assignment
(However, only a very nominal deviation from this fixed value is possible).
Under the fixed exchange rate system, a deficit in the balance of payment is adjusted by a fall in the national income if the resources are not fully employed.
The adjustment of a deficit in the balance of payment requires official intervention in the markets.
Following are the advantages of fixed exchange rate system:
(i) Fixed exchange rate provides a measure of exchange rate stability and therefore eliminates a further source of uncertainty and price instability.
(ii) Fixed exchange rate contributes to the co-ordination of macro policies of countries in a world economy.
(iii) Fixed exchange rates are more conducive to expansion of world trade as they prevent risk and uncertainty in transactions.
(iv) Poorer nations would get foreign exchange for development purposes at low costs.
Following are the disadvantages of fixed exchange rate system:
(1) The system does not respond to the changes in the economy which may result into persistent balance of payments deficits and surpluses.
(ii) The system requires regular vigorous control and monitoring by the monetary authorities.
(iii) The system is not self-equilibrating and therefore over valuation and under valuation are rampant.IBO 01 Free Solved Assignment
Under the fixed exchange rate system a deficit in the balance of payment is adjusted by money supply changes and the consequent changes in the price level.
Under the fixed exchange rate system a deficit in the balance of payment is adjusted by a fall in the national income, if the resources are not fully employed.
(c) GATT and WTO.
Ans. Following are the distinctions between GATT and WTO:
|Basis of Distinction||GATT||WTO|
|1) Nature||GATT was ad-hoc and provisional,||WTO and its agreements are|
|2) Member||GATT has contracting parties. Its scope was limited||WTO has more than 150 members. Its scope is far wider than under the GATT|
|3) Domestic||GATT allowed existing domestic legislation to continue even if it violated a GATT agreement||WTO does not permit any domestic legislation|
|4) Power||GATT was less powerful and dispute settlement was slow and less efficient.||WTO is more powerful than GATT and dispute mechanism is faster and more efficient.|
|5) Blocking Divison||Under the GATT dispute panel findings could be easily blocked||WTO members cannot block decisions arrived|
|6) Framework||GATT allowed for the existence of a number of important side agreements negotiated and concluded in various GATT rounds.||WTO provides a unified package of agreements to which all members committed|
|7) Role||Its role was confined to overseeing international trade in goods||WTO has expanded the role of GATT by including Trade in services and intellectual property rights within the multilateral trading system. It includes the environment as one of the major items.|
The apex WTO body responsible for decision-making is the Ministerial Conference. It is expected to meet every two years.
The first WTO Ministerial conference is scheduled to be held, in Singapore before the end of 1996.
During the two years between meetings, the functions of the Conference are performed by the General Council. IBO 01 Free Solved Assignment
The General Council meets as a Dispute Settlement Body when it considers complaints and takes necessary steps to settle disputes between member countries.
It is also responsible for carrying out reviews of the trade policies of individual countries on the basis of the reports prepared by the WTO secretariat.
The General Council is assisted in its work by the:
• Council for Trade in Goods, which oversees the implementation and operation of GATT 1994 and its associate agreements;
• Council for Trade in Services, which oversees the implementation and operation of GATS; and
• Council for TRIPs which oversees the operation of the agreement on TRIPs.
It also indicates the various committees established by the WTO Agreement itself and the other committees that have been established for detailed work at the operational level under the various associate agreements.
Functions of WTO-The Agreement establishing WTO provides that it should perform the following four functions. IBO 01 Free Solved Assignment
(1) First, it shall facilitate the implementation administration and operation of the Uruguay Round legal instruments and of any new agreements that may be negotiated in the future.
(2) Second, it shall provide a forum for further negotiations among member countries on matters covered by the agreements as well as on new issues falling within its mandate.
(3) Third, it shall be responsible for the settlement of differences and disputes among its member countries.
(4) Fourth, it shall be responsible for carrying out periodic reviews of the trade policies of its member’s countries.
(d) Export Sales Contract and Domestic Sales Contract.
Ans. Export sales contract may be defined as a contract whereby the exporter (seller) transfers or agrees to transfer (buyer for a price. An Export Sales Contract should have following essentials:
(i) Two parties-exporter and importers
(ii) Transfer or agreement to transfer the goods
(V) All other essentials of a valid contract e.g., competence of the parties to make contract, free consent etc. IBO 01 Free Solved Assignment
Following are the distinction between Export Sales Contract and Domestic Sales Contract:
Basic of Distinction
- Foreign element
- Movement of goods
- Applicable Law
Domestic Sales Contract::
> Domestic sales contraets do not have foreign elements because both buyer and seller are from same country.
> Domestic sales contract mentions only one currency i.e., home currency.
> Goods are transferred with in the geographical limits of the country.
> Domestic sales contract is subject to the law of the land where it is signed. Domestic sales contract is not governed by foreign exchange laws and regulations.
> Various legal and procedural formalities are required in domestic sales contract.
Foreign Sales Contract ::
> Foreign sales contracts have foreign element because buyer is from foreign country.
> Foreign sales contract states the price in foreign currency.
> Goods are exported outside the geographical limits of the country.
> Foreign sales contract may not be subject to exporter country’s law ESC is concluded subject to various law such as foreign exchange regulations etc
> ESC is subjected to various legal and procedural formalities.
4. Comment on the following statements:
(a) Indian foreign trade policy does not facilitate the import of technology.
Ans. The flow of technology to India has been comparatively limited because of the type of industrial development strategy. IBO 01 Free Solved Assignment
Up to July 1991, India was following a very restrictive policy towards foreign technology. Import of technology was considered on merits if substantial exports were guaranteed over a period of 5 to 10 years and if there were reasonable proposals for such exports.
Technical collaborations were to be considered on the basis of annual royalty payments which were linked with the value of actual production.
The percentage of royalty was dependent on the nature of technology. Whenever possible the payment of fixed amount of royalty per unit of production was preferred.
Royalty payments were limited to a period of 5 years. In the ‘eighties’. India entered into a large number of technology collaboration agreements.
It was considered that the government should take active measures to facilitate the transfer of technology. In the pre-liberalization era, technology agreements neer’ prior approval.
On 24th July 1991, the Government of India liberalized its policy. The industrial policy statement emphasized that there is a great need for promoting an industrial environment where the acquisition of technological capability receives priority.
Towards that end, government interference with commercial technology relationships of Indian entrepreneurs with foreign technology suppliers was unnecessary.
As viewed by the government, in the fast changing world of technology the relationship between the suppliers and users of technology must be a continuous one where as governmental interference on a case-to-case basis involved in ordinate delays and fastened uncertainty.
The Indian entrepreneur had come of age and no longer needed bureaucratic clearances of technology relationships. IBO 01 Free Solved Assignment
Thus, Indian companies will here after, be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgment with in the specified parameters.
This is expected to induce industry to develop indigenous competence for the efficient absorption of foreign technology and invest more in Research and Development (R&D) due to greater competitive pressure.
The New Industrial Policy has allowed import of technology with automatic approval. Technology agreements do not need prior approval.
Following are the important provisions of government policy regarding foreign technology agreements:
(1) Automatic permission will be given for foreign technology agreements in high priority industries upto a lump-sum payment of Rs l crore 5% royalty for domestic sales and 8% for exports, subject to total payments of 8% of sales over a 10 years period from date of agreement or 7 years from the commencement of production.
The prescribed royalty rates are net of taxes and will be calculated according to standard procedures. IBO 01 Free Solved Assignment
(2) In respect of industries other than those in Annex Ill automatic permission will be given subject to the same guidelines as above if no free foreign exchange is required for any payments.
(3) All other proposals will need specific approval under the general procedures in force.
(4) No permission will be necessary for hiring of foreign technicians, foreign testing of indigenously developed technologies.
Payment may be made from blanket permits or free foreign exchange according to RBI guidelines As a result of liberalized policy the number of technology agreements increased from 661 in the year 1991 to 982 in the year 1995.
The number further decreased to 595 in 1998. The largest number of technology agreements was made with USA in the year 1998 followed by Germany, Japan and U.K.
Following are the main limitations in the transfer of technology to Indian firms:
(1) Indian firms do not make necessary homework before entering into the negotiations for the transfer of technology. Effective purchase of technology can be done only when a buyer prepares sufficiently. IBO 01 Free Solved Assignment
(2) Indian firms do not build a team of experts to enable the management to negotiate an effective transfer of technology agreements. They do not take recourse to design conferences. Thus, there is lack of teamwork.
(3) There is a tendency to accept restrictive business clauses. Restrictive business clauses ensure imposition by the seller on the buyer to adhere to certain practices which are obstructive ineffective functioning of buyers.
Restrictive business clauses include ban on exports, areawise restrictions for exports, buying machinery and equipment from the sources specified by the seller of technology etc.
(4) There is no research and development effort by the Indian firms. As a result the seller of technology is not willing to provide research and development facilities to the buyer.
There have been a number of cases of repetitive import of technology.
(5) Very often there are many loopholes in the technology call abortion agreements such as lack of performance guarantee, lack of differentiation of technology from the changes of brand name and trademark.
(b) ICC has no role in arbitration and conciliation.
Ans. Arbitration is a cost and time-saving method of settlement of trade disputes and therefore, it has become a pop method of settlement of disputes.
There are a number of arbitral institutions and organizations operating at national, regii 16, and international levels. For the settlement of disputes relating to international trade.
There is the International Chamber of Commerce (ICC). ICC has its head office at Paris.
ICC arbitration or conciliation can take place anywhere in the world and there are no restrictions on the type of business dispute that can be submitted to ICC for arbitration or conciliation. IBO 01 Free Solved Assignment
ICC has a clear framework of rules and procedures which provides the required facilities and administrative and supervisory services. The ICC system has the flexibility of ad hoc arbitration.
(ii) Court of Arbitration.
ICC has a permanent secretariat that supervises each arbitration and conciliation, together with a comprehensive set of rules for guiding the procedure.
The Court of Arbitration is headed by a chairman assisted by 8 Vice Chairman a Secretary General and one or several Technical Advisors selected by the council of ICC.
The court meets once in a month. The court of Arbitration does not itself settle disputes. The Court of Arbitration appoints and confirms the appointment of arbitrators and conciliators.
The court has the power to ensure application of ICC rules for arbitration and conciliation. The court fixes the place of arbitration.
The arbitral award is made at the place of arbitration. The arbitral award is final and binding and the parties shall be deemed to carry out the award.
(c) All contracts are agreements but all agreements are not contracts.
Ans. According to Section 2(e) of Indian Contract Act an agreement is a promise or set of promises forming consideration for each other.
According to Section 2(b) a promise is an accepted proposal.
A person is said to be making a proposal (offer) when he signifies his willingness to another person to do or abstain from doing something with a view to obtaining his assent to the act or abstinence. IBO 01 Free Solved Assignment
When the assent is given by another person, he is said to have accepted the proposal (offer). Thus,
Agreement = Proposal + Acceptance According to Section 2(h), a contract is an agreement enforceable by law. Thus,
Contract = Agreement + Enforceability at law
“Enforceability at law” requires following elements:
(*) Both the parties to the agreement should have an intention to create legal relations.
(*) Both the parties to the agreement should be competent or capable of contract.
(*) The agreement must be supported by lawful consideration.
(*) Agreement should be based on the genuine or free consent of both parties.
(*) The object of the agreement must be lawful.
(*) The terms of agreement should be capable of performance.
(*) The terms of agreement should be certain and not vague or uncertain.
(*) Agreement should not have been expressly declared to be void or illegal.
(*) An agreement requiring the compliance of legal formalities should satisfy this condition.
An agreement is a very wide term. Agreement may be a social agreement or a legal agreement.
Since legal agreements give rise to legal consequences, they may be contracts. Social agreements are agreements but they cannot become contracts because they do not give rise to legal consequences. IBO 01 Free Solved Assignment
Agreements of moral, social or religious nature are not contracts because they are not likely to create a duty enforceable by law.
Therefore intention of the parties to contract is very important.
For example, if A agrees to come to the house of B for a dinner at B’s request, there is an agreement but it cannot be termed as contract because A and B do not intend to create legal relationship.
It can be concluded that all agreements are not contracts but all contracts are agreements. Contracts have their sourc agreements.
But all agreements do not materialize into contracts. Some of the agreements because sources of social ties some are based on trust etc. Some agreements do not satisfy essential elements of a valid contract.
(d) World Trade is not concentrated in a few countries and products.
Ans. Today we are living in the era of globalization and the entire world has become a global village.
Globalization can be felt by the presence of multinationals around opening of trade barriers, availability of vast range of products and services.
Globalization has made impact on world trade also. World trade has grown substantially over the years. IBO 01 Free Solved Assignment
The growth experienced is in the range of 4-10 percent per annum. In fact, world trade has grown more faster than the world economy in recent years.
For developing countries, trade is the primary vehicle for realizing the benefits of globalization.
Growing trade has contributed to the on going shift of some manufacturing and service activities from industrial to developing countries, which further accelerates the process of globalization.
The creation of World Trade Organization in 1995 is another step towards creating an environment conducive to the exchange of goods and services.
5. Write notes on the following:
(a) Political Risks,
Ans. Political risk means risk of a change in the government policy. Political risk adversely affects a company’s ability to operate effectively and profitably.
Political risk can deter company from doing international business. When the perceived level of political risk is lower, a country is more likely to attract investment.
All other things being equal, the less developed a country. The greater would be the political risk. IBO 01 Free Solved Assignment
Following are the major types of political risks:
(v) Blocking of funds
i) Confiscation-Confiscation refers to a situation on under which a government forfeits a foreign investment. It means that the government does not pay any compensation for taking over the foreign investment.
(ii) Expropriation-Expropriation refers to a situation under which a government takes over a foreign investment by paying some compensation.
This compensation may not be equal to market value of foreign investment. It implies that a compensation is paid for taking over the foreign investment.
(iii) Nationalization- Nationalization refers to a situation under which a government takes over the ownership of the entire industry.
It means that nationalization affects the entire industry rather than a single company. Nationalization involves transfer of ownership of business to a government agency.
The process of nationalization may or may not have any compensation to be paid to previous owners of the business. It means that a compensation may be paid or may not be paid to the previous owners. IBO 01 Free Solved Assignment
(iv) Domestication-Domestication refers to a situation under which a government restricts gradually the freedom of operations of a foreign business firm.
The purpose of domestication is to bring the activities of a foreign business firm in line with national interest.
It implies that domestication is a mild form of intervention of a government. Domestication is a gradual encroachment of the freedom of a business firm.
Domestication can be either firm initiated, government-initiated or predetermined. The government initiated domestication is quite risky and is treated at par with expropriation.
(v) Blocking of Funds-Blocking of funds refers to a situation under which a government does not allow a foreign firm remit the funds or earnings back to home country.
Blocking of funds may be temporary or permanent. In this case, there is no danger to ownership and property rights of the funds but a foreign firm is not allowed to repatriate its earnings and investment.
Blocking of funds was a common problem faced by Indians during Idi Amin’s rule in Uganda when it was almost impossible for the Indian firms to repatriate their earnings in any form.
(b) Alternative Dispute Resolution (ADR).
Ans. Litigation and arbitration are considered to be the traditional methods of settlement of international trade disputes. IBO 01 Free Solved Assignment
Alternative dispute resolution refers to an informal method for the resolution of commercial disputes. Alternative dispute resolution involves face-to-face negotiations.
Alternative dispute resolution includes the following:
(>) Mutual negotiations.
An alternative dispute resolution mechanism was developed in USA. But it has been gaining popularity, recognition, and use of non-traditional methods for the resolution of trade disputes.
ADR is based on the principle “Prevention is better than cure”. It implies that alternative trade disputes believe in the prevention of disputes.
ADR is a non-formal, economical and less time-consuming method.
Conciliation-Conciliation means the process of seeking agreement between the parties, without recourse to arbitral or judicial proceedings.
Thus conciliation being consensual is an independent procedure to resolve disputes between the parties.
A conciliation proceeding can be initiated by a party inviting the other party to conciliate once the opposite party expresses its consent to the
conciliation, the conciliation proceedings will start. It is for the parties to the dispute to decide the number of conciliators. IBO 01 Free Solved Assignment
Unlike an arbitrator, a conciliator is not a judge but only a facilitator. Accordingly, a conciliator assists the parties in the resolution of disputes amicably in an independent and impartial manner.
A conciliator derives his authority from the parties to the dispute. Therefore, the scope of his authority is determined by the agreement between the parties.
In the discharge of his duties, he must keep in mind the following:
(i) principles of objectivity, fairness, and justice;
(ii) usage of the trade and
(ii) facts and circumstances of the dispute.
Keeping the above factors in mind, the conciliator may make proposals for the settlement of the dispute.
These proposals can be made by him at any stage of conciliation proceedings. However, these proposals need not be in writing.
Also he is not required to give any reasons for his proposals. These proposals will form the basis of a settlement agreement between the disputant parties.
This settlement agreement duly signed by the parties is final and binding on them and the persons claiming under them.
The settlement agreement has the same status and effect as if it is an Arbitral Award on agreed terms. IBO 01 Free Solved Assignment
Also, it is enforceable as a decree of the court, like an Arbitral Award.
However, Parties to conciliation may, before signing the settlement Agreement, terminate the conciliation proceedings by giving a written declaration to the conciliator indicating the date from which the termination will be effective.
But they cannot initiate any arbitral or judicial proceeding during the continuance of the conciliation proceeding.
The only exception being the resort to such proceedings for preserving the parties’ rights. Unless otherwise agreed by the parties, a conciliator is not allowed to :
(i) act as arbitrator,
(ii) be a representative or counsel of a party in any arbitral or judicial proceedings and
(iii) be presented as a witness in any arbitral or judicial proceeding by the parties, at a later stage.
Further, a conciliator is under an obligation to keep all matters relating to conciliation proceedings confidential, where it has resulted in a settlement agreement or not.
Also this principle of confidentiality is to be maintained by the parties except where its disclosure is necessary for the implementation and enforcement of the settlement agreement, IBO 01 Free Solved Assignment
(c) Wagering Agreement.
Ans. Section 30 only says that agreements by way of wager are void. The section does not define “wager”.
According to William Anson, wager is a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event.
In the words of Justice Hawkins, “A wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event,
mutually agree that dependent on the determination of that event, one shall pay or hand over to him, a sum of money or another stake,
neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose there is no other real consideration for the making of such contract by either of the parties.”
In short wager may be defined as an agreement between two parties to the effect that if a given uncertain event is determined in one way,
one of them shall pay a certain sum of money to the other, and determined the other way, the latter shall pay to the former. IBO 01 Free Solved Assignment
For example, A and B bet as to whether it would rain on a particular day or not-A promising to pay Rs. 100 to B if it rained and B promising an equal amount to A if it did not. This agreement is a wager.
Essential of a Wagering Agreements
(1) It is a promise to pay money or money’s worth.
(2) The promise must be conditional on an event happening or not happening.
(3) Event must be uncertain. An event may be uncertain on account of two reasons:
(a) It has not happened so far, or
(b) It has already happened but the parties are ignorant of the results.
(4) Each party must stand equally to win or lose. The gain of one party must be the loss of other. An agreement is not wagered if either of the parties may win but cannot lose or may lose but cannot win.
(5) Neither party should have any interest in the event other than the sum or stake he will win or lose.
(6) Neither party should have control over the happening of the event one way or other.
Following are the circumstances under which an agreement is not a wager:
(i) A contract of insurance is not a wager. In insurance, the insured or assumed has an insurable interest in the subject matter and parties are interested in the protection of the subject matter. IBO 01 Free Solved Assignment
A contract of insurance is based on scientific calculation of risks.
(ii) Share market transactions in which delivery of stocks and shares is intended to be given and taken are not wagered.
(iii) A subscription or contribution or an agreement to subscribe or contribute toward any plate prize or sum of money of the value of Rs. 500 or above to be awarded to the winners of a horse race is not void, and hence, enforceable.
(iv) A cross word competition involving a good measure of skill for its successful solution is not a wagering agreement.
However, if prizes of a crossword competition depend upon the correspondence of the competitors, a solution with a previously prepared solution kept with the editor of a newspaper, it is a lottery and wagering transaction.
(v) Games of skill, e.g., picture puzzles or athletic competitions are not wagered. If skill pays a substantial part and prizes are awarded to the merits of solutions, the competition is not a lottery. IBO 01 Free Solved Assignment
(d) Code of Ethics for International Marketing.
Ans. Code of ethics are statements of values and principles which define the purpose of the corporate enterprise code of ethics is a document that clarifies the ethics of the business and defines the responsibilities of business towards various stakeholders multinational corporations have a long list of stakeholders having conflicting interests.
People of different countries have lot of expectations from multinationals. The question is-are the multinationals in a position to meet the expectations of all stakeholders? Naturally, the answer is not positive.
There are new few multinational corporations who take their business responsibilities seriously. The dream of companies honouring their social responsibilities is far to be achieved. Hence, there is a need for code of ethics for multinational corporations.
It is always desirable that each of multinational corporation should have its own code of ethics. IBO 01 Free Solved Assignment
Code of ethics should clearly lay down guidelines in the form of code ethics, for their employees, customers, shareholders, business partners, suppliers and the community.
However, some outside agencies have drafted codes of conduct for multinational corporations. These agencies are as under
(i) Organization for Economic Co-operation and Development (OECD)
(ii) International Chamber of Commerce
(iii) International Labour Organization
(iv) U.N.Committee on Transnational Corporations.
These codes address various issues related to MNCs and their stakeholders such as host government, the public, customers and employees.
OECD-OECD is an international organization helping governments tackle the economic social and governance challenges of a globalized economy.
A key goal of the OECD is strengthening the governance structures and practices with in shareholders and other stakeholders.
The OECD guidelines for multinational enterprises known as “MNE Guidelines” complement and support the private initiatives of companies for corporate responsibility.
These guidelines are recommendations addressed to multinational enterprises operating in or from adhering countries (30 members countries and many other countries with which OECD hands dialogues).
The MNE guidelines of OECD cover the full range of areas relevant to standards of responsible business conduct and therefore, provide the corporations a most valuable international benchmark of society’s expectations.
However, the ethical codes of multinational corporations should ensure the following:
(i) MNCs should respect the laws and regulations of the host countries.
(ii) MNCs should do nothing to compromise the health and safety of consumers.
(iii) MNCs should not sell the products in the host countries, market if the products are banned elsewhere. It means that MNCs should not exploit the weakness in the legislation.
(iv) TNCs should be proactive and assist the governments in preventing the marketing of used products. IBO 01 Free Solved Assignment
(V) TNCs should not use take advantage of local lack of expertise in a particular area.
BSOC 131 Free Solved Assignment July 2021 & Jan 2022
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