International Business Environment
Objective of the study/Why to study?
1. Examine the environmental factors which
may lead an established business to enter the international business arena.
2. Assess the factors which contribute to an
organisation's success in the domestic marketplace and consider the extent to
which these factors may have to be adapted to the needs of foreign markets to
achieve international success.
3. Review the impact of multinationals
supranational bodies and agencies on the international trading environment.
4. Identify the alternative strategies
available to an organisation operating in the international environment.
5. Appreciate critically the ethical and
environmental issues involved in the conduct and operations of international business.
Managerial Aspect
1. Appreciate the impact of the international
business environment on management and on the ways in which management can meet
its objectives;
2. Appreciate the obstacles but also the
opportunities which arise when business is conducted in many countries.
Important Terms
Management:
Management is the organizational process that
includes:
A. Strategic planning,
B. Setting; objectives,
C. Managing resources,
D. Deploying the human and financial assets
needed to achieve objectives,
E. Measuring results.
Management also includes recording and
storing facts and information for later use or for others within the organization.
Management functions are not limited to managers and supervisors. Every member
of the organization has some management and reporting functions as part of
their job.
Or
Management is a process of optimal use of
available resources and creates opportunity for the organization growth.
Foreign
Crossing the national boundary.
Business :
A. The occupation, work, or trade in which a
person is engaged.
B. An Organised economics activity.
C. An affair or matter.
D. A commercial enterprise or establishment.
Environment.
A. The totality of surrounding conditions
B. The area in which something exists or lives.
Regional Blocks / Regional Economic
Grouping/Regional Economic co-operation./Regional Integration
When two or more countries together decide to
engage in an economic co-operation with the objective to use their resources
more effectively and to provide larger markets for member countries.
Multilateral
Among a large number of countries. Contrasts
with bilateral and plurilateral.
Multilateralism
Multilateralism is an international relations
term that refers to multiple countries working in concert.
Consortium
A coalition of organizations, such as banks
and corporations, set up to fund ventures requiring large capital resources
Or
An association of independent organizations
usually formed to undertake a specific project that requires skill and resources
which are not possessed by any of the participants individually
Globalisation
Development of extensive worldwide patterns
of economic relationships between nations.
Or
A set of processes leading to the integration
of economic, cultural, political, and social systems across geographical boundaries.
Global Competitiveness
Competitiveness, applied internationally
Offshore Financial Centre (OFC)
Centres which provide some or all of the
following services: low or zero taxation; moderate or light financial
regulation; banking secrecy and anonymity.
Economic Growth
An increase in an economy’s ability to
produce goods and services which brings about a rise in standards of living.
Economic Development
Sustained increase in the economic standard
of living of a country's population, normally accomplished by increasing its
stocks of physical and human capital and improving its technology. Economic
development is typically measured in terms of jobs and income, but it also
includes improvements in human development, education, health, choice, and
environmental sustainability.
Tariff Barriers
A duty(or tax) applied to goods transported
from one country to another, or on imported products. Tariffs raise the prices
of imported goods, thus making them less competitive within the market of the
importing country.
Non-Tariff Barriers
Government laws, regulations, policies,
procedures, embargoes, import quotas, unnecessary sanitary restrictions or practices
that either protect domestic products from foreign competition or artificially
stimulate exports of particular domestic products.
Trade
Trade is an exchange of goods and/or
services.
Bilateral Trade
When exchanges of good and/or services may
take place between two parties only.
Multilateral Trade
When exchanges of good and/or services may take
place amongst more than two parties.
UNIT – 1
INTERNATIONAL BUSINESS
Business : A business (also called a firm or an enterprise) is a legally recognized organization
designed to provide goods and/or services to consumers, governments or other
businesses. A business needs a market. A consumer is an essential part of a
business. Businesses are predominant in capitalist economies, most being
privately owned and formed to earn profit to increase the wealth of owners. The
owners and operators of a business have as one of their main objectives the receipt or generation of a financial
return in exchange for
work and acceptance of risk. Notable exceptions include cooperative businesses
and state-owned enterprises. Socialistic systems involve either government,
public, or worker ownership of most sizable businesses. The term
"business" has at least three usages, depending on the scope — the
singular usage (above) to mean a particular company or corporation, the
generalized usage to refer to a particular market sector, such as "the
music business" and compound forms such as agribusiness, or the broadest
meaning to include all activity by the community of suppliers of goods and
services. However, the exact definition of business, like much else in the philosophy
of business, is a matter of debate.
International
Business : is a term used
to collectively describe topics relating to the operations of firms with
interests in multiple countries. Such firms are sometimes called multinational
corporations (MNC's). Well known MNCs include fast food companies McDonald's
and Yum Brands, vehicle manufacturers such as General Motors and Toyota
Hence International Business Is:
• “A business activity which consists of transactions that
are devised and carried out across national borders to satisfy the objectives
of individuals and organizations.”
• 'International Business' is a field of business that looks into all aspects of
multinational corporations (MNCs)or multinational enterprises (MNEs).
Therefore:
• International Business is all business transactions that
involve two or more countries.
• International Business comprises a large and growing
portion of the world’s total business.
• International Business usually takes place within a more
diverse external environment.
WHY INTERNATIONAL BUSINESS ?
OR MOTIVATION FACTORS OF INTERNATIONAL
BUSINESS
OR DRIVERS FOR INTERNATIONAL BUSINESS.
A. Product Life Cycle
B. Competition
C. Excess Capacity
D. Geographic diversification
E. Increase the market size
F. Government influences due to regional
integration
Market Driver
• Convergence of lifestyles & taste
• Increased travel creating global consumer
• Growth of global and regional channels
• Establishment of world brands
• Push to develop global advertising
• Shortening product life cycle
Government Drivers
• Reduction of tariff barriers
• Creation of trading blocs
• Decline in role of government
• Reduction in non-tariff barriers
• Shift in open market economies
Cost/ Economic drivers
• Continuing push for economies of scale.
• Accelerating technological innovation
• Advances in transportation
• Emergence of NIC
• Increasing cost of product development
Competitive Drivers
• Increase in level of world trade
• Increase in foreign acquires of corporation
• Companies becoming globally centered
• Increased formation of global strategic
alliances
• Globalization of financial markets
SIGNIFICANCE / IMPORTANCE OF INTERNATIONAL
BUSINESS
With the increasing number of businesses
going global, our world seems to be getting smaller. Companies no longer focus
on one global region of the market. In most cases if there is a market for a
product in one country, there is a market for the product in another country.
In most cases, companies will increase their target market to increase their revenue.
International business comprises a large and
growing portion of the world's total business. Today, almost all companies,
large or small, are affected by global events and competition because most sell
output to and/or secure suppliers from foreign countries and/or compete against
products and services that come from abroad. Much of the international business
theory related to enterprises, which are internationally based and have global ambitions,
does often change depending on the special requirements of each country. Another
core issue is the company's growth and the importance of networking and
interaction. This view looks at the way in which companies and organisations
interact and consequently network with each other to gain commercial advantage
in world markets. The network can be using similar subcontractors or
components, sharing research and development costs or operating within the same
governmental framework. Clearly, when businesses formulate a trading block with
no internal barriers they are actually creating their own networks.
Collaborations in aerospace, vehicle manufactures and engineering have all
sponsored the development of a country's or a group of countries' outlook based
on their own internal market network. This network and interaction approach to internationalization
shows the substance of being able to influence decisions when knowing how the
global network players work or interact.
For example, a crucial market network is that of the Middle East . Middle East
countries are rich, diverse markets, with a vibrant and varied cultural
heritage. This means that although there has been a harmonisation process
during the past few years, differences still exist. Rather than business being
simpler as a result, it should be recognised that because of regulations and
the need those countries have to restructure as they enter the global market,
performing any kind of business can be highly complex. It should be remembered
though that the Middle-Eastern countries have a low-income average and like to
have their cultural differences recognised. Those firms that will or have recognized
these facts have a good chance of developing a successful marketing strategy to
meet their needs. Fortunately some firms have realised these important
differences and reacted adequately when strategic decisions had to be made regarding
their penetration to this kind of markets.
BENEFITS OF INTERNATIONAL BUSINESS:
In today's world, more and more businesses
are taking steps toward globalization, and companies must work to remain
competitive. 'Global Business' will help every business professional understand
how all the components fit together to create a truly global business. Benefits
may be categorized as follows:
A. Reductions in costs
– International differences in factor prices
– International differences in factor productivity
– Low-cost access to local markets
– Spreading overheads
B. Government support in host countries
– Lower taxes
– Subsidies
– Provision of infrastructure
C. Increased demand
International business widens the market and
increases the market size. Therefore, the companies need not depend on the
demand for the product in a single country or customer’s tastes and preferences
of a single country. Due to the enhanced market the Air France, now, mostly
depends on the demand for air travel of the customers from countries other than
France Toyota
D. Spreading risks
Both commercial and political risks are
reduced for the companies engaged in international business due to spread in different
countries.
E. Can exploit advantages over local firms
– ownership of superior technology
– entrepreneurial and managerial skills
– R&D capacity
F. Access to local technology
Companies can adopt the latest technology
either on its own and/or through joint ventures.
G. Economics of Scale:
Companies can get the economies of scale
through division of labour, specialization, automation, rationalization, computerization,
forward integration and backward integration.
H. Reduced Effects of Business Cycles:
The stages of business cycles vary from
country to country. Therefore, MNCs shift from the country, experiencing a recession
to the country experiencing ‘boom’ conditions. Thus international business
firms can escape from the recessionary conditions.
Domestic Vs International Business /
Differences Between Domestic and International Business.
Sr.No
|
Decision Variable
|
Domestic Business
|
International Business
|
01
|
Market Segment
|
Single Market ,Sub-Market
|
Multiple Market, Multiple Sub-Market
|
02
|
Marketing Control
|
Easier as only a single market and
sub-market is served
|
More difficult as new variable like
culture, religion, govt. policy enter in gamut of decisions
|
03
|
Market Research
|
Awareness of the market in
domestic market is high
therefore one can often do
without market research.
|
Imperative
|
04
|
Administration
|
Easy
|
Complex
|
05
|
Product Mix
|
PLC may be Ignored.
|
Decision grounds are identical but market
adaptability and acceptability becomes a
question
|
06
|
Product Quality
|
May be placed anywhere on
the BCG Matrix of product
and price
|
With the production function, Product
quality is normally high even is technology
is old
|
07
|
Product Design
|
Since the product is designed
for the market , question of
adapting does not arise.
|
Product has to be adapted to every
,market segment
|
08
|
Product Development
|
Need Domestic market need
|
Product developed to meet international
market needs. May move to new markets
where it may be in growth or introduction
stage.
|
09
|
Advertising
|
Single market single
message. Media choice
known with certainty
|
Multiple market, Multiple message,
depending on the emphasis demand by
each market. Complex media availability.
|
10
|
Sales Promotion
|
Options are known with
certainty therefore choice is
often taken in advance
|
Options may not be known, choice
therefore depend upon market research
|
TYPES OF INTERNATIONAL BUSINESS
OR ENTRY MODE IN INTERNATIONAL BUSINESS
OR SCOPE OF INTERNATIONAL BUSINESS.
A. Export / Import
a. Direct Import / Export : When firms
managed itself all activity.
b. Indirect Import / Export : Working through
Channels / Intermediaries
B. Licensing / Franchising
When a company want to protect its Patent and
Trademark rights (Singer, McDonald’S, Domino’s, NTPC, Media Lab Asia)
C. Joint Venture
Shared ownership in international business.
(Maruti, HDFC-Standard Life, Modi-Xerox). About 932 Indian Joint Venture
abroad.
D. Manufacturing/ Wholly Owned Subsidiary
Nestle India ,
Hindustan Leaver, P & G
E. Management Contracts / Services / Turnkey
Project / Travel & Tourism
Fiat(Italian Company) In USSR , IRCON in UAE, Oberois In Egypt & Australia
F. Portfolio Investment.
Share Market, Short term gain
GRAPHICAL VIEW OF ENTERING METHOD IN
INTERNATIONAL BUSINESS.
Business Environment
An environment can be defined as anything
which surrounds a system. Therefore, the Business environment is anything which
surrounds the business organization. It affects the decisions, strategies, processes
and performance of the business.
Core Business Environment (PEST )
Political / legal
Economic
o The microeconomic environment (Porter’s 5 forces)
o The macroeconomic environment (National economic
BOP,GDP,NNP,NNI etc)
Social / cultural
Technological
Extended Business Environment (STEEPLED)
Socio-cultural
Technological
Economic
Environmental
Political
Legal
Education
Demographic
HIERARCHY OF INTERNATIONAL BUSINESS
ENVIRONMENT VARIABLES / PARAMETERS.
1. Political / Legal
2. Economic
3. Competitiveness
4. Technology
5. Structure of Distribution
6. Geography
7. Cultural
DETAIL OF INTERNATIONAL BUSINESS ENVIRONMENT
VARIABLE (EXTERNAL / UN-CONTROLLABLE)
1. Political / Legal : An international
business entity is a guest of host country and , therefore , the host country
reserves the right of not only allowing it access but also of expropriating it.
It also can influence the scale and dimensions of the operations through its
policies.
A. Major parameters of Political Variable.
a. Orientation ( Inward / Outward): Inward (Promotes Domestic/ Restricts Import)–
Sri Lanka , Pakistan , Indonesia ,
Philippines Burma Outward (Makes no
difference for Export/Import) – USA , Hong Kong , Japan ,
Singapore , South Korea , India ,
Thailand
b. Political System
1. Democracy: Power in the hand of peoples. Provides stable business environment but no
grantee for fast economic growth as India
2. Totalitarianism / Dictatorship /
Authoritarianism No space for
individual freedom . Authority in the hand of one person. China , Cambodia
B. Political Risk.
a. Macro
1. Domestication
2. Expropriation
3. Civil War
4. Blockage of Fund
5. Labour Law
b. Micro
1. Law & Order
2. Taxation
3. Corruption
C. Major Legal Environment Variable : Very crucial and complex part of
International business. Major parameters are
1. Legal System
a.
Common Law : English Law (England ,
India
b.
Islamic Law : Voice of God . (Pakistan ,
Iraq , Iran
c.
Civil Law or Code Law : Code of Conduct for all. ( Japan ,
Germany , France
d.
Socialist Law / Marxist Law : Law for equity(China ,
Russia , Vietnam
2. Conflict of laws
3. Freedom of contracts
4. Patents and Trademarks
5. Conflict resolution
6. Recourse
7. Tariff mechanism
8. Equity Control
9. Documentation and formalities
D. Managing Political Risk
a. Pre-Investment
1. Avoidance
2. Insurance
3. Negotiating Environment
4. Structuring Investment
b. Post-Investment
1. Planned Disinvestments
2. Short Term Profit Maximisation
3. Change of Benefit / Cost Ratio
4. Develop Local Stockholders
5. Adaptation
Dealing with Political Risk
Direct Approach Indirect Approach
1. Control of Raw material 1. Insurance
2. Control of Transportation(I. Law) 2. Capitalised Firms
3. Control of external Market 3. External Financing
4. Licence or Patent under I.
Law)
5. Concession agreements
6. Joint Venture With Govt.
7. Joint Venture with local bank citizen
8. local sourcing of raw material
2. ECONOMIC ENVIRONMENT.
Economic environment is a major determinant
of market potential an opportunity but also very complex to understand and control. Here are
major changes noted in resent world economy.
A. Capital movement rather than trade have
become the driving forces of world economy.
B. Production has become uncoupled from employment.
C. Primary products have become uncoupled
from industrial economy.
D. The world economy is in control . The
Macro economics of nation-states no longer control economic outcomes
E. Balance of payment becomes determinants of
country’s economy.
F. Foreign exchange problem is much more complex which does
not exist in domestic environment.
Major economic variables are:
a. Balance of Payment: The Balance of Payments 'BOP' is an account of all transactions between one country and all
other countries-- transactions that are measured in terms of receipts and payments.
For example from the U.S.
country or any transaction that requires the
conversion of dollars into some other currency. The three main components of the
Balance of Payments are:
1. The Current Account including Merchandise (Exports Imports), Investment income (rents,
profits, interest)
2. The Capital Account measuring Foreign investment in the Host and Host’s investment
abroad, and
3. The Balancing Account allowing for changes in official reserve assets (SDR's, Gold,
other payments)
b. GDP (Gross domestic Product) growth : GDP is defined
as the total value of all goods and services produced within that territory
during a specified period (or, if not specified, annually, so that
"the UK GDP" is the UK
A common equation for GDP is:
GDP = consumption + investment + exports -
imports
Economists (since Keynes) have prefered to
split the general consumption term into two parts; private consumption, and public sector spending. Two
advantages of dividing total consumption this way in theoretical macroeconomics
are:
c. Inflation : In economics,
inflation is an increase in the general level of prices of a given kind.
General inflation is a fall in the market value or purchasing power of money
within an economy, as compared to currency devaluation which is the fall of the
market value of a currency between economies. General inflation is referred to
as a rise in the general level of prices. The former applies to the value
of the currency within the national region of use, whereas the latter
applies to the external value on international markets. The extent to which
these two phenomena are related is open to economic debate. Inflation is the
opposite of deflation. Zero or very low positive inflation is called price
stability. In some contexts the word "inflation" is used
to mean an increase in the money supply, which is sometimes seen as the cause of
price increases
3. Competitiveness : Competing with
multinationals can be considered a big game of chess, with each engagement with
a competitor
broken into an opening, a middle game, and an
endgame. The moves an organization makes in one market are designed to achieve goals in another market
in ways that aren't immediately apparent to rivals. We call this approach
"competing under strategic interdependence," Competitiveness may be defined as :
“The sustained ability to profitably gain and
maintain market share in the domestic and/or
International market”
GLOBAL COMPETITIVENESS: To achieve
global competitive advantage, cost and revenue have to be managed
simultaneously; efficiency and
innovation are both important, since
innovations can take place in different parts of the organization, selective decisions have
to be made instead of centralizing or decentralizing assets. Certain resources
and capabilities are best centralized within the home country
operation, not only to realize scale of economies, but also to protect certain core
competencies and to provide necessary supervision of corporate management, such
as R&D activities.
Some resources may be decentralized, on a
local basis, either because of small potential economies of scale compared to the
benefits of differentiation or because of the need to create flexibility and to
avoid exclusive dependence on a single facility. The result is a complex configuration of
assets and capabilities that are distributed; yet specialized. The Figure below
shows this complex configuration.
Global competitiveness increasingly requires
the simultaneous optimization of scale, scope, and factor cost
economies, along with the flexibility to cope with unforeseen changes in
exchange rates, tastes, and technologies.
4. Technological Environment
In International business technology plays a
very important role. We cannot avoid influences of technology on international
business.
Main features are :
1. Rapid ness
2. Wide Scope / Wide spared
3. Self-Reinforcing
4. Consistency
Main Impacts :
1. Social
a. High Expectation
b. System complexity
c. Social Change
d. Social Systems
2. Economics
a. Economic of Scale
b. Job become intellectual
c. Boundaries redefine
3. Operation / Plant
a. Organization Structure
b. Resistant to change
c. Fear of risk
5. Structure of Distribution : International
marketers have options of organizing distribution of their goods in foreign
market through the use
of indirect channels, i.e. using
intermediaries , direct channels, or a combination of the two in the same or different
market. Following are different type of channel.
A. Direct : Company’s own distribution system
and recourses.
B. Domestic Overseas Intermediaries. (In
Direct)
1. Commission buying agents
2. Country- controlled buying agents
3. Export Management Companies (EMC’s)
4. Export Merchants
5. Export Agent
6. Piggy backing
C. Foreign Intermediaries. (In Direct)
1. Foreign Sales Representatives
2. Foreign Sales Agents
3. Foreign Stocking and Non-Stocking Agents
4. State Controlled Trading Companies
6. Geographic / Demographic: Major Impact of
geographic variable is on Distribution Channel. According to location, reach a
firm select proper distribution channel. All business activities ultimately revolve
around the people. People are the cause of any business. So, any change in their population has
an impact on the business. Some of the important ways in which demographic environment
influences business can be stated as under:
1. Population Size
2. Age Distribution
3. Migration
4. Education and Occupation
7. Cultural Environment.: In the
physics today , so for as we know , the galaxies that one studies are all controlled
by the same laws. This is not entirely true of the world created by humans. Each
cultural world operate according to its own internal dynamic, its own
principals and its own laws – written or unwritten even time and space
are unique to each culture. There are however, some common thread that run
through all the culture. Some important features of culture are as
under:
1. Culture is a world created by human
controlled by its own dynamic, its own principal and its own law written and un-written.
2. Culture is communication which has
following parts
a.
Words : Medium of business, Politics & Diplomacy.
b.
Mental Things : Indicator of power & Status
c.
Behavior : Provides feedback on how other people feels and includes technique for
avoiding confrontation
3. Culture is a silent language that is
usually conveyed unconsciously . Thus silent language includes a broad range of evolutions concept
, practices and solutions to problem which have their roots not the lofty ideas of
philosophers but in the shared experiences of ordinary people.
4. Culture is a giant , extraordinary complex
, subtle computer which program guide the actions and response of human being in every walk of
life.
5. Culture is an action chain , is an
established sequence of event in which one or more people participate.
6. Culture is synchrony ( The subtle ability
to move together)
7. Culture is context ( It is information
that surrounds an event)
Culture is Very important and complex part
any business either domestic or global. we can define Culture as “A set of shared values of a society . It
encompasses religion, language, customs, traditions and beliefs,
tastes and preference, social stratification, social intuitions, buying an consumption
habits etc.” Cultural has several interfaces where it
influences the business. In global business we have to deal with much diversified culture which
are much complex to handle with while in domestic marketing we are well aware with our
culture . We can divide a country culture in four major part:
1. National Culture
2. Business Culture
3. Organizational Culture
4. Occupational Culture
Major Cultural Variables are:
1. Material Culture :
a. Technology
b. Economics
2. Social
Intuitions :
a. Social organizations
b. Education
c. Political structure
3. Man and the
Universe :Belief System
4. Aesthetics
a. Graphic and plastic art
b. Folklore
c. Music, drama and dance
5. Language
International Business Environment &
Managers Implications
FOREIGN INVESTMENT
Policy &
Procedure of Foreign Investment vary from country to country. Here I am going
to discuss most common procedure of foreign investment. “Foreign
Investment is a Private capital investment by firms of one country into those
of another.” It also known as “Foreign Direct Investment” FDI or Foreign
Direct Investment is any form of investment that earns interest in enterprises
which function outside of the domestic territory of the investor. FDIs require a
business relationship between a parent company and its foreign subsidiary.
Foreign direct business relationships give rise to multinational
corporations. For an investment to be regarded as an FDI, the parent firm needs to have at
least 10% of the ordinary shares of its foreign affiliates. The investing firm
may also qualify for an FDI if it owns voting power in a business
enterprise operating in a foreign country.
FACTORS EFFECT FOREIGN INVESTMENT
Consistent economic growth, de-regulation,
liberal investment rulse, and operational flexibility are all the factors
that help increase the inflow of Foreign Investment or FDI.
Types of FDI
FDI can be broadly classified into two types:
1. Outward FDI
Investing Abroad is a form of Outward FDI. An
outward-bound FDI is backed by the government against all types of associated risks. This form of FDI
is subject to tax incentives as well as disincentives of various forms. Risk
coverage provided to the domestic industries and subsidies granted to the local
firms stand in the way of outward FDI, which are also known as “direct
investments abroad.”
2. Inward FDI.
Attracting FDI in the Country. Different
economic factors encourage inward FDI. These include interest loans, tax
breaks, grants, subsidies, and the removal of restrictions and limitations.
Factors detrimental to the growth of FDI include necessities of
differential performance and limitations related with ownership patterns.
Other Forms of FDI
A. Vertical Foreign Direct Investment takes place when a multinational corporation
owns some shares of a foreign enterprise, which supplies input for
it or uses the output produced by the MNC.
B. Horizontal foreign direct investments happen when a multinational company carries
out a similar business operation in different nations.
C. Market-seeking FDI :Foreign Direct Investment is guided by different
motives. FDI that are undertaken to strengthen the existing market structure or
explore the opportunities of new markets can be called market seeking FDI.
D. Resource-seeking FDI: are aimed at factors of production which have more
operational efficiency than those available in the home country of the
investor.
E. Efficiency-seeking FDI: Some foreign direct investments involve the transfer of
strategic assets. FDI activities may also be carried out to ensure
optimization of available opportunities and economies of scale. In this case, the
foreign direct investment is termed as efficiency-seeking FDI.
FDI in India
whose size exceeds the population of the USA or the European Union, provide India India India
Government of India
Current Trends
The rapid growth of the economy, favourable
investment regime, liberal policy changes and procedural relaxations, has resulted in
a horde of global corporations investing in India India
According to the
AT Kearney FDI Confidence Index 2007, India India India India
Sector-wise FDI
A large portion of the FDI has been flowing
into the skill-intensive and high value-added services industries, particularly
financial services and information technology. India
o Leading Japanese, Korean, European, French,
and American automobile companies have set up their manufacturing base in India
o Currently, FDI inflows into the Indian real
estate sector are estimated to be between US$ 5 billion and US$ 5.50 billion.
Investment in the Indian realty market is set to increase to US$ 20 billion by
2010. Prominent foreign players include Emaar Properties (Dubai ), IJM Corp (Malaysia ),
Lee Kim Tah Holding (Singapore )
and Salim Group (Indonesia
o Many big names in international retail are
also entering Indian cities. Global players, such as Wal Mart, Marks & Spencers,
Roseby, etc, have lined up investments to the tune of US$ 10 billion for the
retail industry.
o According to Mines Minister, Sis Ram Ola,
"FDI of about US$ 2.5 billion per annum is expected in the mining sector from the
fifth year of implementation of the new National Mineral Policy (NMP)."
o The surge in mobile services market is likely
to see cumulative FDI inflows worth about US$ 24 billion into the Indian
telecommunications sector by 2010, from US$ 3.84 billion till March 2008.
Aggressive Investment Plans
The surging economy has resulted in India
o Panasonic is planning to line up US$ 200
million investment in India
o Japanese engineering major, Toshiba plans to
put up a power boiler plant at Ennore, north of Chennai with an initial
investment of around US$ 232.91 million.
o Dell would be investing more in India
o Intel Corp will invest US$ 40 billion in
partnership with Indian IT companies to create an end-to-end IT solution for the health
sector in the country.
o Cairn India
o HPCL and Mittal Energy will together put in
US$ 81.94 billion worth investment in developing a petrol hub.
o Havells India
o Essar Power will infuse up to US$ 2 billion
as foreign equity for undertaking various downstream projects, including power
and coal mining.
o Coca Cola India
o Goldman Sachs (Mauritius
o A Merrill Lynch & Co entity had bought 49
per cent equity in seven residential projects in Chennai, Bangalore , Kochi and Indore
o Zoom Entertainment Network will bring in US$
28.02 million through induction of foreign equity.
o Toyoda Gosei Company Ltd of Japan
o Another Japanese company, T S Tech Company,
will invest US$ 3.50 million to set up a joint venture firm to manufacture
seats and interior of doors for cars.
o UAE mobile retailer, Cellucom, will invest
US$ 116.79 million for rolling out 500 stores across India
Government Initiatives
The Indian Government's approach towards
foreign investment has changed considerably during the past decade. Foreign
investment, which was permitted only in restricted industries under exceptional
conditions, has been liberalised across the board, excluding
certain restricted or prohibited industries. The sweeping economic reforms undertaken by
the government aimed at opening up the economy and embracing globalisation have
been instrumental in the surge in FDI inflows. The government
has taken various steps to further facilitate and augment the inflow of foreign
investment into India
o The government would soon remove the
compulsory disinvestment clause on overseas companies in major sectors like
food processing and chemicals, a move aimed at simplifying foreign direct
investment (FDI) rules further. The finance ministry is weighing the
proposal after the Department of Industrial Policy and Promotion (DIPP, which
formulates FDI policy) suggested waiving the clause for all companies that have
decided on divestment.
o The government may allow 49 per cent FDI in
segments such as gems & jewellery and apparel after National Council of
Applied Economic Research (NCAER), which studies the effects of multi-brand
retail in India
o Restructuring the Foreign Investment
Promotion Board (FIPB).
o Shri Kamal Nath, Union Minister of Commerce
& Industry, has stated that Foreign Direct Investment (FDI) up to 100 per cent
is permitted under the automatic route in most of the sectors.
o Establishment of the Indian Investment
Commission to act as a one-stop shop between the investor and the bureaucracy.
o Progressively raising the FDI cap in other
sectors like telecom, aviation, banking, petroleum and media sectors among
others.
o Removal of the investment cap in the small
scale industries (SSI) sector.
o Companies will now require only an FIPB
approval for investments up to US$ 231.90 million (Rs 1,000 crore).
Clearance from Cabinet Committee of Economic
Affairs (CCEA) will be imperative only for investments above US$ 231.90
million (Rs 1,000 crore). These measures will greatly enhance the
global community's confidence in the fundamentals of the Indian economy, and reflect the
efforts of the Indian Government to integrate with the global economy. With
government planning more liberalisation measures across a broad range
of sectors and continued investor interest, the inflow of FDI into India
WORLD TRADE IN RECENT YEARS
World (goods and services) exports grew by 9
per cent in volume terms and by 15 per cent in value terms in 2006 (Chart 1).
This was up slightly from 2005, but below the
very high 21 per cent increase in 2004. A vibrant world economy has been supporting
exports growth. Since 2001, there has been broad-based strengthening in world GDP,
with major emerging economies, notably China
and India
The strong world economy has boosted demand
for commodities, particularly those, such as 1 On a market exchange rate basis,
world GDP grew by 3.9 per cent in 2006 (IMF WEO July 2007 Update). energy and
metals, used in industrial manufacturing and infrastructure development (Chart 3).
Since the late 1990s, commodity prices have trebled as
growth in global demand has run ahead of the supply response. Oil prices have
also been affected by geopolitical tensions, supply disruptions and
concerns over declining reserves in some countries. By comparison, prices for manufactures
exports have been subdued (Chart 4).
Increasing numbers of producers have entered the
market, especially from China Australia
the rise.
Regional developments
Growth in the global economy over recent
years has been broad-based (Chart 6). In most major
economies, strong regional growth has been accompanied by strong growth in
exports (Chart 7 and
8).
United States GDP grew by 2.9 per cent in
2006. Growth was mainly driven by domestic consumption, although the weak housing
sector increasingly weighed on growth over the year. US
Since 2003, the Chinese economy has delivered
double-digit growth, reaching 11.1 per cent in 2006. GDP growth has been driven by
investment and exports, with Chinese export growth exceeding 20 per cent (and
at times 30 per cent) each year, over the past five years. China ’s merchandise exports are rapidly
approaching the value of the United
States China
is also an increasingly important destination for imports
(particularly intermediate goods) and in 2006 imported more goods than Japan Japan Japan India India has now started to produce rates of export
growth similar to China China
COUNTRY RISK & EVALUATION
Country Risk: There are two type of country risk:
1. Political Risk
A. Macro
a. Domestication : Discriminatory treatment against foreign firms in the application of regulations
or laws.
b. Expropriation of corporate assets without prompt and adequate
compensation
c. Civil War
d. Blockage of Fund
e. Labour Law
f. Forced sale of equity to host-country nationals, usually at or below depreciated
book value
g. Barriers to repatriation of funds (profits or equity)
h. Loss of technology or other intellectual
property (such as patents, trademarks, or trade names)
i. Interference in managerial decision making
B. Micro
a. Law & Order
b. Taxation
c. Corruption : Dishonesty by government officials, including canceling
or altering contractual agreements, extortion demands, and so forth
2. Economic Risk
a. A country’s level of economic development
generally determines its economic stability
b. Economic risk falls into 2 categories
i. Government changes its fiscal policies
ii. Government modifies its
foreign-investment policies
MANAGING COUNTRY RISK
• Avoidance – either the avoidance or withdrawal of investment in a particular country
• Adaptation – adjust to the political & Economic environment.
o Equity sharing includes the initiation of joint ventures with nationals
(individuals or those in firms, labor unions, or government) to reduce
political risks.
o Participative management requires that the firm actively involve nationals,
including those in labor organizations or government, in the management of the
subsidiary.
o Localization of the operation includes the modification of the subsidiary’s name, management
style, and so forth, to suit local tastes. Localization seeks to transform the
subsidiary from a foreign firm to a national firm.
o Development assistance includes the firm’s active involvement in infrastructure
development (foreign-exchange generation, local sourcing of materials or parts,
management training, technology transfer, securing external debt, and so forth)
Dependency – keeping the host nation dependent on the parent
corporation
o Input control means that the firm maintains control over key inputs,
such as raw materials, components, technology, and know-how.
o Market control requires that the firm keep control of the means of
distribution
o Position control involves keeping certain key subsidiary management
positions in the hands of expatriate or home-office managers.
o Staged contribution strategies mean that the firm plans to increase, in each successive
year, the subsidiary’s contributions to the host nation
* Hedging – minimizing the losses associated with political &
Economical risk events
o Political risk insurance is offered by most industrialized countries. Insurance
minimizes losses arising from specific risks—such as the inability to
repatriate profits, expropriation, nationalization, or confiscation— and from
damage as a result of war, terrorism, and so forth.
The Foreign Credit Insurance Association (FCIA) also
covers political risks caused by war, revolution, currency inconvertibility,
and the cancellation of import or export licenses.
o Local debt financing (money borrowed in the host country), where available,
helps a firm hedge against being forced out of operation without adequate
compensation. In such instances, the firm withholds debt repayment in lieu of
sufficient compensation for its business
IN COUNTRY EVALUATION FOLLOWING FACTORS ARE
CONSIDERED.
A. General Factors
1. Political stability
2. Economic stability
3. Currency strength and stability
4. Government policy
5. Infrastructuctural facility
6. Ability of serve as marketing hub.
7. Tax incentives
8. Ethnic factors
9. Bureaucracy and procedure
B. Specific Factors
1. Competition
2. Demand
3. Labour Cost
4. Labour Productivity
5. Infrastructure
6. Govt. Policy and regulation
7. Incentives
UNIT-II
MACROECONOMICS
Macroeconomics is a branch of economics that
deals with the performance, structure, and behavior of a national or regional economy as a whole.
Along with microeconomics, macroeconomics is one of the two most
general fields in economics. Macroeconomists study aggregated indicators such
as GDP, unemployment rates, and price indices to understand how
the whole economy functions. Macroeconomists develop models that explain the relationship
between such factors as national income, output, consumption, unemployment,
inflation, savings, investment, international trade and international finance. In
contrast, microeconomics is primarily focused on the actions of
individual agents, such as firms and consumers, and how their behavior determines prices and
quantities in specific markets.
MACROECONOMIC POLICIES
In order to try to avoid major economic shocks,
such as The Great Depression, governments make adjustments through policy changes which they hope will
succeed in stabilizing the economy. Governments believe that the success of these
adjustments is necessary to maintain stability and continue growth. This
economic management is achieved through two types of strategies.
Fiscal Policy
Fiscal policy refers to government attempts to influence
the direction of the economy through changes in government taxes, or through some spending
(fiscal allowances).
Monetary Policy
Monetary policy is the process by which the government,
central bank, or monetary authority of a country controls (i) the supply of money, (ii)
availability of money, and (iii) cost of money or rate of interest, in order to attain a set of
objectives oriented towards the growth and stability of the economy. Monetary
theory provides insight into how to craft optimal monetary policy.
BALANCE OF PAYMENT
Balance of Payment of a country is one of the
important indicators for International trade, which significantly affect the economic
policies of a government. As every country strives to a have a favorable
balance of payments, the trends in, and the position of, the balance of payments
will significantly influence the nature and types of regulation of export and import business in
particular. Balance of Payments is a systematic and summary record of a
country’s economic and
financial transactions with the rest of the
world over a period of time.it consists of
• Transactions in good and services and income between an
economy and the rest of the world,
• Changes of ownership and other changes in that country’s
monetary gold, SDRs, and claims on and liabilities to the rest of the world,
and
• Unrequited transfers and counterpart entries that are
needed to balance, in the accounting sense, any entries for the foregoing
transactions and changes which are not mutually offsetting.
Hence
The Balance of Payments 'BOP' is an account of all transactions between one country
and all other countries--transactions that are measured in terms of receipts
and payments. For example from the Indian perspective, a receipt represents any
Rupee flowing into the country or any transaction that require the exchange of
foreign currency into Rupee. A payment represents Rupee flowing out of the
country or any transaction that requires the conversion of Rupee into some
other currency.
Components of Balance of Payments
Balance of Payments is generally grouped
under the following heads
i) Current Account
“The Current Account includes all
transactions which give rise to or use up national income.” The Current Account
consists of two major items, namely:
i)
Merchandise exports and imports, and
ii)
Invisible exports and imports.
Merchandise exports, i.e., the sale of goods
abroad, are credit entries because all transactions giving rise to monetary
claims on foreigners represent credits. On the other hand, merchandise imports,
i.e., purchase of goods from abroad, are debit entries because all transactions
giving rise to foreign money claims on the home country represent debits.
Merchandise imports and exports form the most important international
transaction of most of the countries. Invisible exports, i.e., sales of
services, are credit entries and invisible imports, i.e. purchases of services,
are debit entries. Important invisible exports include the sale abroad of such
services as transport, insurance, etc., foreign tourist expenditure abroad
and income paid on loans and investments (by
foreigners) in the home country form the important invisible entries on the
debit side.
ii) Capital Account/ Financial Account(IMF)
The Capital Account consists of short- terms
and long-term capital transactions A capital outflow represents a debit and a
capital inflow represents a credit. For instance, if an American firm invests Rs.100
million in India , this
transaction will be represented as a debit in the US
balance of payments and a credit in the balance of payments of India
iii) Balancing account
The Balancing Account allowing for changes in official reserve
assets (SDR's, Gold, other payments) . Major components are:
A. Unilateral Payments Account
Unilateral transfers is another terms for
gifts. These unilateral transfers include private remittances, government
grants, disaster relief, etc. Unilateral payments received from abroad are
credits and those made abroad are debits.
B. Official Settlement Account.
Official reserves represent the holdings by
the government or official agencies of the means of payment that are generally
accepted for the settlement of international claims.
Balance of payments identity
The balance of payments identity states that: Current
Account = Capital Account + Financial Account + Net Errors and Omissions
This is a convention of double entry
accounting, where all debit entries must be booked along with corresponding credit
entries such that the net of the Current Account will have a corresponding net
of the Capital and Financial Accounts: X + Ki = M + Ko
where:
• X = exports
• M = imports
• Ki = capital inflows
• Ko = capital outflows
Nature of Balance of Payments Accounting
The transactions that fall under Balance of
Payments are recorded in the standard double-entry book-keeping form, under
which each international transaction undertaken by the country results in a
credit entry and a debit entry of equal size, As the international transactions
are recorded in the double-entry book-keeping form, the balance of payments
must always balance, i.e., the total amount of debits must equal the total
amount of credits. Some times, the balancing item, error and omissions, must be
added to balance the balance of payments.
Balance of Payments Items
Credits
|
Debits
|
Current Account
|
Current Account
|
1. Merchandise Exports (
|
1.Merchandise Imports (Purchase of Goods)
|
2. Invisible Exports(
(a) Transport Services (Sold abroad)
(b) Insurance services (Sold abroad)
(c) Foreign tourist ( Expenditure in
country)
(d) Other services sold abroad
(e) Incomes received on loans &
Investment in Home
|
2.Invisible Imports (Purchase of Services)
(a) Transport Services purchased from
abroad)
(b) Insurance Services (purchased from
abroad)
(c) Tourist Expenditure abroad
(d) Other services purchased abroad from
abroad
(e)Income paid on loans and investments
abroad.
|
Capital Account
|
Capital Account
|
3. Foreign long-term investments in home
(a) Direct investments in abroad the home
(b) Foreign investments securities in
domestic
(c) Other investments of foreigners abroad
(d) Foreign Government’s loans to the loans
to foreign
4. Foreign short-term in home country
|
3. Long-term investments abroad.
(a) Direct investments country.
(b)Investments in foreign securities
(c) Other investments abroad
(d)Government to foreign country
4. Short-term investments abroad
|
Unilateral Transfers Account
|
Unilateral Transfers Account
|
5. Private remittances received from abroad
6. Pension Payments received from abroad
7. Government grants Received from abroad
|
5. Private remittances abroad
6. Pension payments abroad.
7. Government grants abroad
|
Official Settlements Account
|
Official Settlements Account
|
8. Official sales of foreign currencies or
other reserves abroad
|
8. Official purchases of foreign currencies
or other services abroad
|
Total Credits
|
Total Debits
|
BALANCE OF PAYMENT EQUILIBRIUM
A balance of payments equilibrium is defined as a condition where the sum of
debits and credits from the current account and the capital and financial
accounts equal to zero; in other words, equilibrium is where
Balance of Payments Disequilibrium
The balance of payments of a country is said
to be in equilibrium when the demand for foreign exchange is exactly equivalent
to the supply of it. The balance of payments is in disequilibrium when there is
either a surplus or a deficit in the balance of payments. When there is a
deficit in the balance of payments, the demand for foreign exchange exceeds the
demand for it. A number of factors may cause disequilibrium in the balance of payments.
These various causes may be broadly categorized into:
(i) Economic factors ;
(ii) Political factors; and
(iii) Sociological factors.
1. Economic Factors
A number of economic factors may cause
disequilibrium in the balance of payments. These are:
A. Development Disequilibrium
Large-scale development expenditures usually
increase the purchasing power, aggregate demand and prices, resulting in
substantially large imports. The development disequilibrium is common in
developing countries, because the above factors, and large-scale capital goods
imports needed for carrying out the various development programmes, give rise
to a deficit in the balance of payments.
B. Capital Disequilibrium
Cyclical fluctuations in general business
activity are one of the prominent reasons for the balance of payments disequilibrium.
As Lawrance W. Towle points out, depression always brings about a drastic
shrinkage in world trade, while prosperity stimulates it. A country enjoying a
boom all by itselt ordinarily experiences more rapid growth in its imports than
its exports, while the opposite is true of other countries. But production in
the other
countries will be activated as a result of
the increased exports to the boom country.
C. Secular Disequilibrium
Sometimes, the balance of payments
disequilibrium persists for a long time because of certain secular trends in the
economy. For instance, in a developed country, the disposable income is
generally very high and, therefore, the aggregate demand, too, is very high. At
the same time, production costs are very high because of the higher wages. This
naturally results in higher prices. These two factors – high aggregate demand
and higher domestic prices may result in the imports being much higher than the
exports. This could be one of the reasons for the persistent balance of
payments deficits of India
D. Structural Disequilibrium
Structural changes in the economy may also
cause balance of payments disequilibrium. Such structural changes include the
development of alternative sources of supply, the development of better
substitutes, the exhaustion of productive resources, the changes in transport
routes and costs, etc.
2. Political Factors
Certain political factors may also produce a
balance of payments Certain political factors may also produce a balance of
payments disequilibrium. For instance, a country plagued with political instability
may experience large capital outflows, inadequacy of domestic investment and
production, etc. These factors may, sometimes, cause disequilibrium in the
balance of payments. Further, factors like war, changes in world trade routes,
etc., may also produce balance of payments difficulties.
3. Social Factors
Certain social factors influence the balance
of payments. For instance, changes in tastes, preferences, fashions, etc. may
affect imports and exports and thereby affect the balance of payments.
Correction Of Disequilibrium
A country may not be bothered about a surplus
in the balance of payments; but every country strives to remove, or at least to
reduce, a balance of payments deficit. A number of measures are available for
correcting the balance of payments disequilibrium. These various measures fall
into measures. We outline below the important measures for correcting the
disequilibrium caused by a deficit in the balance of payments.
A. Automatic Corrections
The balance of payment disequilibrium may be
automatically corrected under the Paper Currency Standard. The theory of automatic
correction is that if the market forces of demand and supply are allowed to
have free play, the equilibrium will automatically be restored in the course of
time. For example, assume that there is a deficit in the balance of payments.
When there is a deficit, the demand for foreign exchange exceeds its supply,
and this results in an increase in the exchange rate and a fall in the external
value of the domestic currency. This makes the exports of the country cheaper
and its imports dearer than before. Consequently, the increase in exports and
the fall in imports will restore the balance of payments equilibrium.
B. Deliberate Measures
This measure is widely employed today. The
various deliberate measures may be broadly grouped into; (a) Monetary
measures (b) Trade measures (c)
Miscellaneous.
(a) Monetary Measures
The important monetary measures are outlined
below;
1. Monetary contraction; the level of aggregate domestic demand, the domestic
price level and the demand for
imports and exports may be influenced by a
contraction or expansion in money supply and correct the balance of payments
disequilibrium the measure required is a contraction in money supply. A
contraction in money supply is likely to reduce the purchasing power and
thereby the aggregate demand. It is also likely to bring about a fall domestic
prices. The fall in the domestic aggregate demand and domestic prices reduces
for imports. The fall in the domestic aggregate demand and domestic prices
reduces the demand for imports. The fall in domestic prices is likely to
increase exports. Thus, the fall in imports and the rise in exports would help
correct the disequilibrium.
2. Devaluation : Devaluation means a reduction in the official rate at
which one currency is exchanged for another currency. A country with a
fundamental disequilibrium in the balance of payments may devalue its currency
in order to stimulate its exports and discourage imports to correct the
disequilibrium. To illustrate, let us take the example of the devaluation of
the Indian Rupee in 1966, Just before the devaluation of the Rupees with effect
from 6th June 1966, the exchange rate was $ I= Rs. 4.76. The devaluation of the
Rupee by 36.5 per cent changed the exchange rate to $ I = Rs. 7.50. Before the
devaluation, the price of an imported commodity, which cost $ I abroad, was Rs.
4.76 (assuming a costless free trade). But after devaluation, the same
commodity, which cost $ I abroad, cost Rs. 7.50 when imported. Thus,
devaluation makes foreign goods costlier in terms of the domestic currency, and
this would discourage imports. On the hand, devaluation makes exports (from the
country that has devalued the currency) cheaper in the foreign markets. For example,
before the devaluation, a commodity which cost Rs. 4.76 in India
3. Exchange Control: Exchange control is a popular method employed to
influence the balance of payments position of a country. Under exchange
control, the government or central bank assumes complete control of the foreign
exchange reserves and earnings of the country. The recipients of foreign exchange
such as exporters are required to surrender foreign exchange to the
government/central bank in exchange for domestic currency. By the virtue of its
control over the use of foreign exchange, the government can control the
imports.
b. Trade Measures
Trade measures include export promotion
measures and measures to reduce imports. Exports may be encouraged by reducing
or abolishing export duties, providing an export subsidy, and encouraging
export production and export marketing by offering monetary, fiscal, physical
and institutional incentives and facilities. Import Control: Imports may be
controlled by imposing or enhancing import duties, restricting imports through
import quotas and licensing, and even by prohibiting altogether the import of
certain inessential items.
c. Miscellaneous Measures
Apart from the measures mentioned above,
there are a number of other measures that can help make the Balance of Payments
position more favourable, such as obtaining foreign loans, encouraging foreign
investment in the home country, development of tourism to attract foreign
tourists, providing incentives to enhance inward remittances, developing import
substituting industries, etc
Balance of Payment & Macro Economic
Management
Following table (1) shows the items includes
in the balance of payment account.
Microeconomic Management is a management of
country’s monetary & Economic policy. It address some of the key questions,
policymakers faces in managing national economics:
The balance of payments also has implications
for overall macroeconomic management. This is done by relating the balance of
payment accounts to the macro-economic framework of the economy. In this
framework, the gross domestic product of a country is defined as:
Gross Domestic Product
GDP = C + I + X – M (1)
where C = consumption both private and
government;
I = Investment for both private and
government,
X = Exports and M = Imports.
Further, the gross national income GNI = GDP
+ Y whereby Y = Income within the Current Account of the balance of payments.
Thus,
GNI = C+I+X+M+Y (2)
The Gross National Disposable Income
GNDI = GNI + Trf. (3)
Where, Trf = Transfers in the Current Account
of the balance of payments; Thus ,
GNDI = C+I+(X-M+Y+Trf) (4)
From equation (4) the items in bracket are
items in the Current Account of the balance of payments (items A, B, C, D,E, F
in table 1). Equation (4) states that :
The Gross National Domestic Product =
Consumption + Investment + The current account of the balance of payments.
Equation (4) has powerful policy implications
with simple re-arrangements. Since national savings (S) amounts to national
disposable income (GNDI) less consumption (C):
S = GNDI – C (5)
It follows that equation (4) can be
re-written as:
S – I = X – M + Y + Trf (6)
Or, alternatively:
S – I = The Current Account of the BOP (7)
Equation (7) states a condition that the
Current Account Balance of a country’s balance of payments must equal the savings
(S) of both the public (Government) and the private sector, minus that
country’s Investment (I). If there is a Current Account surplus it corresponds
to the excess of savings over investment or if there is a Current Account deficit,
it corresponds to an excess of investment over savings. Thus:
* If a country wants to increase its level of
investment it must be done through an increase in private or public (Government)
savings, or a deterioration in the Current Account balance;
* An increase in the Government budget
deficit must be reflected in an increase of savings in the private sector, or a
decrease in investment, or a deterioration in the Current Account balance;
* If a country has a high savings rate, both
private and public (Government), it will either have a high level of investment
or a surplus in its Current Account of the balance of payments.
TRADE & INVESTMENT THEORY
Before discussing trade theory let us know
some important terms
(a) International Economics: International economics is a field of study
which assesses the implications of international trade in goods and
services and international investment. There
are two broad sub-fields within international economics: international trade
and international finance.
(b) International Trade: International trade is a field in economics that applies microeconomic models to help understand the international
economy. Its content includes the same tools that are introduced in
microeconomics courses, including supply and demand analysis, firm and consumer
behaviour, perfectly competitive, oligopolistic and monopolistic market
structures, and the effects of market distortions. It describes economic
relationships between consumers, firms, factor owners, and the government.
(c) International Finance: International finance applies macroeconomic models to help understand the international economy. Its focus is on
the interrelationships between aggregate economic variables such as GDP,
unemployment rates, inflation rates, trade balances, exchange rates, interest
rates, etc. This field expands macroeconomics to include international
exchanges. Its focus is on the significance of trade imbalances, the
determinants of exchange rates and the aggregate effects of government monetary
and fiscal policies. Among the most important issues addressed are the pros and
cons of fixed versus floating exchange rate systems.
(d) Red-Tape Barriers:
Red-tape barriers refers to costly
administrative procedures required for the importation of foreign goods.
Red-tape barriers can take many forms.
(e) Network Effect:
The network effect is a characteristic that causes a good or service to have
a value to a potential customer dependent on the number of customers already
owning that good or using that service.
(f) Specialized Production Factor: Skilled labor, Capital & Infrastructure.
(g) General use Production Factor: Unskilled labor , Raw material
INTERNATIONAL TRADE
International trade is exchange of capital, goods, and services
across international borders or territories. In most countries, it represents a
significant share of gross domestic product (GDP). While international trade
has been present throughout much of history , Silk Road ,
its economic, social, and political importance has been on the rise in recent
centuries. Industrialization, advanced transportation, globalization,
multinational corporations, and outsourcing are all having a major impact on
the international trade system. Increasing international trade is crucial to
the continuance of globalization. International trade is a major source of
economic revenue for any nation that is considered a world power. Without international
trade, nations would be limited to the goods and services produced within their
own borders.
International trade is in principle not
different from domestic trade as the motivation and the behavior of parties involved
in a trade does not change fundamentally depending on whether trade is across a
border or not. The main difference is that international trade is typically
more costly than domestic trade. The reason is that a border typically imposes
additional costs such as tariffs, time costs due to border delays and costs
associated with country differences such as language, the legal system or a
different culture.
Another difference between domestic and
international trade is that factors of production such as capital and labor are
typically more mobile within a country than across countries. Thus
international trade is mostly restricted to trade in goods and services, and
only to a lesser extent to trade in capital, labor or other factors of
production. Then trade in good and services can serve as a substitute for trade
in factors of production. Instead of importing the factor of production a
country can import goods that make intensive use of the factor of production
and are thus embodying the respective factor. An example is the import of labor-intensive
goods by the United States
from China United
States is importing goods from China
What Trade Theory Says
A. The main support for free trade arises
because free trade can raise aggregate economic efficiency.
B. Trade theory shows that some people will
suffer losses in free trade.
C. A country may benefit from free trade even
if it is less efficient than all other countries in every industry.
D. A domestic firm may lose out in
international competition even if it is the lowest-cost producer in the world.
E. Protection may be beneficial for a
country.
F. Although protection can be beneficial, the
case for free trade remains strong.
Affecting factors for Terms of Trade
The terms of trade which is ultimately
decided upon by the two trading partners will depend on a variety of different
and distinct factors. Below we describe many
of these factors.
• Preferences
• Uncertainty
• Scarcity
• Size
• Quality
• Effort
• Persuasion
The art of persuasion can play an important
role in determining the terms of trade. Each partner has an incentive to
embellish the quality and goodness of his product, while diminishing the
perception of quality of the other product.
• Expectations of Future Relationship
• Government Policies
• Morality
• Coercion /Threats
DIFFERENT TRADE THEORY IN INTERNATIONAL
BUSINESS
Following main theories are in International
Business
1. Mercantilism/ Theory of Relative Advantage:
Mercantilism is the economic theory holding that the
prosperity of a nation depends upon its supply of capital, and that the global
volume of trade is "unchangeable." The amount of capital, represented
by bullion (amount of discouraging imports, especially through the use of
tariffs. The economic policy based upon these ideas is often called the mercantile system.
Mixed
exchange through trade with accumulation of wealth
Conducted
under authority of government
Demise of
mercantilism inevitable
2. Absolute Advantage /Absolute Cost
Advantage) (18th Century) (By Adam Smith 1776): The theory that trade occurs when one
country, individual, company, or region is absolutely more productive than another
entity in the production of a good. A person, company or country has an
absolute advantage if its output per unit of input of all goods and services
produced is higher than that of another entity producing that good or
Service The ability of a country to produce a
product with fewer inputs than another country
3. Comparative Advantage / Comparative Cost
Advantage (19th Century): In economics, the theory of comparative advantage explains why it can be beneficial for two
parties (countries, regions, individuals,) to trade, even though one of them may be able to produce every kind
of item more cheaply than the other. What matters is not the absolute cost of production, but rather the ratio between how easily the two
countries can produce different goods. The concept is highly important in
modern international trade theory.
Comparative advantage may be compared to absolute advantage. When one entity (be it a company or a country) is able to produce more efficiently than
another entity it has an absolute advantage: that is, assuming equal inputs,
the entity with an absolute advantage will have a greater output. Comparative
advantage was first described by Robert Torrens in 1815 in an essay on the corn trade. However, the theory is usually attributed to David Ricardo who created a systematic explanation in his 1817 .
Factors of Comparative Advantage:
a. Land
b. Labor
c. Location
d. Natural Resource
e. Population
Critical analysis of Ricardo's theory
Ricardo's principle relies on a variety of
implicit assumptions that are debatable, such as that there is no (or a low)
cost for transportation, and that the advantages of increased production
outweigh externalities such as environmental contamination or social inequities.
It is also necessary that there be restrictions on the flow of capital —
otherwise, there would be no incentive to invest in the manufacture of either
wine or cloth in England
4. Factor Proportions Theory (20th Century) [
By Heckscher-Ohlin]
The factor proportions model was originally
developed by two Swedish economists, Eli Heckscher and his student Bertil Ohlin
in the 1920s. This theory of international trade treats the factors of
production -- Labor, and Capital -- as essentially analytically similar and symmetrical.
“A country that is relatively labor abundant
(capital abundant) should specialize in the production and export of that
product which is relatively labor intensive (capital intensive). “
5. Product Life Cycle Theory(20th Century)
Long-term patterns of international trade are
influenced by product innovation and subsequent diffusion. A country that
produces technically superior goods will self these first to its domestic
market, then to other technically advanced countries. In time, developing
countries will import and later manufacture these goods, by which stage the
original innovator will have produced new products. On a smaller scale,
individual products pass through distinct phases: after a period of research
and development, and trial manufacture, there is a period of introduction
characterized by slow growth and high development costs. This is followed by a
period of growth as sales and profits rise. A phase of maturity and saturation
is then
experienced as sales level off and the first
signs of decline occur. The final phase is decline, characterized by lower
sales and reduced profits, and perhaps final disappearance from the market. The duration of each stage of the cycle
varies with the product and the type of management supporting it
6. New Trade Theory (21st Century)
New Trade theorists challenge the assumption of diminishing
returns to scale, and some argue that using protectionist measures to build up
a huge industrial base in certain industries will then allow those sectors to
dominate the world market (via a Network effect).
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Beginning in the 1970s some economists asked whether it might be effective for a
nation to shelter infant industries until they had grown to
sufficient size to compete internationally.
The theory was initially associated with Paul Krugman and the MIT economists
of the early 1970s. Looking back in 1996 Krugman wrote that International economics
a generation earlier had
completely ignored returns to scale:
"The idea that trade might reflect an overlay
of increasing-returns specialization on comparative advantage was not there at
all: instead, the ruling idea was that increasing returns would simply alter
the pattern of comparative advantage."
7. National Competitive Advantage Theory (20th
Century)[ by Michael Porter]
Traditionally theory of Comparative Advantage takes following factors:
1. Land
2. Labor
3. Location
4. Natural Recourses
5. Local Population Size
These factors also called as passive . They
can not be influenced .
Porters Diamond Model
Porter says “Sustained industrial growth has
hardly ever been built on basic passive factors. Abundance of such factors may
actually “cluster” or group of interconnected firms , suppliers, related
industries, and institutions that arise in particular location.
As a rule Competitive Advantage of Nation has been the outcome of 4 interlinked
advanced factor and activities in and between companies in those clusters,
these can be influenced in a pro-active way by government.
Factors may be defined as:
A. Firm Strategy, Structure and Rivalry [ Dynamic conditions & Direct
competitions that motivate a firm for productivity and innovation.]
B. Demand Conditions
C. Related Supporting Industries
D. Factor Conditions : Key factors of production or specialized factors are
created not inherited.
General use factors do not generate
competitive advantage, However Key factors requires heavy sustainable
investment.
UNIT-III
World financial Environment
In the 1990s, the world reached the climax in
a drama of economic change. No one can deny the effects of these changes on our
hopes for peace and prosperity: the disintegration of the Soviet Union;
political and economic freedom in eastern Europe; the emergence of
market-oriented economies in Asia; the creation of a single European market;
trade liberalization through regional trading blocs, such as the European
Union, and the world’s joint mechanism, such as the World Trade Organization.
As global integration advances amid intensified international competition, the United States , Japan ,
and Europe are expected to lead the world
toward a system of free trade and open markets. Three changes have had a
profound effect on the international financial environment:
1. THE END OF THE COLD WAR
In 1989 the Soviet Union
relaxed its control over the eastern European countries that had suffered its
domination for over 40 years. These countries immediately seized the
opportunity to throw off authoritarian Communist rule. Two years later the Soviet Union itself underwent a political and ideological
upheaval, which quickly led to its breakup into 15 independent states. Most of
these and other formerly centrally planned economies are now engaged in a
process of transition from central planning and state ownership to market
forces and private ownership.
2. INDUSTRIALIZATION AND GROWTH OF THE DEVELOPING WORLD
The second great change of recent years has
been the rapid industrialization and economic growth of countries in several
parts of the world. The first of these emerging markets were the four Asian
“tigers”: Hong Kong , Singapore ,
South Korea , and Taiwan China Argentina ,
Brazil , Chile , Mexico ,
and Venezuela
3. INCREASED GLOBALIZATION
The third major change in the international
financial environment is even more sweeping than the first two. National
economies are becoming steadily more integrated. Technological barriers have
fallen as transportation and communication costs have dropped. Government-made
barriers have also fallen as tariffs and non-tariff barriers have been reduced
in a series of multilateral negotiations and trading blocs since the Second
World War.
Hence World financial environment consist
with:
1. International Institution (World Bank,
IMF, IDA etc)
2. International Monetary System
1. Before IMF
A. Gold Currency Standard (Up to 1914)(Mint
Par Value, Used Coin as Currency)
The gold standard is a monetary system in which a region's
common media of exchange are paper notes that are normally freely convertible
into pre-set, fixed quantities of gold. Gold standards should not be confused
with their historical predecessor, "gold-coin standards", wherein
taxes are payable in either gold coins or overvalued, government-minted, less
expensive, coins. Government-minted gold and silver
coins were
first used in ancient Lydia Rome
B. Gold bullion Standard ( Up to 1936) (Paper
Currency Replaced Gold Coin)
A gold standard without redemption of
currency in gold coin. The gold bullion standard has the advantage of
economizing in the use of gold by keeping it from domestic circulation without
preventing its free international movement. From 1934 to 1971, the U.S. had a restricted international gold bullion
standard, with domestic currency irredeemable in gold, but the dollar
convertible internationally into gold on an official accounts basis until
closing of the "gold window" by the U.S.
C. Gold Exchange Standard ( Return of Gold
Currency Standard)
After the Second World War, a system similar
to the Gold Standard was established by the Bretton Woods Agreements. Under
this system, many countries fixed their exchange rates relative to the US
dollar. The US
2. After IMF
The IMF came into existence in December 1945,
when the first 29 countries signed its Articles of Agreement. Agreement for the
creation of the International Monetary Fund came at the United Nations Monetary and Financial
Conference in Bretton Woods , New Hampshire , United States
July 22, 1944. The principal architects of the IMF at the
conference were British economist John Maynard Keynes and the chief
international economist at the US
Treasury Department, Harry Dexter White. The Articles of Agreement came into force
on December 27, 1945, the organization
came into existence on May 1, 1946, as part of a
post-WW-II reconstruction plan, and it began financial operations
on March 1, 1947.
a. It was Fixed Exchange Rate system with
following scheme.(Up to 1970) Main features were:
1. Each member country should declare the
external value of its currency in term of gold and currency pegged to gold.
2. The value of US dollar was fixed as USD 35
per ounce of fine gold. The USA
3. The monetary reserves of member countries
came to consist of gold and US dollar.
4. Each country agreed to maintain the market
value of its currency within a margin of 1% of the par value.
5. Members were free to devalue their
currencies but if the devaluation is more than 10% of par value, approval of
the IMF required.
6. The IMF grant short-term financila
assistance to the members to tide over there temporary BOP problems .
This system worked for two decade but failed
due to following reasons:
i. Growth of means of settlement of
international debts did not keep pace with the increases of the volume of
international trade.
ii. Undue Importance was given to single
currency ie. US dollar.
iii. Heave deficits in the BOP of USA
iv. USA
suspend the par value of US dollar and impose 10% surcharge on import of goods
in USA
b. Simithsonian Agreement (snack in tunnel)
Ten major industrialized country of the world
( USA, Canada, Britain, West Germany, France, Italy, Holland, Belgium, Sweden
and Japan) sit Simithsonian Building Washington and US dollar devaluated by
7.87% to USD 38 rather than USD 35 and other countries also devaluated their
currency ( as YEN by 7.66%, Germany USA devaluate dollar by 10% and West Germany & UK
c. Official price of Gold was abolished in
November 1975 and SDR emerged as international currency.
d . At present ‘Managed float’ exchange rate
system is implemented where foreign currencies are floating but subject to
exchange control regulations to keep the rate movements with in the limits. For
controlling the currency following methods are adopted:
o The major currencies like US dollars, Japanese Yen,
Pound-sterling, are floating.
o Some currencies are pegged to SDR. (Burmese kyat)
o Some currencies are pegged to a major currency. (Sri
Lankan Rupees is pegged to Pound-Sterling)
o For Some currencies rates are based on a basket of
currencies.
o For some currencies , rates are subject to mutual
intervention arrangements
ROLE OF INTERNATIONAL FINANCIAL MANAGER
In order to achieve the firm’s primary goal
of maximizing stockholder wealth, the financial manager performs three major functions:
Financial
planning and control (supportive tools); FINANCIAL PLANNING AND CONTROL Financial planning and control must be
considered simultaneously. For purposes of control, the financial manager
establishes standards, such as budgets, for comparing actual performance with
planned performance. The preparation of these budgets is a planning function,
but their administration is a controlling function. The foreign exchange market
and international accounting play a key role when an MNC attempts to perform its
planning and control function. For example, once a company crosses national
boundaries, its return on investment depends on not only its trade gains or
losses from normal business operations but also on exchange gains or losses
from currency fluctuations. International reporting and controlling have to do
with techniques for controlling the operations of an MNC. Meaningful financial
reports are the cornerstone of effective management. Accurate financial data
are especially important in international business, where business operations
are typically supervised from a distance.
The
efficient allocation of funds among various assets (investment Decisions)
ALLOCATION OF FUNDS (INVESTMENT) When the financial manager plans for the
allocation of funds, the most urgent task is to invest funds wisely within the
firm. Every fund invested has alternative uses. Thus, funds should be allocated
among assets in such a way that they will maximize the wealth of the firm’s
stockholders. There are 200 countries in the world where a large MNC, such as
Royal Dutch/Shell, can invest its funds. Obviously, there are more investment
opportunities in the world than in a single country, but there are also more
risks. International financial managers should consider these two
simultaneously when they attempt to maximize their firm’s value through international
investment.
The
acquisition of funds on favorable terms (financing decisions).
ACQUISITION OF FUNDS (FINANCING) The third role of the financial manager is to
acquire funds on favorable terms. If projected cash outflow exceeds cash
inflow, the financial manager will find it necessary to obtain additional funds
from outside the firm. Funds are available from many sources at varying costs,
with different maturities, and under various types of agreements. The critical
role of the financial manager is to determine the combination of financing that
most closely suits the planned needs of the firm. This requires obtaining the
optimal balance between low cost and the risk of not being able to pay bills as
they become due. There are still many poor countries in the world. Thus, even
Deutsche
Bank , the world’s largest bank in 1999,
cannot acquire its funds from 200 countries. Nevertheless, MNCs can still raise
their funds in many countries thanks to recent financial globalization. This
globalization is driven by advances in data processing and telecommunications,
liberalization of restrictions on cross-border capital flows, and deregulation
of domestic capital markets. International financial managers use a puzzling
array of fund acquisition strategies. Why? The financial manager of a purely
domestic company has just one way to acquire funds – instruments which have
varying costs, different maturities, and
different types of agreements. The financial manager of an MNC, on the other hand,
has three different ways to acquire funds: by picking instruments, picking
countries, and picking currencies.
THE CHANGING ROLE OF THE FINANCIAL MANAGER The role of the financial manager has
expanded in recent years. Instead of merely focusing on the efficient
allocation of funds among various assets and the acquisition of funds on
favorable terms, financial managers must now concern themselves with corporate
strategy. The consolidation of corporate strategy and the finance function – a
fundamental change in financial management – is the direct result of two recent
trends: the globalization of competition and the integration of world financial
markets
facilitated by improved ability to collect
and analyze information. For example, financial managers increasingly participate
in corporate strategic matters – from basic issues such as the nature of their
company’s business to complex issues such as mergers and acquisitions. The
chief financial officer is emerging as a strategic planner. In an era of
heightened global competition and hard-to-make-stick price increases, the
financial fine points of any new strategy are more crucial than ever before.
Many finance chiefs can provide that data, as well as shrewd judgment about
products, marketing, and other areas. The key place where everything comes
together is finance. In a recent survey by head-hunters Korn/Ferry
International, Fortune 100 chief financial officers almost unanimously
described themselves as “more of a partner with the Chief Executive Officer
(CEO)” than they used to be (Scism, 1993).
TRADE BARRIERS
Tariff Barriers
Accessibility to an import market may be
hampered by the tariff barriers, and the non-tariff barriers, of the importing country.
The tariff
barriers or import restraints are to protect the domestic manufacturers or
producers from foreign competition. Export products generally become less
competitive, or uncompetitive, as a result of the barriers.
High Customs Duty
The high import duties in many countries have
been reduced under the former GATT (General Agreement on Tariffs and Trade) multilateral agreements. The GATT was formed in Geneva ,
Switzerland
through tariff concessions. WTO has wide power to regulate international competition.
Countervailing Duty
Countervailing duty is a duty imposed in addition to the regular
(general) import duty, in order to counteract or offset the subsidy and bounty
paid to foreign export-manufacturers by their government as an incentive to export,
that would reduce the cost of goods. Imposing a countervailing duty is the
answer to unfair competition from subsidized foreign goods.
Anti-dumping Duty
Anti-dumping duty is a duty imposed to offset the advantage
gained by the foreign exporters when they sell their goods to an importing
country at a price far lower than their domestic selling price or below cost. Dumping
usually occurs from the oversupply of goods, which is often a result of
overproduction, and from disposing of obsolete goods to other markets.
Customs Duty Assessments
Customs duties are generally assessed in
three ways: ad valorem duty, specific duty and compound duty.
Ad Valorem Duty
Ad valorem means according to value. Duty is assessed as percentage
of the import value of goods (e.g. 30% of FOB price)
Specific Duty
Specific duty is assessed on the basis of
some units of measurements, such as quantity (e.g. $5 per dozen) or weight,
either net weight or gross weight (e.g. $20 per kilogram net).
Compound Duty
Compound duty is assessed as a combination of
the specific duty and ad valorem duty ($20 per kilogram net, plus 30% of FOB
price).
Non-tariff Barriers
Non-tariff barriers are government laws, regulations, policies,
conditions, restrictions, or specific requirements, and private sector business
practices or prohibitions, that protect the domestic industries from foreign
competition. They are the means of keeping the foreign goods out of domestic
market while abiding by the multilateral agreements that the country has signed
through the WTO
(World Trade Organization).
Quotas
Import quota is the number or amount of goods of a
specific kind or class, such as garments and shoes, that the government of
importing country will permit to be imported. Import quotas are normally
imposed on an annual and a country basis.
Export quota is the number or amount of goods of a
specific kind or class that the government of exporting country will allow to
be exported. The purpose of export quota is to protect the domestic supply of
the goods, for example, sugar, cement and lumber. Export quota may also be used
to boost the world prices of such commodities as oil and strategic metals, and
to protect the natural resources of the exporting country.
The term quota usually refers to the import quota. In practice, the term export quota often, but incorrectly, refers to the import
quota. When exporters talk about the export quota, most often they are
referring to the import quota of the importing country. The quota is allocated,
in the form of a permit or a license, to the exporters (the
export-manufacturers and export-traders) usually on pro rata, based on their
past export records. The quota allocation normally is administered by the
government export office or the national industry association of the exporting
country, for example garment manufacturers' association and footwear
manufacturers' association. For new exporters, the chance of being given a
quota by the administering office is often slim. However, they can still export
either by selling their products to exporters with excess quota---having a
quota but for reasons like shortage of supply, they are unable to serve or utilize
all the amount or quantity allocated by the administering office---or by
'buying' the excess quota from willing sellers (exporters), with approval from
the administering office. To ensure that the quota granted to an exporting
country is fully served or utilized within a given time, the administering
office of that country may allow the 'quota buying' between exporters. When a
quota is reached, imports from an exporting country cannot be legally obtained.
Hence, the quota is more effective in limiting imports than the tariff
barriers.
Countertrade
Countertrade is a generic term that describes various
techniques for the conditional exchange of goods and/or services between seller
and buyer. In layman's parlance, countertrade is "You buy from me and I will
buy from you". As the trade reciprocation entails a requirement to buy in
exchange for a right to sell, it is indeed a form of non-tariff barrier.
Import Levies
Levies on imported and transit goods are
often collected from the use of ports and terminal facilities. They are collected
to pay the costs of maintenance and development of the infrastructures. Levies
may vary from port to port (or point to point) within a country.
Import Pre-shipment Inspections
The government normally requires some form of
inspection for health, safety, security, and tax purposes, before goods are
allowed to leave or enter a country.
Consular Invoice or Legalization or Visa of
Export Documents
Certain importing countries, particularly in Central America , require a Consular Invoice. The consular
fee can be a percentage of the invoice value. Some importing countries require
that the export documents be legalized or visaed by their Consulate or the
Commercial Section of the Embassy located in the exporting country. A fee is usually
charged.
Health, Safety and Technical Standards
Certain products require the health
certificate, safety test marks, or standards certification of the importing country
before they are allowed entry. The product modification may be needed to meet
the import requirements, which means additional product inventory and expenses.
Currency Deposit in Importations
Currency deposit, in local or foreign
currency, may be required in applying for a letter of credit (L/C) and/or an import
permit. In practice, many banks require a deposit and the amount varies from
bank to bank. In times of foreign exchange shortage in a country, the
government may require a 100% deposit in foreign currency (U.S. Dollar
usually).
Product Labelling in Foreign Language
Product labelling in the official language of
the importing country is often required, especially health and food products,
which normally require the name of manufacturer and product expiry date. It may
mean having new packaging to conform to import requirements. Consequently,
additional product inventory and expenses are often necessary.
Closed Market Distribution
The closed market distribution can be a
government and/or a private sector business practice or prohibition that precludes
foreign goods from the domestic distribution channels. This may occur in a
country having a centrally planned economy or a deep sense of nationalism.
Advertising Restrictions
In some countries, the comparative advertising---naming or showing of competing
products---is prohibited by laws. The kind of product and the extend of
advertising claims are regulated, which may render the advertisement less
effective. Violators could face heavy penalties.
Free and Preferential Tariff Treatments
Import duties are generally classified into
regular (general) duty, preferential duty and free duty. The free and
preferential tariff treatments, often called the special tariff status, are designed to promote trade with
countries for reasons of foreign policy. Some of the more commonly encountered
tariff treatments include MFN, GSP, FT and BPT.
MFN (Most Favoured Nation)
The non-discriminatory treatment of all
signatory countries to the WTO (World Trade
Organization) with the same duty rate for purposes of imports.
GSP (Generalised System of Preferences)
A free or reduced duty granted by the
developed countries to certain manufactured goods from the least developed
countries, in order to bolster their exports and economic growth. Please see
Form A in the GSP Program for related information. (The word "generalised"
is also written as "generalized".)
FT (Free Trade)
A free duty and/or gradual tariff rate
reductions on specified goods or services over a period of time, such as
EFTA (European Free Trade Agreement) and NAFTA (North American Free Trade Agreement).
BPT (British Preferential Tariff)
A preferential duty on goods or services
originating from some members of the British Commonwealth .
Subsidy
Subsidy is a kind of financial government assistance,
such as a grant, tax break, or trade barrier, in order to encourage the
production or purchase of a good. The term subsidy may also refer to assistance granted by others,
such as individuals or non-government institutions, although this is more
commonly described as charity.
Types of subsidies
Direct
subsidies
Indirect
Subsidies
Labor
subsidies
Tax
Subsidy
Production
subsidies
Regulatory
advantages
Infrastructure
subsidies
Trade
protection (Import)
Export
subsidies (trade promotion)
Procurement
subsidies
Consumption
subsidies
Tax
break
Subsidies
due to the effect of debt guarantees
Direct subsidies
Direct subsidies are the most simple and
transparent, and arguably the least frequently used. In theory,
they would involve a direct cash transfer to
the recipient. For obvious reasons, this may be politically
unacceptable or even illegal.
Indirect Subsidies
Indirect subsidy is a term sufficiently broad
that it may cover most other forms of subsidy. The term would cover any form of
subsidy that does not involve a direct transfer.
Labor subsidies
A labor subsidy is any form of subsidy where
the recipients receive subsidies to pay for labor costs. Examples may include
labor subsidies and tax deductions for workers in certain industries, such as
the film and television industries.
Tax Subsidy
A tax subsidy is any form of subsidy where
the recipients receive the benefit through the tax system, usually through the
income tax, profit tax, or consumption tax systems.
Production subsidies
In certain cases (to encourage the
development of a particular industry, for example), governments may provide
direct production subsidies - cash payments for production of a given good or
service. Frequently, production subsidies are less easily identifiable, such as
minimum price policies.
Regulatory advantages
Policy may directly or indirectly favor one
industry, company, product, or class of producer over another by means of
regulations. For example, a requirement that full-time government inspectors
(at company expense) be present to inspect meat may favor large producers;
conversely, if small producers were not required to undergo meat inspections at
all, this may constitute a subsidy to that class of producer.
Infrastructure subsidies
Infrastructure subsidies may be used to refer
to a form of indirect production subsidy, whereby the provision of
infrastructure (at public expense) may effectively be useful for only a limited
group of potential users, such as construction of roads at government expense
for a single logging company.
Trade protection (Import)
Measures used to limit imports from other
countries may constitute another form of hidden subsidy. The economic argument
is that consumers of a given product are forced to pay higher prices for a
given good than they would pay without the trade barrier; the protected
industry has effectively received a subsidy. Such measures include import
quotas, import tariffs, import bans, and others.
Export subsidies (trade promotion)
Various tax or other measures may be used to
promote exports that constitute subsidies to the industries favored. In other
cases, tax measures may be used to ensure that exports are treated
"fairly" under the tax system. The determination of what constitutes
a subsidy (or the size of that subsidy) may be complex.
Procurement subsidies
Governments everywhere are relatively large
consumers of various goods and services. Subsidies may occur in this process by
choice of the products consumed, the producer, the nature of the product
itself, and by other means, including payment of higher-than-market prices for
goods purchased.
Consumption subsidies
Governments everywhere provide consumption
subsidies in a number of ways: by actually giving away a good or service,
providing use of government assets, property, or services at lower than the
cost of provision, or by providing economic incentives (cash subsidies) to
purchase or use such goods. In most countries, consumption of education, health
care, and infrastructure (such as roads) are heavily subsidized, and in many
cases provided free of charge
Tax breaks
As previously stated, a common form of
subsidy is via a tax break. This is a reduction in the normal rate of a
particular class of taxes targeted towards an individual or group of companies.
Often this is described as "corporate welfare", although that term is
also used as a blanket term for all other forms of subsidies.
Subsidies due to the effect of debt
guarantees
Another form of subsidy is due to the
practice of a government guaranteeing a lender payment if a particular borrower
defaults.
FOREIGN EXCHANGE MARKET MECHANISM
Mechanism
Mechanism is a set of rules designed to bring about a certain outcome through the interaction of a number of agents each of whom maximizes their own utility
Market mechanism
Market mechanism is a term from economics referring to the use
of money exchanged by buyers and sellers with an open and understood system of
value and time trade offs to produce the best distribution of goods and
services. The use of the market mechanism does not imply a free market: there
can be captive or controlled markets which seek to use supply and demand, or
some other form of charging for scarcity, both in social situations and in
engineering.
The market mechanism assumes perfect
competition and is regulated by demand and supply. Hence : Foreign Exchange
Market Mechanism may refer as set of participates , working rule & type of
foreign exchange market . It may be divided into following parts.
1. Definition & Participations &
features
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is
by far the largest market in the world, in terms of cash value traded, and
includes trading between large banks, central banks, currency speculators,
multinational corporations, governments, and other financial markets and
institutions. The trade happening in the forex markets across the globe exceeds
$2.9 trillion/day ( on an average ) presently. Retail traders (small
speculators) are a small part of this market.
Market size and liquidity
The foreign exchange market is unique because
of:
1. Its trading volume,
2. The extreme liquidity of the market,
3. The large number of, and variety of,
traders in the market,
4. Its geographical dispersion,
5. Its long trading hours - 24 hours a day
(except on weekends).
6. The variety of factors that affect
exchange rates,
7. Exchange rate is defined as price or value of a currency
expressed in terms of units of another currency. e.g. FF 2.00/$ Major
Participants
a) Large Commercial Banks
b) Foreign Exchange Brokers
c) Commercial Customers
d) Central Banks
e) Brokers
f) Speculators
2. Exchange Rate
A. Spot Rate
The spot exchange rate refers to the current exchange rate.
B. Forward Rate
The forward exchange rate refers to an exchange rate that is quoted and traded
today but for delivery and payment on a specific future date
C. Cross Rate
Cross-rate is when two currencies are equal
which follows from their Forex currency exchange rate according to a Forex rate
of the third currency
D. Nominal Rate
The nominal exchange rate is the price in
domestic currency of one unit of a foreign currency.
E. Real Rate
The real exchange rate can be defined as the
nominal exchange rate that takes the inflation differentials among the
countries into account.
3. Quotation System
• Spot Quotation: Whole sale price of one currency in terms of another
currency for immediate delivery. (Two working days).
• Forward Quotation: Whole sale price of one currency in terms of another
currency for future delivery, normally after 1,3 or 6 months.
• Direct Quotation: What is the unit of account? Home Currency quoted for
one unit of foreign currency. e.g. $7/DM
• Indirect Quotation: Foreign Currency quoted for one unit of home currency.
• Bid: The Commercial Bank’s buying rate of a foreign currency.
• Ask: The Commercial Bank’s selling rate of a foreign currency. Always Ask rate
> Bid rate
• Point Quotation: Quoted on point basis. $0.3968/78 15/17 33/38 93/103
per SF
4. Potential Activity
• Arbitrage: Creating a position to realize a riskless (sure) Profit
from market disequilibrium.
• Location Arbitrage
• Triangular Arbitrage
• Covered Interest Arbitrage
• Hedge: Covering an existing or prospective position (i.e.
Payable and receivables) to avoid the foreign exchange risk.
If cash-flows are denominated in foreign
currency and firms show risk averse behavior Hedging When
Future Spot > < Forward Rate, then
Importer (payables) OR Exporter (receivables)
will hedge to lock-in cost or profit
• Speculation: Creating a position to realize a profit from his/her
expectation. :Risk taking Behavior When future spot > < expected Either
gain or lose The underlying questions whether the forward rate is an accurate
or poor predictor of future spot rate.
Financial instruments
Spot
A spot transaction is a two-day delivery
transaction (except in the case of the Canadian dollar, which settles the next
day), as opposed to the futures contracts, which are usually three months. This
trade represents a “direct exchange” between two currencies, has the shortest
time frame, involves cash rather than a contract; and interest is not included
in the agreed-upon transaction. The data for this study come from the spot
market. Spot has the largest share by volume in FX transactions among all
instruments.
Forward
One way to deal with the Forex risk is to
engage in a forward transaction. In this transaction, money does not actually
change hands until some agreed upon future date. A buyer and seller agree on an
exchange rate for any date in the future, and the transaction occurs on that
date, regardless of what the market rates are then. The duration of the trade
can be a few days, months or years.
Future
Foreign currency futures are forward
transactions with standard contract sizes and maturity dates — for example,
500,000 British pounds for next November at an agreed rate. Futures are
standardized and are usually traded on an exchange created for this purpose.
The average contract length is roughly 3 months. Futures contracts are usually
inclusive of any interest amounts.
Swap
The most common type of forward transaction
is the currency swap. In a swap, two parties exchange currencies for a certain
length of time and agree to reverse the transaction at a later date. These are
not standardized contracts and are not traded through an exchange.
Option
A foreign exchange option (commonly shortened
to just FX option) is a derivative where the owner has the right but not the
obligation to exchange money denominated in one currency into another currency
at a pre-agreed exchange rate on a specified date. The FX options market is the
deepest, largest and most liquid market for options of any kind in the world.
Exchange Traded Fund
Exchange-traded funds (or ETFs) are Open
Ended investment companies that can be traded at any time throughout the course
of the day. Typically, ETFs try to replicate a stock market index such as the
S&P 500 (e.g. SPY), but recently they are now replicating investments in
the currency markets with the ETF increasing in value when the US Dollar
weakens versus a specific currency, such as the Euro. Certain of these funds
track the price movements of world currencies versus the US Dollar, and
increase in value directly counter to the US Dollar, allowing for speculation
in the US Dollar for US and US Dollar denominated investors and speculators
DAILY FOREIGN EXCHANGE TURNOVER IN 1000000 US
Exchange Rate
In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies
specifies how much one currency is worth in terms of the other. For example an
exchange rate of 48 Indian Rs. to the United States
Types of Exchange Rate System
Fixed Exchange Rate system
A country's exchange rate regime under which
the government or central bank ties the official exchange rate to another
country's currency (or the price of gold). The purpose of a fixed exchange rate
system is to maintain a country's currency value within a very narrow band.
Also known as pegged exchange rate.
Benefits of Fixed Exchange Rate
1. Promotion of International Trade
2. Promotion of International Investment
3. Facility of Long-run Planning
4. Development of Currency Area
5. Prevention of Speculation
6. Best for Small Open Economy
7. Inflation Control is Easy
Floating Exchange rate system
A country's exchange rate regime where its
currency is set by the foreign-exchange market through supply and demand for
that particular currency relative to other currencies. Thus, floating exchange
rates change freely and are determined by trading in the foreign-exchange
market. Contrast to fixed exchange rate regime.
Flexible Exchange rate / Managed Float
Exchange/ Dirty Float Exchange rate / Hybrid Exchange rate
A country's exchange rate regime where its
exchange rate is fixed but is subject to frequent adjustment
depending upon the market conditions.
Benefits of Flexible Exchange Rate system
1. Adjustment of Balance of Payment
2. Better Confidence
3. Better Liquidity
4. Gain from free trade
5. Independence
6. Cost-Price Relationship
Determination of Exchange Rates
Foreign exchange rate may be determined by
following way:
1. Mint parity theory
According to this theory exchange rate are
determined by the mint parity ratio of gold price and plus or minus the cost of
shipping & handling of gold. The Mint –Par is an expression of the ratio between the
statutory bullion equivalents of standard monetary unit of two countries on the
same metallic standard.
Here One British Pound = 113.0016 grains of
gold and
One Dollar = 23.2200 grains of gold
2. Monetary theory
In monetary models, the bilateral exchange
rate, defined to be the relative price of two currencies, is influenced by the
supply and demand for money in the two countries. Hence, one of the main
building blocks of the model is the monetary equilibrium in each country:
Mt – Pt = A1 Yt – A2 It ====== (1)
M*t – P*t = A*1 Y*t – A*2 I*t ====== (2)
where M, P, Y are the logarithms of
the money supply, price level, and output respectively, and asterisk denotes
foreign variable. The level of the opportunity cost (user cost) of holding
money is I
If the parameters are equal across countries,
so that , then the “flexible price monetary model” for the log exchange rate,
can be shown to be the following :
In all versions of the monetary approach, the
money supply and the variables that determine money demand, such as output and
monetary user costs, affect the exchange rate movements, as seen from equations
(1), (2), and (3). As a result, we introduce the aggregation-theoretic correct
monetary aggregates and their opportunity costs. Nevertheless, the simple-sum
monetary aggregates and short-run interest rates are commonly used as the money
supply and the opportunity cost variables in these studies, despite their known
inconsistency with aggregation and index number theory. Simple sum monetary
aggregates, by giving an equal and constant weight to each component monetary
asset, can severely distort the information about the monetary service flows supplied
in the economy, and the commonly used narrow aggregates, such as M1 and M2,
cannot represent the total monetary services supplied in the economy, since
those aggregates impute zero weight to the omitted components that appear only
in broader aggregates.
Hence :
Monetary
approach appropriate in explaining short run exchange rate fluctuations, but
failed to explain movements in exchange rate during floating period of 1973
Monetary
approach overstress role of money and under-emphasis role of trade as determinants
of exchange rate in long run
Monetary
approach treats domestic and foreign financial assets are perfect substitutes,
but actually they are not
3. Portfolio balance approach
• Portfolio Balance Approach assumes
o The home country is too small to influence foreign
interest rates. Further, foreign citizens do not hold
domestic bonds.
o PPP does not hold (Goods are not perfect substitutes)
o UIP does not hold (Bonds are not perfect substitutes)
o Exchange rate expectations are static (i.e. exchange rates
are not expected to change)
• Therefore, PBA is a more realistic and satisfactory
version of monetary approach
• Start from a position of portfolio or financial and trade
balance
• Assume interest rate, and to a shift from domestic bonds
to the domestic currency and
foreign bonds
• Shift towards foreign bonds causes
An immediate
depreciation of home currency
Depreciation
stimulates nation’s exports and discourages imports
Leads to trade
surplus and appreciation of domestic currency
Neutralize part
of original depreciation
• Portfolio balance approach also explain overshooting by
explicitly bring in trade into adjustment process in
long run
The model is more complicated than the
monetary model inasmuch that domestic and foreign assets are
imperfectly substitutable. The bare minimum
of assets is three: domestic money, domestic bonds (and equities),
and foreign assets. The wealth of the
individual is given by:
W = M + D + SF
D = domestic bonds
F = pound-denominated assets (i.e., foreign
assets)
SF = dollar value of pound-denominated
assets.
- - + +
M = f (i, i*, Y, P)W
+ - - -
D = g (i, i*, Y, P)W
- + - -
SF = h (i, i*, Y, P)W
Let us assume that expected inflation rates
at home and abroad are exactly the same, so the interest rates i and i* imply
the same real return in both countries. The Fed sells securities in the open
market: M decreases and D increases. The decline in the stock of money and the
increase in the supply of bonds to the public forces the domestic interest
rate, i, to rise sufficiently to equilibrate both the money and bond markets.
Let’s assume that the foreign interest rate remains unchanged; the demand for
foreign assets falls because of the rise in domestic (nominal and real)
interest rates. To equilibrate the foreign asset market S must fall and the
domestic currency appreciates relative to the foreign currency. The prediction
is the same as in the monetary approach: a reduction in domestic money leads to
an appreciation of the domestic currency. Complicate by allowing foreign interest
rates to adjust to domestic interest rates. As capital flows from the foreign country
to the domestic country, which is a consequence of the rise in domestic
interest rates, foreign interest rates would adjust upwards. This, in turn,
causes the domestic currency to appreciate by a lesser amount than if foreign
interest rates had not adjusted.
4. Purchasing power parity theory
Purchasing power parity (PPP) is a theory
which states that exchange rates between currencies are in equilibrium when
their purchasing power is the same in each of the two countries. This means
that the exchange rate between two countries should equal the ratio of the two
countries' price level of a fixed basket of goods and services. When a
country's domestic price level is increasing (i.e., a country experiences inflation),
that country's exchange rate must depreciated in order to return to PPP. The
basis for PPP is the "law of one price". In the absence of
transportation and other transaction costs, competitive markets will equalize
the price of an identical good in two countries when the prices are expressed
in the same currency.
For example, a particular TV set that sells
for 750 Canadian Dollars [CAD] in Vancouver
should cost 500 US Dollars [USD] in Seattle when
the exchange rate between Canada
and the US Vancouver
was only 700 CAD, consumers in Seattle would
prefer buying the TV set in Vancouver US
Hence:
PPP theory is
more relevant in the long run
Absolute version
of PPP states exchange rate between two currency is the ratio of countries
general price levels
PPP theory is
based on implicit assumptions
No transport
costs, tariffs or other obstruction to free flow of trade
All commodities
are traded internationally
No structural
changes, war etc occur in either countries
As these
assumptions are not true, absolute version of PPP cannot be taken seriously
Relative form of
PPP is ok: if price double in US relative to UK
So long as no
changes in above variables, changes in exchange rate is roughly proportional to
ratio of two countries general price levels.
Now if the law of one price holds for each
individual item in the market basket, then it should hold for the market
baskets as well. In other words,
Rewriting the right-hand side equation allows
us to put the relationship in the form commonly used to describe absolute purchasing power parity. Namely,
If this condition holds between two countries
then we would say PPP is satisfied. The condition says that the PPP exchange
rate (pound per dollars) will equal the ratio of the costs of the two market
baskets of goods denominated in local currency units. Note that the reciprocal
relationship.
is also valid.
EURO CURRENCY MARKET
The euro was established by the provisions in
the 1992 Maastricht Treaty on European Union that was used to establish an
economic and monetary union. In order to participate in the new currency,
member states had to meet strict criteria such as a budget deficit of less than
three per cent of their GDP, a debt ratio of less than sixty per cent of GDP,
low inflation, and interest rates close to the EU average The euro (currency sign: €; banking code: EUR) is the official currency of the European
Union member states of Austria, Belgium, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, also known as
the Eurozone. Slovenia Europe .
The euro was introduced to world financial markets as an accounting currency in
1999 and launched as physical coins and banknotes in 2002. All EU member states
are eligible to join if they comply with certain monetary requirements,
and eventual use of the euro is mandatory for
all new EU members. The euro is managed and administered by the Frankfurt-based
European Central Bank (ECB) and the European System of Central Banks (ESCB)
(composed of the central banks of its member states). As an independent central
bank, the ECB has sole authority to set
monetary policy. The ESCB participates in the printing, minting and distribution
of notes and coins in all member states, and the operation of the Eurozone
payment systems
International Institutions
A. World Bank
The World Bank Group is a group of five international organizations
responsible for providing finance and advice to countries for the purposes of
economic development and poverty reduction, and for encouraging and safeguarding
international investment. The group and its affiliates have their headquarters
in Washington , D.C.
Together with the separate International
Monetary Fund, the World Bank organizations are often called the "Bretton
Woods" institutions, after Bretton
Woods , New Hampshire
Commencing operations on 25 June 1946, it
approved its first loan on 9 May 1947 ($250m to France
1. International Bank for Reconstruction and
Development (IBRD),
2. International Finance Corporation (IFC),
3. International Development Association
(IDA),
4. Multilateral Investment Guarantee Agency
(MIGA), and the
5. International Centre for Settlement of
Investment Disputes (ICSID).
The World Bank's activities are focused on
developing countries, in fields such as human development (e.g. education,
health), agriculture and rural development (e.g. irrigation, rural services),
environmental protection (e.g. pollution reduction, establishing and enforcing
regulations), infrastructure (e.g. roads, urban regeneration, electricity), and
governance (e.g. anti-corruption, legal institutions development). It provides
loans at preferential rates to member countries, as well as grants to the
poorest countries. Loans or grants for specific projects are often linked to
wider policy changes in the sector or the economy. For example, a loan to
improve coastal environmental management may be linked to development of new
environmental institutions at national and local levels and to implementation
of new regulations to limit pollution.
Goals
The World Bank Group’s mission is to fight
poverty and improve the living standards of people in the developing world. It
provides long term loans, grants, and technical assistance to help developing
countries implement their poverty reduction strategies. As such, World Bank
financing is used in many different areas, from reforms in health and education
to environmental and infrastructure projects, including dams, roads, and
national parks. In addition to financing, the World Bank Group provides advice
and assistance to developing countries on almost every aspect of economic
development. Since 1996, with the appointment of James Wolfensohn as Bank
President, the World Bank Group has been focused on combating corruption in the
countries that it works in. This is outlined in the World Bank report 'Helping countries
combat corruption: progress at the World Bank since 1997'. This has been seen
by some observers as a potential conflict with Article 10 Section 10 of the
World Bank's Articles of Agreement which outlines the 'nonpolitical' mandate of
the Bank1. The World Bank's view is that reduced corruption and improved
governance are
not so much political as economic goals and
are crucial for sustainable development and poverty reduction ("Governance
Matters IV: Governance Indicators for 1996–2004", D. Kaufmann, A. Kraay,
M. Mastruzzi (World Bank 2005)
In recent years the World Bank Group has been
moving from targeting economic growth in aggregate, to aiming specifically at
poverty reduction. It has also become more focused on support for small scale
local enterprises. It has embraced the idea that clean water, education, and
sustainable development are essential to economic growth and has begun investing
heavily in such projects. In response to external critics, the World Bank
Group's institutions have adopted a wide range of environmental and social
safeguard policies, designed to ensure that their projects do not harm
individuals or groups in client countries. Despite these policies, World Bank
Group projects are frequently criticized by non-governmental organizations
(NGOs) for alleged environmental and social damage and for not achieving their
intended goal of poverty reduction.
A.1. International Bank for Reconstruction and Development
The International Bank for Reconstruction and Development (IBRD) is one of five institutions that
comprise the World Bank Group. The IBRD is an international organization whose
original mission was to finance the reconstruction of nations devastated by
WWII. Now, its mission has expanded to fight poverty by means of financing
states. Its operation is maintained through payments as regulated by member
states. It came into
existence on December 27, 1945 following international
ratification of the agreements reached at the United Nations Monetary and
Financial Conference of July 1 to July 22, 1944 in Bretton Woods , New Hampshire
The IBRD provides loans to governments, and
public enterprises, always with a government (or "sovereign") guarantee
of repayment. The funds for this lending come primarily from the issuing of
World Bank bonds on the global capital markets - typically $12-15 billion per
year. These bonds are rated AAA (the highest possible) because they are backed
by member states' share capital, as well as by borrowers' sovereign guarantees.
(In addition, loans that are repaid are recycled (relent).) Because of the
IBRD's credit rating, it is able to borrow at relatively low interest rates. As
most developing countries have considerably lower credit ratings, the IBRD can lend
to countries at interest rates that are usually quite attractive to them, even
after adding a small margin (about 1%) to cover administrative overheads.
History
Commencing operations on June 25, 1946, it
approved its first loan on May 9, 1947 ($250m to France Japan after World War II, with an additional
mandate to foster economic growth in developing countries in Africa, Asia and Latin America . Originally the bank focused mainly on
large-scale infrastructure projects, building highways, airports, and powerplants.
As Japan and its European client countries "graduated" (achieved
certain levels of income per capita), the IBRD became focused entirely on
developing countries. Since the early 1990s the IBRD has also
provided financing to the post-Socialist
states of Eastern Europe and the former Soviet Union .
A.2. International Finance Corporation
The International Finance Corporation (IFC) promotes sustainable private sector
investment in developing countries as a way to reduce poverty and improve
people's lives. IFC is a member of the World Bank Group and is headquartered in
Washington , DC
1. Financing private sector projects located
in the developing world.
2. Helping private companies in the
developing world mobilize financing in international financial markets.
3. Providing advice and technical assistance
to businesses and governments.
Ownership and Management
IFC has 178 member countries , which
collectively determine its policies and approve investments. To join IFC, a country
must first be a member of the International Bank for Reconstruction and
Development (IBRD). IFC's corporate powers are vested in its Board of
Governors, to which member countries appoint representatives. IFC's share
capital, which is paid in, is provided by its member countries, and voting is
in proportion to the number of shares held. IFC's authorized capital (the sums
contributed by its members over the years) is $2.45 billion; IFC's net worth
(which includes authorized capital and retained earnings) is considerably
larger and at the end of June, 2005, was $9.8 billion. The Board of Governors
delegates many of its powers to the Board of Directors, which is composed of
the Executive Directors of the IBRD, and which represents IFC's member
countries. The Board of Directors reviews all projects. The President of the
World Bank Group, Paul Wolfowitz, also serves as IFC's president. IFC's
Executive Vice President, Lars Thunell, is responsible for the overall management
of day-to-day operations. He was appointed
on January 15, 2006. Although IFC coordinates
its activities in many areas with the other institutions in the World Bank
Group, IFC generally operates independently as it is legally and financially
autonomous with its own Articles of Agreement, share capital, management and
staff.
Funding of IFC's Activities
IFC's equity and quasi-equity investments are
funded out of its net worth: the total of paid in capital and retained earnings.
Strong shareholder support, triple-A ratings, and the substantial paid-in
capital base have allowed IFC to raise funds for its lending activities on
favorable terms in the international capital markets. Retained earnings now
represent almost three-quarters of IFC's net worth of $9.8 billion (end-June
2006).
IFC Activities
Within the World Bank Group, the World Bank
finances projects with sovereign guarantees, while the IFC finances projects
without sovereign guarantees. This means that the IFC is primarily active in
private sector projects, although some projects in the public sector (at the
municipal or sub-national level) have recently been funded. Private sector
financing is IFC's main activity, and in this respect is a profit-oriented
financial institution (and has never had an annual loss in its 50-year
history). Like a bank, IFC lends or invests its own funds and borrowed funds to
its customers and expects to make a sufficient risk-adjusted return on its
global portfolio of projects. IFC's activities, however, must meet a second
test of contributing to a reduction in poverty in line with its mandate.In
practice, this is broadly interpreted, but considerable time and effort is
devoted to both (i) selecting projects with positive developmental outcomes,
and (ii) improving the developmental outcome of projects by various means. Apart
from its core investment activities, IFC also carries out technical cooperation
projects in many countries to improve the investment climate. These activities
may be linked to a specific investment project, or, increasingly, to broader
goals such as improving the legislative environment for a specific industry.
IFC's technical cooperation projects are generally funded by donor countries or
from IFC's own budget.
A.3. International Development Association
The International Development Association (IDA) created on September 24, 1960, is the part of the World Bank that helps
the world’s poorest countries. It complements the World Bank's other lending
arm—the International Bank for Reconstruction and Development (IBRD)—which
serves middle-income countries with capital investment and advisory services. The
International Development Association (IDA) is responsible for providing
long-term interest-free loans to the world's 81 poorest countries, 40 of which
are in Africa . IDA provides grants and
credits, with repayment periods of 35 to 40 years and no interest. Since its
inception, IDA credits and grants have totaled $161 billion, averaging $7–$9
billion a year in recent years and directing the largest share, about 50
percent, to Africa . IDA is part of the World
Bank Group based in Washington ,
D.C.
While the IBRD raises most of its funds on
the world's financial markets, IDA is funded largely by contributions from the
governments of the richer member countries. Additional funds come from IBRD's
income and from borrowers' repayments of earlier IDA credits.
IDA loans address primary education, basic
health services, clean water and sanitation, environmental safeguards, business
climate improvements, infrastructure and institutional reforms. These projects
pave the way toward economic growth, job creation, higher incomes and better
living conditions. Criticisms include the improper use of financial resources
as well as its structure of voting power, based on financial contributions (the
largest being from the USA
conflict or deal with its aftermath. IDA’s
long-term, no-interest loans pay for programs that build the policies,
institutions, infrastructure and human capital needed for equitable and
environmentally sustainable development. IDA’s goal is to reduce inequalities both
across and within countries by allowing more people to participate in the
mainstream economy, reducing poverty and promoting more equal access to the
opportunities created by economic growth.
A4. Multilateral Investment Guarantee Agency
The Multilateral Investment Guarantee Agency (MIGA) is a member of the World Bank group.
It was established to promote foreign direct investment into developing countries.
MIGA was founded in 1988 with a capital base of $1 billion and is headquartered
in Washington , D.C.
MIGA promotes foreign direct investment into
developing countries by insuring investors against political risk, advising
governments on attracting investment, sharing information through on-line investment
information services, and mediating disputes between investors and governments.
MIGA
also requires host country government
approval for every project. MIGA tries to work with host governments - resolving
claims before they are filed.
Guarantees
MIGA provides guarantees against
noncommercial risks to protect cross-border investment in developing member
countries. Guarantees protect investors against the risks of Transfer
Restriction, Expropriation, War and Civil Disturbance, and Breach of Contract
(for contracts between the
investor/project enterprise and the
authorities of the host country). These coverages may be purchased individually
or in combination. MIGA can cover only new investments. These include:
1. New, greenfield
2. New investment contributions associated
with the expansion, modernization, or financial
restructuring of existing projects; and
3. Acquisitions involving privatization of
state enterprises.
A5. The International Centre for Settlement
of Investment Disputes (ICSID)
The International Centre for Settlement of Investment
Disputes (ICSID), an institution of the World Bank group based in Washington , D.C.
increased. As of March 30, 2007, ICSID had
registered 263 cases more than 30 of which were pending against Argentina – Argentina 's
economic crisis in the late 1990s and subsequent Argentine government measures
led several foreign investors to file cases against Argentina Bolivia , Nicaragua ,
Ecuador and Venezuela
2. IMF :
International
Monetary Fund. The IMF is an
international organization of 184 member countries, established to promote
international monetary co-operation, exchange stability, and orderly exchange arrangements;
foster economic growth and high levels of employment; and provide temporary
financial assistance to countries to help ease balance of payments adjustments.
Established along with the World Bank (qv) in 1945, the
IMF is a specialized agency affiliated with the United Nations and is
responsible for stabilizing international exchange rates and payments. The main
business of the IMF is the provision of loans
to its members (including industrialized and developing countries) when they
experience balance of payments difficulties. These loans frequently carry
conditions that require substantial internal economic adjustments by the
recipients, most of which are developing countries.
An autonomous
international financial institution that originated at the Bretton Woods
Conference of 1994. It's main purpose is to regulate the international monetary
exchange system, control fluctuations in exchange rates, in a bid to supposedly
alleviate sever balance of payment problems. It does this by using a "one
size fits all" kind of process, in the mind set that the economic
situation: ie: poverty has to get really worse, before it can get better. The
four components of a typical stabilization program are:
1. Removing tariff protections and increasing
exports, to try and devalue the official foreign exchange rate.
2. Reduction in the exchange rate: ie: The
value of the pound would not be as strong in comparison to the value of other
currencies. This would be so as to reduce demand for foreign imports, because
they would be more expensive comparatively.
3. A stringent domestic anti-inflation
program, consisting of:
a) Less bank credit, raising interest rates,
to control for inflation and attract foreign investment. This would increase
the likelihood of bankruptcy, corruption and a worsening of the situation
b) Control of budget deficit, often through
drastic reduction in Government spending, which proves to hit the lower to
middle income people particularly: Ie: Less government spending on
education, health etc.
c) Either Control of wage increases or wage
reduction;
d) Dismantling various price controls and
ensuring a freer market so big business can go to town exploiting the poor even
further.
4. Encouragements of foreign investment,
opening up the economy to international trade so Multi-National Corporations
can crush them and developed country Governments.
Organization and Purpose
The IMF describes itself as: "an
organization of 184 countries, working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty". Of all UN member
states only North Korea , Cuba , Liechtenstein ,
Andorra , Monaco , Tuvalu
and Nauru
Membership Qualifications
A country may apply for membership status
within the IMF. The application will be considered, first, by the IMF's Executive
Board. After its consideration, the Executive Board will submit a report to the
Board of Governors of the IMF with recommendations in the form of a
"Membership Resolution." These recommendations cover the amount of
quota in the IMF, the form of payment of the subscription and other customary
terms and conditions of membership. After the Board of Governors has adopted
the "Membership Resolution," the applicant state needs to take the
legal steps required under its own law to enable it to sign the IMF's Articles
of Agreement and to fulfill the obligations of IMF membership. A member's quota
in the IMF determines the amount of its subscription, its voting weight, its
access to IMF financing, and its allocation of SDRs
Assistance and Reforms
Part of its mission has become to provide
assistance to countries that experience serious economic difficulties. Member
states with balance of payments problems may request assistance in the form of
loans and/or organizational management of their national economies. In return,
the countries are obliged to launch certain reforms, an example of which is the
"Washington Consensus".
3. Non-banking financial company (NBFCs)?
A non-banking financial company (NBFC) is a
company registered under the Companies Act, 1956 and is engaged in the business
of loans and advances, acquisition of shares/stock/bonds/debentures/securities
issued by government or local authority or other securities of like marketable
nature, leasing, hire-purchase, insurance business, chit business, but does not
include any institution whose principal business is that of agriculture
activity, industrial activity, sale/purchase/construction of immovable
property. A non-banking institution which is a company and which has its
principal business of receiving deposits under any scheme or arrangement or any
other manner, or lending in any manner is also a non-banking financial company (residuary
non-banking company).
Function of NBFCs
NBFCs are doing functions akin to that of
banks, however there are a few differences:
• NBFC cannot accept demand deposits (demand deposits are
funds deposited at a depository institution that are payable on demand --
immediately or within a very short period -- like your current or savings
accounts.)
• It is not a part of the payment and settlement system and
as such cannot issue cheques to its customers;
• Deposit insurance facility of DICGC is not available for
NBFC depositors unlike in case of banks.
Different types of NBFCs registered with RBI
The NBFCs that are registered with RBI are:
• Equipment leasing company;
• Hire-purchase company;
• Loan company;
• Investment company.
With effect from December 6, 2006 the above
NBFCs registered with RBI have been reclassified as
• Asset Finance Company (AFC)
• Investment Company (IC)
• Loan Company (LC)
SALIENT FEATURES OF NBFCS REGULATIONS
Some of the important regulations relating to
acceptance of deposits by NBFCs are as under:
• The NBFCs are allowed to accept/renew public deposits for
a minimum period of 12 months and maximum period of 60 months. They cannot
accept deposits repayable on demand.
• NBFCs cannot offer interest rates higher than the ceiling
rate prescribed by RBI from time to time. The present ceiling is 11 per cent
per annum. The interest may be paid or compounded at rests not shorter than monthly
rests.
• NBFCs cannot offer gifts/incentives or any other
additional benefit to the depositors.
• NBFCs (except certain AFCs) should have minimum
investment grade credit rating.
• The deposits with NBFCs are not insured.
• The repayment of deposits by NBFCs is not guaranteed by
RBI.
• There are certain mandatory disclosures about the company
in the Application Form issued by the company soliciting deposits
4. GATT :
Full form of GATT is “General Agreement on Tariffs and Trade”. An integrated
set of bilateral trade agreements among the contracting nations. Originally drawn up in 1947 to abolish
quotas and reduce tariffs among members. The Soviet Union
eschewed joining GATT until 1987, when it applied for membership. It achieved
observer status in 1990. In January 1995, GATT became the World Trade
Organization (WTO).
In Bretton Wood Conference (Held in 1944) it
was envisaged that the new world economic order would organized around two
International Organizations i.e.
(1) International Bank for Reconstruction and
Development (IBRD)
(2) International Monetary Fund (IMF)
Despite the non-adoption of the charter of
ITO, the developed nations were keen to ensure reduction of trade barriers.
Tariff negotiations were started among 23 nations and as a result of this and
extensive set of bilateral trade concessions were then extended to all
participants and were incorporated in a General Agreement on Tariffs and
Trade(GATT) established in 1947.
As per preamble of GATT the main objectives
were to :
(A) Raise the standard of living.
(B) Ensure the full employment and increase
the volume of real income effective demand.
(C) Ensure better utilization of the
resources of the world.
(D) Ensure expansion of production and
international trade since the establishment of the GATT , eight rounds of
negotiations of reduce the tariffs and trade barriers in the trade in goods
have been held.
FEATURES OF GATT CAN BE DEFINED AS :
The GATT is a
set of rules, a multilateral agreement, with no institutional foundation, only
a small associated secretariat which had its origins in the attempt to
establish an International Trade Organization in the 1940s.
The GATT was
applied on a "provisional basis" even if, after more than forty
years, governments chose to treat it as a permanent commitment.
The GATT rules
applied to trade in merchandise goods.
While GATT was a
multilateral instrument, by the 1980s many new agreements had been added of a plurilateral,
and therefore selective, nature.
The "GATT 1947" will continue to
exist until the end of 1995, thereby allowing all GATT member countries to accede
to the WTO and permitting an overlap of activity in areas like dispute
settlement. Moreover, GATT lives on as "GATT 1994", the amended and
up-dated version of GATT 1947, which is an integral part of the WTO Agreement
and which continues to provide the key disciplines affecting international
trade in goods.
5. World trade Organization ( WTO)
In line with the final accords of the Uruguay
Round of the GATT (General Agreement on Tariffs and Trade), the World Trade
Organization (WTO) began operating on 1 January 1995. This replacement for the
GATT was designed to promote a new era in international trade relations.
“The World Trade Organization (WTO) is an international, multilateral organization, which sets the rules for
the global trading system and resolves disputes between its member states; all
of whom are signatories to its approximately 30 agreements.” The creation of
the WTO sought to establish a new legal framework to ensure that trade laws
conformed to the evolution of the world economy and its multilateral trade
system. One hundred and twenty countries signed the foundational document (Marrakesh
Officially, the WTO describes itself as a
"democratic" organization which seeks "to improve the welfare of
the peoples of the member countries" through trade liberalization.
However, civil society and many governments from developing countries consider
it to be "one of the least transparent organizations", which excludes
less developed countries from its negotiations and favors the interests of
wealthy countries. For these reasons the WTO is one of the organizations whose
work is closely monitored by non-governmental organizations. Its ministerial
meetings –the institution's highest decision-making body- have been transformed
into opportunities for mass protest by anti-globalization movements.
Structure of WTO.
Highest level: Ministerial Conference
Second level: General Council
Third level: Councils for Trade
Fourth level: Subsidiary Bodies
Major Objective
A trading system
should be free of discrimination in the sense that one country cannot privilege
a particular trading partner above others within the system, nor can it
discriminate against foreign products and services.
A trading system
should tend toward more freedom, that is, toward fewer trade barriers (tariffs
and non-tariff barriers).
A trading system
should be predictable, with foreign companies and governments reassured that
trade barriers will not be raised arbitrarily and that markets will remain
open.
A trading system
should tend toward greater competition.
A trading system
should be more accommodating for less developed countries, giving them more
time to adjust, greater flexibility, and more privileges.
WTO made an grater impact on global trade.
WTO creates an common environment for Global trade for members country. It reduce
tariff and non-tariff barriers which makes global trade complicated. WTO :
A. facilitate and implement action,
operation, administration and the promotion of the agreement, the multilateral and
plurilateral trade agreement.
B. Provides the forum of negotiations among
its member in respect of multilateral trade relation.
C. To administer the rules and procedures
governing the settlement of trade disputes among member.
D. Oversee national trade policies by
administering trade policy review mechanism (TRPM)
E. Cooperate with the IMF, World Bank and
other International institutions involved in global policy making.
STOCK MARKET
STOCK
A corporation is generally entitled to create
as many shares as it pleases. Each share is a small piece of ownership. The more shares you own, the more of the company you own, and the more
control you have over the company's operations. Companies sometimes issue
different classes of shares, which have different privileges associated with
them. So a corporation creates some shares, and sells them to an investor for an agreed upon price, the corporation
now has money. In return, the investor has a degree of ownership in the
corporation, and can exercise some control over it. The corporation can
continue to issue new shares, as long as it can persuade people to buy them. If
the company makes a profit, it may decide to plow the money back into the
business or use some of it to pay dividends on the shares.
Stock Market
A stock market, or equity market, is a private or public market for the
trading of company stock and derivatives of company stock at an agreed price;
these are securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market is estimated at about $36.6 trillion US at
the beginning of October 2008 . The world derivatives market has been estimated
at about $480 trillion face or nominal value, 12 times the size of the entire world
economy. It must be noted though that the value of the derivatives market,
because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed
income security, which traditionally refers to an actual value. Many such
relatively illiquid securities are valued as marked to model, rather than an
actual market price. The stocks are listed and traded on stock exchanges which
are entities a corporation or mutual organization specialized in the business
of bringing buyers and sellers of the organizations to a listing of stocks and
securities together. The stock market in the United States
the Amex, as well as on the many regional
exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges
include the London Stock Exchange, the Deutsche Börse and the Paris Bourse, now
part of Euronext. In India BSE & NSE are main stock exchange.
Trading
Participants in the stock market range from
small individual stock investors to large hedge fund traders, who can be based
anywhere. Their orders usually end up with a professional at a stock exchange,
who executes the order. Some exchanges are physical locations where
transactions are carried out on a trading floor, by a method known as open
outcry. This type of auction is used in stock exchanges and commodity exchanges
where traders may enter "verbal" bids and offers simultaneously. The
other type of stock exchange is a virtual kind, composed of a network of computers
where trades are made electronically via traders. Actual trades are based on an
auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or
bid price for the stock, respectively.) When
the bid and ask prices match, a sale takes place on a first come first served
basis if there are multiple bidders or askers at a given price. The purpose of
a stock exchange is to facilitate the exchange of securities between buyers and
sellers, thus providing a marketplace (virtual or real). The exchanges provide
real-time trading information on the listed securities, facilitating price
discovery.
Market participants
Many years ago, worldwide, buyers and sellers
were individual investors, such as wealthy businessmen, with long family
histories (and emotional ties) to particular corporations. Over time, markets
have become more "institutionalized"; buyers and sellers are largely
institutions (e.g., pension funds, insurance companies, mutual funds, index
funds, exchange traded funds, hedge funds, investor groups, banks and various
other financial institutions). The rise of the institutional investor has
brought with it some improvements in market operations. Thus, the government was
responsible for "fixed" (and exorbitant) fees being markedly reduced
for the 'small' investor, but only after the large institutions had managed to
break the brokers' solid front on fees they then went to 'negotiated' fees, but
only for large institutions. However, corporate governance (at least in the
West) has been very much adversely affected by the rise of (largely 'absentee')
institutional 'owners'.
Function and purpose
The stock market is one of the most important sources for companies to
raise money. This allows businesses to be publicly traded, or raise additional
capital for expansion by selling shares of ownership of the company in a public
market. The liquidity that an exchange provides affords investors the ability
to quickly and easily sell securities. This is an attractive feature of investing
in stocks, compared to other less liquid investments such as real estate. History
has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social
mood. An economy where the stock market is on the rise is considered to be an
up coming economy. In fact, the stock market is often considered the primary
indicator of a country's economic strength and development. Rising share
prices, for instance, tend to be associated with increased business investment
and vice versa. Share prices also affect the wealth of households and their
consumption. Therefore, central banks tend to keep an eye on the control and
behavior of the stock market and, in general, on the smooth
operation of financial system functions.
Financial stability is the raison d'être of central banks. Exchanges also act
as the clearinghouse for each transaction, meaning that they collect and
deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty
could default on the transaction. The smooth functioning of all these
activities facilitates economic growth in that lower costs and enterprise risks
promote the production of goods and services as well as employment. In this way
the financial system contributes to increased prosperity.
How Transaction completed
Behind the scenes, however, there's a lot of
action that takes place between your order and the confirmation. Here's what
has to happen:
1. You place the order with your broker to
buy 100 shares of the Coca-Cola Company.
2. The broker sends the order to the firm's
order department.
3. The order department sends the order to
the firm's clerk who works on the floor of the exchange where shares of
Coca-Cola are traded (the New York Stock Exchange).
4. The clerk gives the order to the firm's
floor trader, who also works on the exchange floor.
5. The floor trader goes to the specialist's
post for Coca-Cola and finds another floor trader who is willing to sell shares
of Coca-Cola.
6. The traders agree on a price.
7. The order is executed.
8. The floor trader reports the trade to the
clerk and the order department.
9. The order department confirms the order
with the broker.
10. The broker confirms the trade with you.
UNIT-IV
Regional Blocs / Economic Integration
DEFINITION –
Economic integration is term used to describe
how different aspects between economies are integrated. As economic integration
increases, the barriers of trade between markets diminishes. The most
integrated economy today, between independent nations, is the European Union
and its
euro zone.
FORMS OF INTEGRATION
(1) Preferential Trade Area
A Preferential Trade Area is a trading bloc which gives preferential access to
certain products from certain countries. This is done by reducing tariffs, but
does not abolish them completely.An example of a preferential trading area is
one formed by the EU and the ACP countries. PTA is established through trade
pact. It can be said to be the weakest form of economic integration.
(2) Free Trade Area (FTA) -
No tariffs against members, individual
tariffs against outsiders. E.g., the North American Free Trade Area (NAFTA),
the European Free Trade Area (EFTA), and the Latin American Integration Association
(LAIA).
(3) Customs Union -
No tariffs against members, common tariff
against outsiders. E.g., EEC, Andean Group, Central American Common Market
(CACM), Caribbean Community and Common Market (CARICOM).
(4) Common Market -
A single market is a customs union with common policies on product regulation, and freedom of movement of all the four factors of production (goods, services, capital and labour). Sometimes a single market is differentiated as a more advanced form of common market. In comparison to common a single market envisions more
efforts geared towards removing the physical (borders), technical (standards)
and fiscal (taxes) barriers among the member states. These barriers obstruct
the freedom of movement of the four factors of production. To remove these
barriers the member states need political will and they have to formulate
common economic policies..
(5) Economic and monetary union
An economic and monetary union is a single market with a common currency. It
is to be distinguished from a mere currency union (e.g. the Latin Monetary
Union in the 1800s), which does not involve a single market. This is the fifth stage
of economic integration. EMU is established through a currency-related trade
pact
(6) Complete Economic Integration -
Unification of monetary, fiscal, social, and
counter-cyclical policies; requires a binding supranational organization. The
only example is the EU, perhaps in 1997-1999.
International Agreements
Accord, annex, charter, compromise, convention,
memorandum of understanding, protocol, treaty, etc., which (as defined by the
Vienna Convention On The Law Of Treaties) is an "agreement concluded
between states in written form and governed by international laws, whether
embodied in a single instrument or in two or more related instruments and
whatever its particular designation.” The title of the agreement is not a determining
factor in making distinctions among different arrangements. Although considered
binding, international agreements may lapse on expiration, through war or
denunciation, or when a fundamental change in circumstances occurs.
Types of Agreements
1. Multilateral agreements are usually open
to all nations,
2. Plurilateral agreements involve a
restricted number of nations,
3. Bilateral agreements are usually private
arrangements between two nations.
Regulation of international trade / Effect of
Trading Agreement
Traditionally trade was regulated through
bilateral treaties between two nations. For centuries under the belief in Mercantilism
most nations had high tariffs and many restrictions on international trade. In
the 19th century, especially in the United Kingdom United States
and Europe . The Netherlands
and the United Kingdom were
both strong advocates of free trade when they were economically dominant, today
the United States , the United Kingdom , Australia
and Japan India , China
and Russia
at the transaction cost associated with
meeting trade and customs procedures.
Traditionally agricultural interests are
usually in favor of free trade while manufacturing sectors often support
protectionism. This has changed somewhat in recent years, however. In fact,
agricultural lobbies, particularly in the United
States , Europe and Japan United States , Canada and Mexico Buenos
Aires
Area of the Americas (FTAA) failed largely
because of opposition from the populations of Latin American nations. Similar
agreements such as the Multilateral Agreement on Investment (MAI) have also
failed in recent years.
Global Competition
Globalization generates controversy. It
unleashes competition and accelerates the forces of creative destruction, to borrow
the term coined by economist Joseph Schumpeter. In this turbulent sea of
change, there are challenges and opportunities. Business leaders confront them
every day. The men and women who manage America
As strategists have learned from game theory,
the results of any move a player makes stem in large part from the choices his
opponent makes. Often those results are nonlinear—that is, out of proportion to
the events that provoke them. Furthermore, they might happen far away from the
apparent sphere of competition, like the proverbial butterfly that flaps its
wings in New York and causes a tsunami in Japan
Global competition now shapes economies and
societies in ways unimaginable only a few years ago, and laws shape and
maintain global competition, determining how effective global markets are and
how they distribute benefits and harms. Competition law plays a central role in
this framework of law. These laws are intended to protect the competitive
process from distortion and restraint, and in the domestic context, they embody
and reflect the relationships between markets, their participants and those
affected by them. On the global level, however, competition law is provided by
those players that have sufficient nullpowernull to apply their laws
transnationally. In practice, this means that the US
Factors affecting Global Competition
1. Institutes ( Both Public & Private)
Ethic &
Corruption
Undue influence
(Judicial independence, Favoritism in decisions of government officials)
Government
inefficiency (red tape, bureaucracy and waste)
Security
(Business costs of terrorism, Reliability of police services, Business costs of
crime and violence)
Corporate ethics
Ethical behavior
of firms
2. Accountability
Efficacy
of corporate boards
Protection
of minority shareholders’ interests
Strength
of auditing and accounting standards
3. Infrastructure
Overall
infrastructure quality
Railroad
infrastructure development
Quality of port
infrastructure
Quality of air
transport infrastructure
Quality of
electricity supply
Communication
4. Macroeconomic
Government
surplus/deficit (hard data)
National savings
rate (hard data)
Inflation (hard
data)
Interest rate
spread (hard data)
Government debt
(hard data)
Real effective
exchange rate (hard data)
5. Health & education
Medical
Infrastructure
Quality of
Health services
Quality of
education ( Both Primary as well as higher)
6. Market efficiency
Goods market [
Competition, Size , Distortion (Government Policy regarding business)]
Labor Market
[Flexibility and efficiency]
7. Technological readiness
Firm-level
technology absorption
FDI and
technology transfer
8. Business sophistication
Networks and
supporting industries [( Logistics & Procurement (Local)]
Sophistication
of firms’ operations and strategy
Nature of
competitive advantage
9. Innovation
Quality of
scientific research institutions
Company spending
on research and development
University/industry
research collaboration
Government
procurement of advanced technology products
Availability of
scientists and engineers
In other words
1. Growth
2. Infrastructure
3. FDI (Foreign Direct Investment)
4. Export
5. Language
6. Capital Market
7. Legal System
8. Form of Government
9. Demographic
Challenges of Global Competition
Globalisation has resulted into manifold
increase in competition in almost every sector. Both product and services are facing
stiff competition from domestic as well as global brands. The pace at which the
successful products are being imitated has reduced the market life of products
including those with solid Unique Selling Proposition (USP). Diminishing
differences among various brands of product in terms of quality, service,
uniqueness etc. is soon making novel and innovative products generic. Products
are fast moving from specialty product to shopping goods, resulting into
further challenge of increasing brand differentiation and loyalty. Further,
sales promotion offers are making customers deal loyal rather then brand loyal.
High disposable income, large proportion of urban youth, and peer group influence
is attracting customers to go for brands of global repute. All this has posed a
big challenge before marketers to maintain and brighten the aura of their brand
(s). To tackle this challenge, companies are adopting multi-pronged strategies,
spending huge amounts of money on strategies such as advertisement, celebrity
endorsement, sales promotion offers, etc. While such spending has increased
substantially, there is no effective tool to differentiate the exact return on
investment made on different strategies.
GLOBALIZATION AND HUMAN RESOURCE DEVELOPMENT
Human Resource Development
Human Resource is the backbone of any
organization. Properly trained and highly skilled human resource is perceived
as the greatest asset of an organization. Skilled personnel contribute to efficiency,
growth, increased productivity and market reputation of an organization. This
has been
realized by industrial, commercial, research
establishments and even governments. Invariably, a separate Human Resources
Development department exists in all these organizations to attend to the
matters relating to recruitment, training and deployment Human Resource
Development is the framework for helping employees develop their personal and
organizational skills, knowledge, and abilities. Human Resource Development
includes such opportunities as employee training, employee career development,
performance management and development, coaching, succession planning, key
employee identification, tuition assistance, and organization development. The
focus of all aspects of Human Resource Development is on developing the most
superior workforce so that the organization and individual employees can
accomplish their work goals in
service to customers. Human Resource
Development can be formal such as in classroom training, a college course, or an
organizational planned change effort. Or, Human Resource Development can be
informal as in employee coaching by a manager. Healthy organizations believe in
Human Resource Development and cover all of these bases.
Components of HRD are:
Longevity(reflected
by life expectancy with the organization)
Carrier
Development ( reflected by status change )
Education
(reflected by literacy, Education),
Command over
resources. ( reflected by Skill )
Assessment of an
individual’s assets and limitations,
Development of a
positive self-concept,
Development of
employability skills,
Development of
communication skills,
Development of
problem-solving skills,
Awareness of the
impact of information technology in the workplace.
Aspects of HRD are:
Education
Training
Leaning
Above discussion shows that HRD is concept of
management which must be converted into program. So overall components of HRD
(Including Components & Aspects) are:
1. Career Planning and Counseling.
The focus of this activity is to help staff
with their personal career planning. This involves the establishment of
long-and short-term goals and then designing the educational plan necessary to
accomplish these goals. Ideally, this would involve a computer data base that would
maintain records of the training, education, or development needs of the
individual and match individual needs with educational opportunities.
2. Training.
These activities focus on the improvement of
the actual job performance of both staff and volunteers. Training should be
offered so it will be immediately used on the job and primarily in the form of
in-service training.
3. Education.
The organization should provide an
opportunity for employees to take advantage of formal educational offerings at
institutions of higher education. These opportunities should be provided to
individuals needing large amounts of new knowledge to be able to function in their
present position or to become prepared to assume the responsibilities of
another position within the organization. This allows the organization to plan
for future promotions and for employees to plan for their career advancement.
4. Development.
Developmental activities focus on the organization.
All organizations must change and grow to remain viable. Extension must provide
learning experiences that allow staff to move in new directions required by
organizational change. Extension must remain visionary. Equipping staff to meet
the needs of a changing world is essential for Extension to be a leader in education,
not a follower.
5. Quality of Work Life.
Studies have shown that employees are more
satisfied, have less turnover, and are generally more productive when they feel
that their employer is concerned about them as individuals. A recent study in Pennsylvania
Benefits
The implementation of an HRD program has many
benefits for both staff and the organization. Some of these include increased
productivity, internal mobility of the work force, employee satisfaction,
increased quality of work life, and a better match between the human resources
and
the needs of the organization. Extension is
operating in an ever-changing environment. Educational issues change constantly
and new technologies appear every day. If Extension's to survive as an
organization, it must be able to keep up with these changes. An HRD program
would help.
Globalization and Human Resource Development
The world today is becoming more complex,
dynamic and increasingly uncertain. Globalization, a process fostered and
spurred by rapid change in the information and communication technology, is
making the world economy more interdependent. It brings about the free flow of
trade and investment among the nations. The process also results in higher
efficiency increase in productivity, better products and lower prices. For the
developing countries, the inflow of funds, new technology and management skills
as well as smart partnership have catalyzed the rapid development of their
economies.
As countries in the world decided to embrace
market oriented development strategies and to open their doors to the world
economy, the world has become one interdependent global market place. Increasing
worldwide competition and accelerating economic change with unpredictable
outcomes characterize it. Under these circumstances, it is noted that competitiveness will be decided on a
country's or an enterprise's capacity to add value to global economic products,
services and processes and a key contributor in this regard is the knowledge
and skills of the workforce. The education and skills of the workforce has
become the key competitive weapon for the 21st century.
Global world is also changing. Following are
the conceptual changes in present era.
FROM
Production Driven
Functional(Silo)
Tangible Assets
Top Down
Incremental Change
Management
|
TO
Customer Driven
Process (Integrated)
Intangible Assets
Bottom Up
Transformational Change
Leadership
|
Types of Employee In MNC
A. Parent Country Nationals
B. Host
County
C. Third Country Nationals
D. Mixed
Main Function of HRM
A. Manpower Planning
B. Recruitment & Selection
C. Employee Motivation / Employee Reward
D. Employee Evaluation / Performance
Appraisal
E. Industrial Relation / Organization
Development
F. Employee Services / Communication
G. Employee Training & Development
Human Resource Development Strategy Based on
:
A. What kind of people do you need to run and
manage your business to meet your strategic business objective
B. What peoples program and initiatives must
be designed and implemented to attract , develop and retain staff to
compete effectively.
Key Determinants
A. Culture : Language, Beliefs, Values, Norms
and Management style etc.
B. Organization : Structure, Job role,
reporting style etc.
C. People : Skill level, Potential ,
Management Capability.
D. Human Resource System: Selection , Reward,
Carrier development, communication etc.
In the era of globalization HRD includes:
1. Technological Change
2. Strategic Change Management
3. Group dynamics
4. Experimental Learning
Economic Growth & the Environment
Will the world be able to sustain economic
growth indefinitely without running into resource constraints or despoiling the
environment beyond repair? What is the relationship between a steady increase
in incomes and environmental quality? Are there trade-offs between the goals of
achieving high and sustainable rates of economic growth and attaining high
standards of environmental quality? For some social and physical
scientists such as growing economic activity
(production and consumption) requires larger inputs of energy and material, and
generates larger quantities of waste by-products. Increased extraction of natural
resources, accumulation of waste and concentration of pollutants will therefore
overwhelm the carrying capacity of the biosphere and result in the degradation
of environmental quality and a decline in human welfare, despite rising
incomes. Degradation of the resource base will eventually put economic activity
itself at risk. To save the environment and even economic activity from itself,
economic growth must cease and the world must make a transition to a
steady-state economy. At the other extreme, are those who argue that the
fastest road to environmental improvement is along the path of economic growth:
with higher incomes comes increased demand for goods and services that are less
material intensive, as well as demand for improved environmental quality that
leads to the adoption of environmental protection measures.
Income Environment Relationship Under
Different Policy and Industrial Scenario
For Sustainable world economic growth
Adaptation in agriculture, forests , terrestrial ecosystems and water resources
should considered high priority measures .
Terrestrial Ecosystem : A community of organisms and their
environment that occurs on the land masses of continents and islands
Globalization with Social Responsibility
Globalization:
Development of extensive worldwide patterns
of economic relationships between nations.
Or
A set of processes leading to the integration
of economic, cultural, political, and social systems across geographical boundaries.
Social Responsibility
Social responsibility can be viewed as a part
of the social contract in that is the responsibility of each entity whether it is
state, government, corporation, organisation or individual that they are
contributing to society at large, or on a smaller scale.
Corporate social responsibility
Corporate social responsibility (CSR, also called corporate responsibility,
corporate citizenship, responsible business and corporate social opportunity)
is a concept whereby organizations consider the interests of society by taking
responsibility for the impact of their activities on customers, suppliers,
employees, shareholders, communities and other stakeholders, as well as the
environment. This obligation is seen to extend beyond the statutory obligation to
comply with legislation and sees organizations voluntarily taking further steps
to improve the quality of life for
employees and their families as well as for
the local community and society at large. The practice of CSR is subject to
much debate and criticism. Proponents argue that there is a strong business
case for CSR, in that corporations benefit in multiple ways by operating with a
perspective broader and longer than their own immediate, short-term profits.
Critics argue that CSR distracts from the fundamental economic role of businesses;
others argue that it is nothing more than superficial window-dressing; still
others argue that it is an attempt to preempt the role of governments as a
watchdog over powerful multinational corporations.
Globalization with Social Responsibility
Integration of economic, cultural, political,
and social systems across geographical boundaries with adoption of responsible
policies on labor, environmental and human rights issues, animal rights,
women's rights, technology transfer, rainforest conservation etc.
Need of Study
It is apparent that any actions which an
organisation undertakes will have an effect not just upon itself but also upon the
external environment within which that organisation resides. In considering the
effect of the organisation upon its external environment it must be recognised
that this environment includes both the business environment in which the firm
is operating, the local societal environment in which the organisation is
located and the wider global environment. Effectively therefore there is a
social contract between organizations and their stakeholders. Recognition of
the rights of all stakeholders and the duty of a business to be accountable in
this wider context therefore has been largely a relatively recent phenomenon.
The economic view of accountability only to owners has only recently been
subject to debate to any considerable extent.
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