International Business Environment
IGNOU IBO 01 Solved Free Assignment
IBO 01 Solved Free Assignment July 2023 & January 2024
Q. 1. (a) Define international busienss environment. Differentiate between micro and macro environment with examples.
Ans. International business environment refers to totality of all the factors viz. geographic, economic, financial, socio- cultural, 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 trading partner.
Thus, international business environment is sum total of domestic, foreign and global environments. IGNOU IBO 01 Solved Free Assignment
A firm has to go through the foreign country environment.
Broadly environment of business may be classified into two groups:
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. 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.
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. IGNOU IBO 01 Solved Free Assignment
Macro- environment of a company refers to all those factors which exercise their influence on the business activity in general.
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:
(i) 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.
(b) What is political risk? Discuss the major types of political risk with examples.
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.IGNOU IBO 01 Solved Free Assignment
Following are the major types of political risks:
(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. IGNOU IBO 01 Solved Free Assignment
It means that a compensation may be paid or may not be paid to the previous owners.
(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.IGNOU IBO 01 Solved Free Assignment
(v) Blocking of Funds-Blocking of funds refers to a situation under which a government does not allow a foreign firm to 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.
Q. 2. (a) Explain various theories explaining emergence of TNCs in the world economy.
Ans. There are a number of theories explaining the emergence of TNCs in world economy.
Following are theories:
(1) According to Stephen Hymer’s Market Imperfections Theory, the presence of TNCs is due to market imperfections which are structural and arise from the innovation of superior technology access to capital, control of distribution system, economies of scale, differentiated products and superior management.
(2) According to Raymond Vernon’s Product Life Cycle Theory, there are sequential stages in the life cycle of the products innovated by a particular company. This theory explains the various stages of the international involvement of the company.
(3) According to John H. Dunning and Mark Casson’s Theory of International Resource. Allocation and Theory of Market Failure, TNC engages in the internal transfer of intermediate products across national boundaries.
A TNC produces at different points of the value added chain and in different countries. According to this theory, TNCs undertake foreign investments for raising their efficiency and reducing the transaction costs.
(4) According to another theory, TNCs emerge to minimize tax burden and exchange risks and to derive advantages of cheap labour and raw-materials.
(5) According to another theory TNCs emerge to receive the benefits offered by the host countries for foreign investment.IGNOU IBO 01 Solved Free Assignment
(6) McManus propounded transaction cost theory in 1970 emphasizing the effects of TNCs on the internalization of the external markets. According to this theory, imperfections in the foreign markets are of natural types.
According to this theory TNCs undertake foreign direct investment to raise the efficiency and reduce transaction costs like the cost of information, enforcement and bargaining.
(7) A comprehensive theory is “Eclectic Theory” propounded by Dunning. This theory encompasses a large number of other theories.
It aims at providing an analytical framework to the analyst for carrying out empirical investigations in accordance with that theory which is most relevant to the problem in hand.IGNOU IBO 01 Solved Free Assignment
(b) Highlight the main advantages and disadvantages of TNCs operations for the host coutnry and the investing country.
Ans. Following are the main advantages and disadvantages of TNCS operations for the host country and the investing country:
Advantages to Host Country:
(1) Foreign Capital-Developing countries suffer from shortage of capital required for rapid industrialization. TNCs bring in capital for the development of these countries. Direct foreign investment speeds up the process of economic development.
(2) Advanced Technology-Developing countries are technologically backward. They do not have sufficient resources to carry on research and development.
TNCs bring advanced technology to developing countries. Through continuous research and development, TNCs serve as a source of inventions and innovations.
(3) Employment Opportunities-Developing countries face unemployment problem. TNCs create large scale employment opportunities in host countries TNCs increase the investment level and thereby the employment level.
(4) Foreign Exchange-Most of the developing countries face adverse balance of payment position. TNCs help the host countries to increase their exports and reduce their dependence on imports. As a result, balance of payment position of host countries improves.IGNOU IBO 01 Solved Free Assignment
(5) Development of Human Resources-TNCs employ modern management techniques and trained managers. TNCs help to professionalism management in host countries. As carriers of knowledge and experience.
TNCs build up knowledge base and thereby assist the development of human resources in host countries.
(6) Healthy Competition-TNCs increase competition and thereby break domestic monopolies. TNCs compel the domestic companies to improve their efficiency or withdraw from the market.
For example, many Indian companies acquired ISO-9002 quality certification due to competition from multinational corporations after 1991.
(7) Growth of Domestic Firms-TNCs stimulate the growth of local enterprises. In order to support its other operations, a TNC may assist domestic suppliers and ancillary units.IGNOU IBO 01 Solved Free Assignment
(8) Standard of Living-TNCs provide superior products and services and help to improve living standards in host countries.
(9) World Economy-TNCs help to integrate national economies into a world economy. TNCs encourage international brotherhood and cultural exchanges through international business.
Different TNCs operate in different countries. As a TNC offers many benefits to each of the host countries, these countries are getting united.
Cultural differences between them are reducing and they are gradually moving towards a single i.e. global economy.
Disadvantages to Host Country:
(1) Disregard of National Goals-TNCs invest in the most profitable sectors e.g. consumer goods disregarding the goals and priorities of host country. TNCs do very little for underdeveloped strategic sectors and regions.
Due to their capital intensive technology and profit maximization approach. TNCs have failed to help in solving the problems of unemployment and poverty.
(2) Threat to National Sovereignty-TNCs pose a danger to the independence of host countries. IGNOU IBO 01 Solved Free Assignment
To promote their interests TNCs tend to interface in the political affairs of host countries. Some TNCs are accused of overthrowing governments in countries such as Chile.
(3) Alien Culture-TNCs bring not only capital and technology but their own culture also. TNCs tend to vitiate the cultural heritage of local people and propagate their own culture to sell their products.
For example, TNCs have encouraged the consumption soft drinks, packaged food etc. in India.
(4) Obsolete Technology-TNCs often transfer outdated technology to their collaborators in host countries. In a number of cases technology transferred by TNCs was found unsuitable causing waste of scarce capital.
Repetitive imports of similar technology led to excessive royalty payments without adding to technical knowledge in host countries.
Sometimes machinery available locally was imported or it remained idle for want of repairs and maintenance facilities. TNCs have failed to develop local skills and talents.IGNOU IBO 01 Solved Free Assignment
(5) Excessive Remittance-TNCs remit huge amount to the home country by way of royalty technical fee, dividend, licensing fee etc. This puts serve pressures on the foreign exchange reserves and balance of payments of host countries.
(6) Creation of Monopoly-TNCs give rise to monopoly and concentration of economic power in host countries by exploiting their strategic advantages like patents, superior technology etc.
TNCs kill indigenous enterprises for example, Parle Sofit Drinks and Kwality Ice Cream Co. had to sell themselves to foreign TNCs in India.
(7) Restrictive Clauses-Due to strong bargaining power. TNCs introduce restrictive clauses in collaboration agreements.
According to these restrictive clauses, technology cannot be passed to their parties or pricing of products will be by the TNC, or exports from host country will be restricted or managerial posts will be filled by parent company.
TNCs do not transfer R&D, training and other facilities to host countries.
(8) Depletion of Natural Resources-TNCs have caused rapid depletion of some of the non-renewable natural resources in host countries.
Advantages to Investing (Home) Country: TNCs offer following advantages to investing country: IGNOU IBO 01 Solved Free Assignment
(1) Lower Cost-The home country can obtain raw materials and labour at comparatively lower cost. TNCs help in acquiring a steady supply of raw materials from abroad.
(2) Wider Market-The home country can export components and finished products and thereby market is widened.
(3) More Revenue-The home country can earn huge revenue by way of dividends, royalty, licensing fees etc.
(4) Increase in Domestic Employment-The home country is benefitted by increase in domestic employment due to higher scale of operations.
(5) Expertise-The home country can acquire technical and managerial expertise of foreign nations.
(6) Foreign Exchange Reserves-TNCs export components and finished goods in foreign markets and strengthen the country’s foreign exchange reserves.
Disadvantage to Investing (Home) Country:
(1) Diversion of Resources-TNCs divert resources available in the home country to host countries without paying adequate taxes.
Marketing practices of TNCs may create scarcity of goods in the home country and home country does not get the benefit of availability of goods at cheaper rates.
(2) Unemployment-TNCs established produc-tion centres in those countries where labour is relatively cheap. This may create unemployment in the home country.
(3) Blow to Environment-TNCs do not follow environmental standards. This creates environmental problems in the home country.
(4) Transfer of Technology-TNCs export their technology abroad to combine with other foreign factors. This is done to maximize corporate profits. The technological superiority of the home nation is, thus, undermined.
(5) Loss of Tax Revenue-TNCs shift their operations to lower tax nations and, thus, reduce the tax revenue of home country. There is substantial loss of tax revenue to the home country if the companies are operating abroad.
Q. 3. Comment on the following:
(a) Tariff barriers are not the only instrument to restrict trade and give protection to the domestic import competing industry.
Ans. It is an established fact that for all countries free trade is always better than autarky. Even then, some governments adopt a policy of restricted trade i.e. trade subject to different types of barriers.
There are two broad types of barriers to trade:
(i) Tariff barriers
(ii) Non-tariff barriers
Tariff or custom duties are imposed by a government on movements of physical goods. A customs area is a geographical area within which the goods may move freely without being subjected to customs duties.
The boundaries of a customs area generally coincide with national boundaries. When a customs area encompasses more than a national boundary of a country, it is known as customs union. Goods can move freely without payment of tariffs within a customs area or union.IGNOU IBO 01 Solved Free Assignment
Tariffs on goods are levied to collect revenue to meet the government expenditure or to protect domestic industries against foreign competition. At times, tariff rates may be raised to meet the balance of payments difficulties.
The protection function of the tariff depends upon a partial or complete restriction of imports, Complete protection is afforded when duty is levied at a level to meet the differences in the marginal cost of production between the domestic product and foreign (imported) product.
When partial protection is desired, goods will continue to the imported (to meet demand and supply) but in quantities required to meet the local demand.
Although an import duty may induce many changes in both the importing and exporting countries, its direct effects in the importing country may be classified as price, revenue, trade, protection, consumption and income redistribution effects.
Non-Tariff barriers refers to non-price based policies to restrict trade. Non-tariff barriers affect not only sectors that are labour intensive but also other sectors of export interest to developing countries.
b] 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. IGNOU IBO 01 Solved Free Assignment
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.
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:
(1) Both the parties to the agreement should have an intention to create legal relations.
(2) Both the parties to the agreement should be competent or capable of contract.
(3) The agreement must be supported by lawful consideration.
(4) Agreement should be based on genuine or free consent of both the parties.
(5) The object of the agreement must be lawful.
(6) The terms of agreement should be capable of performance.
(7) The terms of agreement should be certain and not vague or uncertain.
(8) Agreement should not have been expressly declared to be void or illegal.
(9) 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. IGNOU IBO 01 Solved Free Assignment
Social agreements are agreements but they cannot become contracts because they do not give rise to legal consequences.
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 source in agreements. But all agreements do not materialize into contracts.
Some of the agreements because sources of social ties and some are based on trust etc. Some agreements do not satisfy essential elements of a valid contract.
(c) Indian foreign trade policy does not facilitate the import of technology.
Ans. India has liberalist import of technology since 1991. Now firms are free to import technology based on their commercial judgement. However, there are a few areas where government’s approval is required.
India has a number of technology collaboration agreements with USA, Japan and Germany. Following are some limitations of Indian purchase of technology:
(1) Inadequate understanding of technology market
(2) Lack of teamwork
(3) Tendency to accept restrictive business clauses.
(4) No research and development efforts
(5) Repetitive purchase of technology.
(d) In the neoclassical model free trade not only equalises the relative commodity price in the two countires but also equalises the relative wage rate.
Ans. The neoclassical model is based on differences in relative factor endowment, which is major basis for comparative advantage. The neo-classical model presumes that there are two factors of production-labour and capital.
The neoclassical model has two goods-one good is relatively labour intensive and another is relatively capital intensive.
Relative commodity or product price ratio refers to relative price of one good in terms of the other good.IGNOU IBO 01 Solved Free Assignment
Thus, Price of Commodity X
Relative Commodity Price = Price of Commodity x
Price of commodity y
Since neoclassical model presumes the existence of perfect competition in product market as well as factor market, product price is equal to average cost.
Thus relative commodity price is the ratio between the average cost of X and average cost of Y.
Relative wage rate refers to relationship between wage rate prevailing in two countries i.e. ratio between the home country’s wage rate and the foreign country’s wage rate.
Relative Wage Rate = Wage Rate in Country A
Wage rate in country B
Relative wage rate may be expressed as factor price ratio. Factor price ratio refers to relationship between wage rate and rental of capital. Thus,
Factor Price Ratio = Wage rate
Rental of Capital
Free trade in the neoclassical modes will not only equalize real factor prices but will also equalize factor price ratio in the two countries.
This is known as factor price equalization theorem.
The marginal rate of technical substitution is the ratio of the marginal productivities of factors i.e. ratio between the marginal productivity of labour and marginal productivities of capital. IGNOU IBO 01 Solved Free Assignment
Thus, with the slope of AB representing the equilibrium factorial terms of trade, trade will equate the real factor prices in the two countries.
Thus, in the neoclassical model, free trade only equalizes the relative commodity price in the two countries but also equalizes relative wage rate.
Q. 4. Distinguish between:
(a) Custom union and Common market.
Ans. Customs Union: Customs union refers to a group of countries that have agreed to abosh all barriers to trade among themselves and to follow a common policy with regard to their trade with non-members.
In this way, customs union is an extension of free trade area. In addition to eliminating the internal barriers to trade, the members agree to the establishment of common external barriers Central American Common Market (CACM) and Southern African customs Union (SACU) are examples customs union.
Common Market: Common market refers to a regional grouping which eliminates all barriers to movement of all factors of production between member countries.
A common market goes beyond the removal of internal barriers to trade and the establishment of common external barriers to the important next stage of eliminating the barriers to the flow of factors (labour and capital) within the market.
A common market builds on the elimination of the internal tariff barriers and the establishment of common external barriers.
It seeks to coordinate economic and social policy within the market to allow free flow of capital and labour from country to country.
Thus, a common market creates an open market not only for goods but also for service and capital, Caribbean Common Market (CARICOM) and Economic Community of West African States (ECOWAS) are the examples of Common Market.
(b) GATT and WTO.
Ans. Following are the distinctions between GATT and WTO:
Basis of Distinction
(5) Blocking of Devision
1 GATT was ad-hoc and provisional.
2 GATT has contracting parties. Its scope was limited
3 GATT allowed existing domestic legislation to continue even if it violated a GATT agreement.
4 GATT was less powerful and, dispute settlement was slow and less efficient.
5 Under the GATT dispute panel findings could be easily blocked
6 GATT allowed for the existence of a number of important side agreements negotiated and concluded in various GATT rounds.
1 WTO and its agreements are permanent
2 WTO has more than 150 members. Its scope is farwider than under the GATT
3 WTO does not permit any domestic legislation contrary to WTO.
4 WTO is more powerful than GATT and, dispute mechanism is faster and more efficient. IGNOU IBO 01 Solved Free Assignment
5 WTO members can not block decisions arrived at under the dispute settlement mechanism.
6 WTO provides a unified package of agreements to which all members are committed.
C] Export sales contract and domestic sales contract.
Ans.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
1 Domestic sales contracts do not have foreign elements because both buyer and seller are from the same country.
2 Domestic sales contract mentions only one currency i.e. home currency.
3 Goods are transferred with in the geographical limits of the country.
4.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
1 Foreign sales contracts have foreign element because buyer is from foreign country. IGNOU IBO 01 Solved Free Assignment
2 Foreign sales contract states the price in foreign currency.
3 Goods are exported outside the geographical limits of the country.
4 Foreign sales contract may not be subject to exporter country’s law ESC is concluded subject to various laws such as foreign exchange regulations etc.
5 ESC is subjected to various legal and procedural formalities.
(d) Express contract and Implied contract
Ans. Express contracts are those contracts which are entered into between the parties by words spoken or written.
For example, A writes to B that he offers to sell his house for Rs. 50,000 and B in reply informs A that he accepts the offer. This is an express contract.
Implied contracts are those contracts which come into being on account of the acts or conducts of the parties.
According to Blackstone, implied contracts are those which reason and justice dictate and which the law, therefore presumes that every man undertakes to perform. For example, Z takes a seat in a bus. IGNOU IBO 01 Solved Free Assignment
There is an implied contract that he will pray the prescribed fare and the bus will take him to his destination.
Q. 5. Write short notes on the following:
(a) Porter’s view of Globalization.
Ans. Porter belongs to a school of thought professing the issue of whether and how nations themselves compete and how they provide the context in which firms undertaking the process of globalization are helped or hindered.
Porter’s view of globalization is based on the assumption that comparative advantage and factor endowments are not just inherited or given at the country level but rather created by the firms that undertake innovation in these countries.
According to Porter an industry can be called global if there is some competitive advantage to integrating activities on a worldwide basis.
Porter argued that in the process a pattern of country based competitiveness emerges and identified four determinants of this competitive advantage of nations:
(i) Factor Conditions
(ii) Demand Conditions
(iii) Related and Supporting Industries
(iv) Firm structure, strategy and rivalry.
The way in which a firm coordinates and configures its value chain is an important determinant of how the firm creates value and incurs costs in each part of its value chain. IGNOU IBO 01 Solved Free Assignment
The optimal coordination and configuration needs of the value chain across the world are often determined by the industry structure and industry economies.
Industries globalize when the benefits of configuration and coordination globally exceed the costs of doing so. Further, in global competition a country must be viewed as a platform and not as the place where all activities of a firm are performed.
(b) Hosmer’s model for ethical analysis.
Ans. Hosmer’s model for ethical analysis helps to understand the various factors affecting the managerial decisions across cultures.
Ethical decision making, according to Hosmer, has to be viewed differently because people from different cultures analyses their ethical dilemmas differently. According to Hosmer, management’s ethical dilemmas may have following contents:
(i) Financial content i.e. financial benefits and costs.
(ii) Legal content i.e. legal provisions governing the issue.
(iii) Organizational content i.e. working environment, job security, efficiency in production.
(iv) Social content i.e. implications of the proposed action on society.
(v) Personal content i.e. impact on their career.
Hosmer’s model is basically utilitarian model because executive’s action is judged in the light of its consequences. Hosmer’s model also states moral standards of behaviours of judge the behaviours.
(c) Role of services in economic development.
Ans. The last two decades have witnessed a rapid growth of trade in services. The role of trade in services has increased.
Today more than 60% of the most of the western economies are in service sector. Service sector has been considered as post- industrial development.
According to Daniel Bell if an industrial society is defined by the quantity of goods as marketing a standard of living, the post industrial society is defined by the quality of life as measured by the service desirable and possible for everyone.
Services have gained considerable importance in both developing and developed countries due to following reasons:IGNOU IBO 01 Solved Free Assignment
(i) Services is a major contributor to GDP (Goods domestic product)
(ii) Services is an important source of foreign exchange earnings.
(iii) Service sector provides employment opportunities to the million of people.
(iv) Services play a vital role in the industrialization process and economic development of the countries.
A country can think of economic development if there is adequate and efficient provision of producers, services such as banking, insurance, transportation, warehousing and Telecommunications.
These services are must even for promotion of a country’s manufacture and service exports.
(v) Import of services and foreign direct investment in services can be immensely helpful in filling up the infrastructural gaps and providing the needed fillip to the development and industrialization process especially in developing countries.
(d) Sales of Goods Act, 1930.
Ans. According to Section 4 of Sales of Goods Act. “contract of sale of goods means a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price.”
A contract of sale may be of two types:
(i) Contract of sale
(ii) An agreement to sell.
Where under a contract of sale, the property in goods is immediately transferred from the seller to the buyer, the contract is called a sale.
Where under a contract of sale, the transfer of property in goods is to take place at a future time or subject to the fulfilment of certain conditions, the contract is called an agreement to sell.IGNOU IBO 01 Solved Free Assignment
Following are essentials of a contract of sale:
(1) Two parties,
(3) Transfer of property,
(5) Essentials of a valid contract.