GITAM UNIVERSITY (Estd. U/S 3 of the UGC Act, 1956)
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rd
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ASSIGNMENT A SSIGNMENT BOOKL BOOK L ET Identity Identity No.
:
C13MB0480001
L ear n er Nam e
:
P.SA NTOSH REDDY
Mobile No.
:
9490096475
Pr o g r am m e
:
MB A
Group
:
GENERAL GENERAL (OPERATIO (OPERATIONS NS MANAGEMENT) MANAGEMENT)
Pap er er Nam e (Su bj bj ec ec t) t)
: 301-INTERNATIONAL 301-INTERNATIONAL BUSINESS ENVIRONMENT
Year/ Year/ Semest er
: 1
Study Centre
:
St at i o n
: Hy d er ab ad
Date
: 14.05.14
st
2nd
3rd
✓
4th
Jahnavi Degree Degree and PG College, Narayangud Narayangud a
P.SANTOSH REDDY Learner Learner Signature
ASSIGNMENT A SSIGNMENT – I 1) Wha Whatt is electronic commerce? commerce? Answer:
Electr lec tronic onic c ommer omme rc e involves the ac tivi tiviti ties es of sell sellin ing g a nd buyi b uying, ng, but bu t it it per pe rform these these o p e ra tio tio ns using using any a ny elec tro tro nic med me d ium like, like, TV, TV, fax fa x, ra ra d io or o r inte inte rnet. ne t. To d a y internet internet has captured all the e-trade demand with its comparatively greater features, so here we will consider only internet as an e-commerce source. Ther There e are are two two bas ba sic c a tegori tegories of e-comm e-co mmer erc c e: 1. 2.
Busi usiness ness-to-B -to-Bus usiiness ness (B2 (B2B) Busi usiness ness-to-Cons -to-Consum umer er (B2 (B2C )
Business-to-Business (B2B):
E-commerce plays an important role in enhancing and transforming relati ela tions onshi hips ps betwee be tween n a nd a mong busin business esses. es. So me B2B B2B a p p lic lic a tio tio ns a re : Su p p lie r M a n a g e m e n t : Electronic applications in this area aid in expediting – b usines usiness s p a rtnerships tnerships thro through the reduc red ucti tio o n of pur p urc c has ha se or o rd e r (PO ) proc essing essing co c o sts and cycle times, and by maximizing the number of POs processed with fewer people. In v e n t o ry ry M a n a g e m e n t : Electronic applications make the order-ship bill cycle – shorter. For instance, if most of a business's partners are linked electronically, any information sent by mail can be transmitted instantly. Businesses can easily keep track of their documents to make sure that they were received. Such a system improves auditing capabilities, and helps reduce inventory levels, improve inventory turns, and eliminate out-of-stock occurrences. D is ist ri rib u t io io n M a n a g e m e n t : Electronic-based applications make the transmission – of shipping documents a lot easier and faster. Shipping documents include bills of lading, purchase orders, advance ship notices, and manifest claims. E-commerce also enables more efficient resource management by certifying that documents contain more accurate data. C h a n n e l M a n a g e m e n t : E-commerce allows for speedier dissemination of – information regarding changes in operational conditions to trading partners. Tec Tec hni hnic a l, prod product uct and pri pric ing infor nformati mation on c a n be pos po sted with with muc muc h eas ea se on electronic bulletin boards. Pa y m e n t M a n a g e m e n t : An electronic payment system allows for a more – e fficient ffic ient payment pa yment mana g ement eme nt sys system tem by b y minimiz minimizing ing cler c leric ica a l erro erro rs, inc incrrea sing the speed pe ed of c omputing omputing invoic invoices es,, and a nd reduc ing tra tra nsa nsa c tion tion fees fe es and c osts osts.. –
ASSIGNMENT A SSIGNMENT – I 1) Wha Whatt is electronic commerce? commerce? Answer:
Electr lec tronic onic c ommer omme rc e involves the ac tivi tiviti ties es of sell sellin ing g a nd buyi b uying, ng, but bu t it it per pe rform these these o p e ra tio tio ns using using any a ny elec tro tro nic med me d ium like, like, TV, TV, fax fa x, ra ra d io or o r inte inte rnet. ne t. To d a y internet internet has captured all the e-trade demand with its comparatively greater features, so here we will consider only internet as an e-commerce source. Ther There e are are two two bas ba sic c a tegori tegories of e-comm e-co mmer erc c e: 1. 2.
Busi usiness ness-to-B -to-Bus usiiness ness (B2 (B2B) Busi usiness ness-to-Cons -to-Consum umer er (B2 (B2C )
Business-to-Business (B2B):
E-commerce plays an important role in enhancing and transforming relati ela tions onshi hips ps betwee be tween n a nd a mong busin business esses. es. So me B2B B2B a p p lic lic a tio tio ns a re : Su p p lie r M a n a g e m e n t : Electronic applications in this area aid in expediting – b usines usiness s p a rtnerships tnerships thro through the reduc red ucti tio o n of pur p urc c has ha se or o rd e r (PO ) proc essing essing co c o sts and cycle times, and by maximizing the number of POs processed with fewer people. In v e n t o ry ry M a n a g e m e n t : Electronic applications make the order-ship bill cycle – shorter. For instance, if most of a business's partners are linked electronically, any information sent by mail can be transmitted instantly. Businesses can easily keep track of their documents to make sure that they were received. Such a system improves auditing capabilities, and helps reduce inventory levels, improve inventory turns, and eliminate out-of-stock occurrences. D is ist ri rib u t io io n M a n a g e m e n t : Electronic-based applications make the transmission – of shipping documents a lot easier and faster. Shipping documents include bills of lading, purchase orders, advance ship notices, and manifest claims. E-commerce also enables more efficient resource management by certifying that documents contain more accurate data. C h a n n e l M a n a g e m e n t : E-commerce allows for speedier dissemination of – information regarding changes in operational conditions to trading partners. Tec Tec hni hnic a l, prod product uct and pri pric ing infor nformati mation on c a n be pos po sted with with muc muc h eas ea se on electronic bulletin boards. Pa y m e n t M a n a g e m e n t : An electronic payment system allows for a more – e fficient ffic ient payment pa yment mana g ement eme nt sys system tem by b y minimiz minimizing ing cler c leric ica a l erro erro rs, inc incrrea sing the speed pe ed of c omputing omputing invoic invoices es,, and a nd reduc ing tra tra nsa nsa c tion tion fees fe es and c osts osts.. –
Business usiness--to-C o- C onsumer (B2C (B2C))
Busi usiness ness-to-C onsumer onsumer e-c ommer omme rc e involves involves c ustomers ustomers ga theri thering information, information, – purchasing, and receiving products over an electronic network. – The The c onsum onsumer er uses uses electroni electronic c c ommerc ommerc e in the the foll following owing ec onomic onomic transactions: – Pu rc rc h a sin g p ro d u c t s a n d in f o rm rm a t io io n : Electronic applications make it possible for cons c onsumer umers s to look loo k up onl o nliine inform informa a tion tion a bout bo ut exis existing ting a nd new produc prod ucts ts// servi ervic es. es. – Pe rs r so n a l f in in a n c e m a n a g e m e n t : In this field, electronic applications aid the consumers in managing investments and personal finances through the use of online ba nki nking tools. tools. Chow.net C how.net is is a good go od exa exa mple of B2 B2C electr elec tronic onic c ommerc ommerc e a ppl pp lic a tion, pa rtic tic ula ula rly of pur p urc c has ha sing ing produc prod ucts ts online. online. E-c ommerc ommerc e benef benefit its Benef enefits to Organiz ganiza ation – – – – – – –
Expends pe nds the the mar ma rketplac etp lac e to nati na tiona ona l and interna nternati tiona ona l ma ma rkets. ets. Dec rea se the c ost of c rea ting, ting, pr p roc essin essing, g, d istribut tributiing, stori storing ng a nd re trievi trieving ng pa p a per pe rbased information. Allows reduced inventories and overhead by facilitating "pull" type supply chain management. The The pull pull type type proc proc ess essing allows allows for c ustom ustomiization ation of prod products ucts and servi ervic c es whic whic h provides comp c ompetit etitiv ive e a d vantage vanta ges s to its impleme implementer nters s. Reduce the time between the outlay of capital and the receipt of products and se rvice vic e s. Supp up p ort Bus Business iness Proc esses Reeng Ree nginee ineerring (B (BPR) effo efforrts. ts. Lower owe rs telec telec ommuni ommunic a tion tion c ost ost – the the inter internet net is is muc muc h chea c heape perr tha tha n Value Ad ded de d Networks (VANs).
Benefit nefits to Socie Soc ietty
Enables more individual to work at home, and to do less traveling for shopping, resulting in less traffic on the roads, and lower air pollution. – Allows some merchandise to be sold at lower prices benefiting the poor ones. – Enables people in Third World countries and rural areas to enjoy products and service ervices s which whic h otherwis otherwise a re not no t avail ava ila a ble to them. lities es delivery delivery of public p ublic servi servic c es at re re d uced uc ed c ost, ost, inc incrrea ses effec tivene tivenes ss, and/ and / or – Fa c iliti impro improves qua lity. lity. –
Benefi enefitts to C onsumer
Enables customers to shop or do other transactions 24 hours a day, all year round from almost any location. Pro vides vide s c ustome ustomerrs with more c hoic ho ices. es. – Pro –
– – – – – –
Provides customers with less expensive prod ucts and services by a llowing them to shop in many places and c onduct quick compa risons. Allows quick delivery of prod uc ts and services in some cases, especially with digitized prod ucts. C ustomers can rec eive relevant and detailed information in sec onds; rather than in days or weeks. Makes it possible to partic ipate in virtual auc tions. Allows customers to interac t with other customers in electronic c ommunities and exchange ideas as well as compare experienc es. Electronic commerce facilitates competition, which results in substantial discounts.
Limitations of E-commerce Tec hnical Limitations – – – – – –
– – –
– –
– –
Lac k of sufficient system's security, reliability, standards, and communication protocols. Insufficient telecommunication bandwidth. The software development tools are still evolving and changing rap idly. Difficulties in integrating the Internet and electronic commerce software with some existing applications and databases. The need for spec ial Web servers and other infrastructures, in ad dition to the network servers (additional cost). Possible problems of interoperability, meaning that some E-commerce software does not fit with some ha rdwa re, or is incompa tible with some operating systems or other components. Non-Tec hnical Limitations C ost and justification (35% of the respondents) The cost of developing an EC in house c an be very high, and mistakes due to lack of experienc e, may result in delays. There are many opportunities for outsourcing, but where and how to do it is not a simple issue. Furthermore, to justify the system one needs to deal with some intangible benefits which are difficult to quantify. Security and Privacy (17% of the respondents) These issues are espec ially important in the B2C area, and sec urity concerns are not truly so serious from a technical standpoint. Privacy measures are constantly improving too. Yet, the customers perceive these issues as very important and therefore the E-commerce industry has a very long and difficult task of convincing customers that online transactions and privacy are, in fact, fairly sec ure. Lac k of trust and user resistanc e (4%) C ustomers do not trust an unknown faceless seller, pa perless transactions, and elec tronic money. So switc hing from a physica l to a virtual store may be difficult. Other limiting factors o Lack of touch and feel online. o Many unresolved lega l issues.
o o o o o
Rapidly evolving and c hanging E-commerce. Lack of support services. Insufficiently large enough number of sellers and buyers. Breakdown of human relationships. Expensive and/ or inconvenient accessibility to the Internet.
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2) What do you mean by foreign direct investment? Answer:
Foreign direc t investment theories:
The international product lifecycle states, a company will begin by exporting its product, and later undertake foreign direct investment as a product used its life cycle. A p rod uct passes through three stages: new-product stage, maturing produc t stage, and standa rdized produc t stage.
Market imperfections theory states when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfec tion. The eclec tic theory states firms undertake foreign direc t investment. When the features of a particular location, combined with ownership and internationalization advantages to make a location appealing for investment. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. Foreign direc t investment management issues: Companies investing abroad are often concerned with controlling activities in the local market. The local governments might require a company to hire local managers were require that all goods produc ed locally be exported. A key conc ern is whether to purchase a n existing business or to build an internationa l subsidiary from the ground up. Ac quisition generally provide an investor with of existing plant and equipment and personnel. Fac tors reducing the appeal of purc hasing of existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location. Adequate facilities are sometimes simply unavailable in the compa ny must go ahead with a Greenfield investment. Labor regulations c an increase the hourly cost of prod uc tion several times. An approa c h compa nies may use to c ontain production c osts is rationalize produc tion — in which a p roduct’s c omponents are produced in the lowest-cost loc ation.
A local market presence might help companies gained valuable knowledge about the behavior of buyers that it could not obtain from the home market. Firms commonly engage in foreign direc t investment. When doing so p uts them close to b oth c lient firms and rival firms. Government intervention in the free flow of foreign direc t investment: Both host and home c ountries interfere with the free flow of FDI for a variety of rea sons. One reason that governments of host countries intervene in foreign direc t investment flows is to protect their balance of payments. Allowing FDI to come in is a nation a balance of payments boost. Countries also improve their balance of payments position from the exports of local production operations created by FDI. But when direct investors sent profits made locally back to the parent company and the home country, the balance of payments decreases. Local investment in technology also tends to inc rea se the p rod uctivity and c ompetitiveness of the na tion. Encouraging FDI also brings in people with management skills who can’t train locals and improve the competitiveness of local firms. Furthermore, many local jobs are also created as a result of incoming FDI. Home countries also intervene in FDI flows. For one thing, investing and other nations, sends resources out of the home country — lowering the balance of payments. Yet profits on assets abroad that are returned home increases a home country’s balance of payments. Also, outgoing FBI may ultimately damage a nation’s balance of payments by taking the place of its exports. And jobs that result from outgoing investments may replace jobs at home that were based on exports to the c ountry. Policy instruments that governments used to promote and restrict foreign direc t investments: Host country governments can impose ownership restrictions that prohibit not domestic compa nies from investing in businesses and c ultural industries and that is vital to national security. They can also create performance demand that influence how international companies operate in the host nation. They c an also grant companies tax incentives such as lower tax rates or offer to waive taxes on local profits for a period of time. A country may also offer low interest loans to investors. Some governments prefer to lower investment by making local infrastructure improvements — that are sea port suitable for containerized shipping, improve roa ds, and increa sed telec ommunications systems. To limit the effects of outbound FDI on the national ec onomy, home governments may impose differential tax rates that charge income from earnings abroad at a higher rate than domestic on a. Or they can’t impose outright sanctions that prohibit domestic firms for making investments in certain nations. But to encourage outbound FDI home country, governments can offer insurance to cover investment risks abroad.
They c an also grant lends to firms that wish to increase their investments abroad. A home country government may guarantee loans that a compa ny takes from financ ial institutions. They might also offer tax breaks on profits ea rned abroad or negotiate special tax trea ties. Finally, it may apply political pressure on other nations to get them to relax restrictions on inbound investments. ===========================================================================
3) What are the instru ments of trade policies? Explain Answer:
Trad e policy is set of rules and regulations applied to trade. Trade policy instruments are a s given below: Tariffs Subsidies Import quotas Voluntary export restraints Others. Tariffs and subsidies are the two most common instruments of trad e policy. Tariffs are broadly divided into specific and ad valorem tariffs, while subsidies could be provided for imports of exports. In the context of the multilateral trade negotiations notions such as applied tariffs, bound tariffs, tariff waters, tariff peaks, tariff escalations and so on are important concepts. These concepts will be discussed during the face-to-face phase of the c ourse.
Tariff – a levy on imports and exports. Specific tariff: Fixed charge for ea ch unit of goods imported (often based on weight, number, length, volume or other unit of measurement). They are often levied on foodstuffs and raw materials.E.g. $1 per kill of app le etc … Ad valorem tariff : It is a bit more complex due to the need to determine the value of the import. Levy as percentage of value (instead of quantity, weight etc.)
Tariffs are the oldest a nd easiest forms of trad e policy. They have traditionally been used as a source of government income. However, tariffs have often been imposed to protect certain domestic industries from external competition. Nowadays, the popularity of tariffs for trade protec tion has dec lined as governments revert to nontariff barriers suc h as import quotas (restriction on quantity of imports), export restrains (restriction on quantity of exports at the importing country's request) other restrictions on the basis of technical and sanitary requirements. Recently, tariffs aimed at protecting the environment and human and a nimal health bec oming popular.
Effects:
C ase 1: Effec ts in the tariff imposing c ountry: The main impac t of a tariff is to raise the cost of importation. As such, a tariff has the same effect as an increase in shipping cost. Its implication is to raise the price of imported goods thereby reducing the demand for them. C ase 2: For the c ountry whose exported good s face the tariff and that the tariff imposing c ountry ac counts for a negligible share of total demand for the good: In the c ase where the tariff imposing c ountry (the home c ountry) is too small to affec t the global demand for the good, the effect of tariffs is limited within the domestic market. In this case, the tariff creates differences between the international price of the good and the d omestic pric e of the good. However, the tariff in this case will have a negligible effect on the international prices of, and the global demand for, the good hence the production, supply and global trade remains unaffected in any significant way. C ase 3: For the c ountry whose exported good s face the tariff and that the tariff imposing c ountry ac counts for a significant share of total demand for the good: Here, the tariff causes the domestic price of the good to increase. Since the tariff imposing country is a significant player in the market for the good (accounting for a significant share), henc e the lower demand for the good in the importing c ountry will cause excess supply of the good at global level. This will lead to a decline in the export price (the international price). The lower international prices discourage production by the exporters in turn leading to a decline in global production of the good and the volume traded. Protection does a tariff offer : As said, one of the most important objectives of a tariff is to protect domestic producers from external competition. But, how much protection does a tariff provide to domestic producers? In analysing trade policy in practice and/or even for imposing how high a tariff is needed to provide just enough protection for domestic prod uc ers, it is important to know how muc h protec tion a tariff actually provides. The a mount of protec tion that a tariff provides is often mea sured by a concept c alled effective rate of protection. E.g., The effective rate of protection of the 20% tariff levied is 100%. In other words, the effec tive impa ct of the tariff is to double the margin between the c ost of the parts and the final price of the auto. Prior to the levy of the tariff, domestic assemblers can assemble cars profitably if and only if the cost of assembly does not exceed 2000. Because, the parts of the car to be assembled will cost them 8,000 and the final price of the c ars is 10,000. If the c ost of assembly exceeds 2,000 the a ssemblers will lose. What the tariff achieved is to make it possible for assemblers to profitably operate even a t a cost of a ssembly as high as 4,000. Bec ause, with the 20% tariff, the price of cars is now inc reased to 12,000.
C osts and benefits of tariffs: The loss of efficiency for the economy refers to that part of consumer welfare that does not get transferred to producers and/ or governments. This is a net loss for the economy. It is caused by distortion of incentives of both producers (production distortion) and consumers (consumption distortion) that a tariff induc es by making them to ac t as if imports were more expensive than they actually are. – Subsidies Import subsidies Export subsidies For exporters, export subsidies increa se revenue bec ause for eac h unit exported, exporters receive total revenue comprised of the international price of the good and the subsidy.
Export subsidy: – A payment for a firm or individual that exports goods abroad. – It can be fixed (fixed payment per unit) or ad valorem (proportional to value of export). – Exports subsidies encourage exporters to export more. From the individual exporter’s point of view, subsidies increase his/ her export revenue. o Well known examples: U.S. subsidy on c otton o The European C ommon Agriculture Policy (CAP) Benefits and costs of subsidy:
The effect of export subsidies on prices is exactly the reverse of that of tariffs. If the exporting country is an influential player in the market of the good then export subsidy will lea d to a fa ll in the international price of the good. Bec ause, the subsidy encourages the influential country to export more hence pushing down the internationa l prices of the export good . So, for the exporter, the benefit of the subsidy is positive as long as the decline in the international prices of the good is less than the subsidy he/she receives. J ust like a tariff, subsidies distort production and consumption incentives. Bec ause of subsidies, exporters who might otherwise have not been able to compete in foreign markets could become major exporters and in fact could even drive out of market more efficient foreign producers. Hence, subsidies may allow less efficient producers to thrive at the expense of more efficient producers (i.e. production distortion). There is, thus, an efficienc y loss. Subsidies also a rtificially lower the international price of a good making the subsidized good less cheaper for consumers thereby inducing them to buy more of the subsidized good than that supplied by more efficient foreign producers (i.e. consumption distortion).In addition to the efficiency cost, an export subsidy also leads to a “terms of trade” loss (i.e. a decline in export prices vis-à-vis import prices).
Other instruments of trade policy:
Import Quotas – Restriction on quantity of imports – Often enforced through import license – Have the same effect as tariffs on d omestic prices (hence production a nd consumption distortions) The implementation/enforcement of import quotas requires issuing import lic enses to some individuals or firms. Often, each individual or firm licensed to import the restricted good will have a quota, i.e. a maximum unit (such as number, weight, etc) of the good that can be imported per year. In some cases only government enterprises are licensed to import the good. J ust like tariffs, import quotas limit quantity of imports hence push domestic prices higher than would otherwise be the case. As a result, consumers pay higher price for imports and demand less than would otherwise be the c ase (c onsumption distortion); and local producers also benefit from the higher prices and produces more than would be the case (production distortion). However, unlike in the case of imports, government ea rns no revenue from import quotas. Instead, the money that would have gone to governments in the form tariff revenue had tariffs instead of import quotas were levied now goes to the firms and individuals who held the right to import goods (i.e. the license holders). This profit is called quota rents.Both in the EU and the US import quotas have been the main trade instruments for sugar aimed at keeping domestic prices of sugar higher than international prices. The objective is to provide protection to domestic sugar producers from cheaper imported sugars. Both in the US and the EU, the right to sell sugars (the quotas) are allocated to foreign suppliers. Hence, the quota rents accrue to foreign suppliers. Case study: One of the oldest and most famous examples of trade protection was the United Kingdom’s C orn Law of 1815. The C orn Law, which was a total ban of importation of grains to England, aimed at maintaining the Frenc h War era lucrative monopoly that farmers and landlords in Britain enjoyed. Voluntary export restraints (VER) are agreed between the importing and exporting countries. The importing countries request (ac tually put pressure) for VER so as to reduce competition from imports. The exporting countries often agree to restrict their own exports than risk sustaining worse terms from tariffs and/ or quotas. In terms of its effec t, VER has the same effec t as that import quota with the import licenses assigned to foreign governments. Under VER, the quota rents go to the foreign suppliers. Examples include: J apan’s VER on its auto exports into the U.S. as a result of American pressure in the 1980s. Another well-known VER wa s the Multi – Fiber Arrangement (MFA) which restricted exports of textile and clothing to developed countries from 22 developing countries. The arrangement expired in 2005. The specific fraction could be stated in terms of physica l units such as volumes etc. In other cases, it could be stated in terms of value-added in that some minimum share of the final price of a good need to represent domestic value-added. This policy was widely used in developing countries in order to promote industrial manufacturing. The policy provides protec tion
to domestic pa rts prod ucers by requiring suppliers to buy domestically certain amount per unit of each product they sell. The objec tive of export credit schemes in their many forms is to assist domestic exporters by providing financing to foreign buyers. The risk on these credits, as well as on guarantees and insurance, is borne by the sponsoring government. To minimize the risk, governments put some form of restrictions on the amount of loa ns or subsidies allowed; and by excluding loans to some countries where risk of default is perceived to be high. Export credit schemes may give unfair trade advantages to domestic exporters against suppliers of competitive goods from other countries. Because the schemes “capture” buyers who would otherwise have preferred to buy the good from other suppliers. To understand the effect, imagine this scenario: You have a shoe shop where you prod uce and sell a pa ir of shoe for $50. There is another shoe shop next to you whic h produces and sell an identical pair of shoes for 60$. Both you and your neighbours provide no loan and ask cash upfront for the sale of shoes. It is clear that you have a competitive advantage over your neighbour and it is sensible to believe that buyers prefer your shoes to your neighbours. According to the World Trade Organization (WTO), government procurement is an important aspect of international trade accounting for considerable size of the proc urement market (often 10-15 percent of G DP). By direc ting or restricting purchase of goods towards domestically produced goods, governments in their procurement decision can discriminate against imported goods. National proc urement – May also be called government procurement, public tendering, public procurement etc … – Purchases by government or regulated firms directed towards domestically produced goods and services. Bureaucratic barriers – Creating bureaucratic delays in customs clearance and other forms of administration barrier in order to discourage imports; – Twisting laws, regulations and requirements in order to affec t the internal sale, purchase, transportation and distribution of foreign goods. ===========================================================================
4) What are the strategies of glo balization? Discus s Answer:
Globalization means integrating the Indian economy with the world economy. In the process India becomes economically interdependent with other countries at the global or international level. It seeks removal of trade barriers. There are various fea tures of globalization they are: – Many prod ucers from other countries can sell their goods and servic es in India.
– India can also sell its goods and services in other countries. – Businessmen of other countries can establish their enterprises in India, produce goods for sale within the country or to other countries as export. – In the same way entrepreneurs from India can also invest in other countries. – Globalization includes not only movement of capital and goods but also allows exchange of technology experience and labourers from one country to other and – In pursuance of this policy government of India has removed restrictions on imports of goods, reduced taxes.
Globalization has helped in: o Raising living standards, o Alleviating poverty, o Assuring food security, o Generating buoyant market for expansion of industry and services, and o Making substantial contribution to the national economic growth. – Impact of Globalization on Industrial Sector: Globalization of the Indian Industry took place in its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement, retail, and BPO – Impact on Financial Sector: Because of Globalization, the financial services industry is in a period of transition. Market shifts, competition, and technological developments are ushering in unprecedented changes in the global financial services industry. The Indian globalization: Doing or planning to expand, business globally• Interlinking prod uction a cross countries: Almost all MNC ’s set up prod uction where it is close to the markets; where there is skilled and unskilled labour available at low costs; and where the availability of other factors of prod uc tion is assured. At times, MNC ’s set up production jointly with some of the local companies of these countries. MNC’s provide money for additional investments like buying new machines for faster production and they might bring with them the latest tec hnology for prod uction. A s a result, production in these widely dispersed loc ations is getting interlinked.• GLOBALISATION PIC TURE IN INDIA? Mushrooming of industries like c ell phones, automobiles elec tronics, soft drinks, fast food or services, via MNC s have c rea ted new avenues. globalization has enabled some large Indian companies to emerge as multinationals themselves, Tata-Motors (automobiles), Infosys (IT), Ranbaxy(Medicines), Asian Paints (Paints).? Globalization and the pressure have also posed a threat to the worker’s jobs, as they are not secure any more. Workers are low and workers are forced to work overtime to make both ends meet. The workers are sometimes denied their fair share of benefits which is brought about by globalization. Impact on Export and Import: Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the other prominent products each of which accounts from nearly 5 to 10% of the country’s total agricultural exports.
There is a n International market for c ompanies and for c onsumers there is awider range of products to c hoose from. Increase in flow of investments from developed countries to developingcountries, which can be used for ec onomic reconstruction. Greater and faster flow of information between countries and greater culturalinteraction ha s helped to overcome cultural barriers. Tec hnologic al development has resulted in reverse brain drain in developing C ountries. Demerits of G loba lization (C hallenges): – The outsourcing of jobs to developing countries has resulted in loss of jobs indeveloped c ountries. – There is a greater threat of spread of communicable diseases. – There is an underlying threat of multinational corporations with immense powerruling the globe. – For smaller developing nations at the receiving end, it could indirectly lead to asubtle form of colonization. o The number of rural landless families increased from 35 %in 1987 to 45 % in 1999,further to 55% in 2005. The farmers are d estined to die of starvation or suicide. – C onditions for globalization – Business freedom: unnecessary restrictions like import, foreigninvestments – Fac ilities: infrastruc ture fa cilities, – Government support: financial market reforms, R&D support – Resources: tec hnology, finance, man power, skilled managers, HR C ompetitiveness: orientation – FOREIGN MARKET ENTRY STRATEGIES: – EXPORTING: “A func tion of international trade whereby goods produc ed in one country areshipped to another country for future sale or trade. The sale of such good s add sto the produc ing na tions gross output. If used for trade, exports are exchangedfor other products or services. Exports are one of the oldest forms of economictransfer, and occur on a large scale between nations that have less restrictionson trade, suc h as tariffs or subsidies.” – LICENSING/ FRANC HISING Definition of Franchising: “Franchising may be defined as a businessarrangement which allows for the reputation, (goodwill) innovation, technical know-how and expertise of the innovator (franchisor) to be combined with theenergy, industry and investment of another party (franc hisee) to conduct thebusiness of providing and selling of good s and services.” Franchising is a system of business that has grown steadily in the last 50 yearsand is estimated to account for more than one-third of the world’s retail sales? Successful franchises are the result of innovation, initiative, investment andindustry. – The lic ense allows the licensee to use make and sell, the product or name for afee without censure.
– In a Trade Mark license, for example, the licensee will be granted full privilege touse the Trade Mark on goods or services provided that the use is in accordancewith agreed signage protocols and quality guidelines Typical Franchise System:
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A license to use the system A shared development and improvement obliga tion The franc hisor’s right to determine how the business operatesLIC ENSING: A lic ense arrangement is a business arrangement where a lic ensor via amonopoly right such as a Patent, a Trade Mark, a design or a copyright has toexclusive right which prevents others from exploiting the idea, design, name orlogo commercially. The lic ense allows the licensee to use make and sell, the product or name for afee without censure. In a Trade Mark license, for example, the licensee will be granted full privilege touse the Trade Mark on goods or services provided that the use is in accordancewith agreed signage protocols and quality guidelines. There is usually no training component, product development strategy andlimited marketing support. The following is a list of some of the things that should be c onsidered: Is the license exclusive, i.e. granted to only one person, or non-exclusive Can the licensee sub-license Are there any limitations to the license e.g., geographic or territorial , Minimumsales, minimum production requirement etc. What is the amount, frequency, and form of payment, e.g. either lump sum or bywa y of royalty, or both, or other payment schedule Who pays for prosecution and maintenance of any IP (patents, trademarks, designs) How are any developments, modifications or improvements to be protected and who owns them? Does the license contain a clause which allows for the license to be cancelled ifthe IP is not being used? What is the term of license? Is there a right to renew? What are the conditions of termination? When are royalty or other payments due? If sub-licensing is permitted what pa yment does the licensor rec eive? What information is the licensee committed to providing to the licensor? What happens if the IP under which the license is granted is refused, infringed, opposed, revoked or other?• Is copyright a consideration? Does the licensee agree not to c hallenge the validity of the patent? Does the licensor agree to provide essential “know-how”? What provisions for any “hardware”, should the lic ense be terminated? How will any disputes be resolved?
– What happens in the event of dea th of one of the parties?• In whose name will the applications be made in? MANAGEMENT CONTRAC T: The management contract is a business format whichseparates ownership from operation. The operator assumes full responsibility for themanagement of the business, while the ultimate legal and financial responsibilitiesand rights of ownership of the property, its furniture and equipment, its workingcapital and the benefits of its profits (or burden of its losses) remain those of theowner. The owner may be a private individual, a financial institution, a real estatec ompany or a government. The operator is most likely to be an established hotel chainoffering marketing strength, brand names, bargaining power, systems and proc edures, project design a nd management, tec hnical services, training a nd management development. CONTRACT MANUFACTURING: C ontract manufacturing is a proc ess that establishes aworking agreement between two companies. As part of the agreement, onecompany custom produces parts or other materials on behalf of their client. In mostcases, the manufacturer also handles the ordering and shipment processes for theclient. As a result, the client does not have to maintain manufacturing facilities, purchase raw materials, or hire lab our in order to produce the finished goods. Industries like personal care andhygiene produc ts, automotive pa rts, and medical supplies are often c rea ted under theterms of a contract manufac ture agreement. TURNKEY CONTRACTS: A turnkey contract is a business arrangement in which aproject is delivered in a completed state. The builder or developer is separate fromthe final owner or operator, and the project is turned over only once it is fullyoperational. In effec t, the developer is finishing the p rojec t and “turning the key“ over to the new owner. Thistype of arrangement is commonly used for construction projects ranging from singlebuildings to large-scale developments, residential home building industry. Under atraditiona l lump-sum contract ASSEMBLY OPERATIONS: A market entry strategy in which an organization sends partsfor produc ts to a foreign plant for final assembly. The products are then sold in the foreignmarket or exported to other countries. Assembly plants may allow a company to takeadvantage of low cost labour in the most labour intensive portion of production. Theremay also be lower duties and other taxes because unfinished products are importedinstead of finished products. Assembly plants also allow a foreign manufacturer to meethost country requests for more domestic produc tion while at the same time allowing themanufacturer to continue control over production by using its own sub-products assupplies and materials for the foreign assembly plant. STARTEGIC ALLIANCES: An arrangement between two companies that have decided toshare resources to undertake a specific, mutually beneficial project. A strategic alliance isless involved and less permanent than a joint venture, in which two companies typicallypool resources to create a separate business entity. In a strategic
alliance, ea ch compa nymaintains its autonomy while gaining a new opportunity. A strategic alliance could help acompany develop a more effective process, expand into a new market or develop anadvantage over a competitor, among other possibilities.an oil and Natural Gas C ompa ny might form a strategic alliance with a researchlaboratory to develop more commercially viable recovery processes. A clothing retailer mightform a strategic alliance with a single clothing manufacturer to ensure consistent quality andsizing. A major website could form a strategic alliance with an analytics c ompany to improveits marketing efforts. WHOLLY OWNED MANUFACTURING FACILTIES: A company whose commonstock is 100% owned by another company, called the parent company. A companycan become a wholly owned subsidiary through acquisition by the parentcompany or spin off from the pa rent compa ny. In contrast, a regular subsidiary is 51 to 99% owned by the pa rent c ompa ny. One situation in which a pa rentcompa ny might find it helpful to establish a subsidiary company is if it wants tooperate in a foreign market. This arrangement is common among high-techcompanies who want to retain complete control and ownership of theirtechnology. J OINT VENTURING: J oint ventures are set up for a number of reasons, includingc arrying out a specific projec t or simply assisting with the growth andc ontinuation of a business. The pa rties to a joint venture can be individuals, pa rtnerships, companies, or other organizations or assoc iations. In certain ca ses, the joint venture c an be created through the incorporation of a company thatbecomes a party to the joint venture agreement. The joint venture will take effect on the day the parties sign the agreement. The parties should be as specific as possible in outlining the pa rty’s relationship and commitments to the joint venture. “Tata Global Beverages and Starbuc ks Form J oint Venture to O pen StarbucksC afés across India, TATA Starbucks Limited, will own and operate Starbucks caféswhich will be branded as Starbucks C offee “A Tata Alliance.” The services of a management contractor might include: Advising on the development of the brief (if appointed at this stage),on appointments (such as site inspectors), feasibility, interfaces, build ability, cost andprogramming of the design, packaging of production information Defining key performance indicators for works contractors C ost planning and c ost control. Preparing a construction programme and defining methods of working on site. C onsenting to sub-c ontracting of work by works contractors Arranging for site accommodation, welfare facilities, fences, hoardings, roads andwa lkways, drainage, power and wa ter supply Arranging labour for certain site activities (such as cleaning) Managing site inspectors C o-ordinating the relea se of information. Managing and co-ordinating works contracts, including acting as contracted ministration, c arrying out inspec tions, issuing instructions and c ertificates etc. C ollating as-built information, building owner’s manual, building usershandbook, project handbook, health and safety file, pre-constructioninformation, site waste
management plan and c onstruction phase plan C hairing site progress meetings and preparing progress reports for the client COUNTERTRADE: International trade in which goods are exchanged for othergoods, rather than for hard currency. Countertrade can be classified into threebroad categories Barter: Barter is the direct exchange of goods between two parties in a transaction C ounter purchase: Sale of goods and services to one c ompa ny in other country bya company that promises to make a future purchase of a specific product fromthe same company in that country. Buy back: oc curs when a firm builds a plant in a c ountry - or supplies tec hnology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant’s output as partial pa yment for the c ontract. Compensation deal: Compensation trade is a form of barter in which one of the flows is pa rtly in good s and pa rtly in hard currenc y. MERGERS AND ACQUISITIONS: A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company byanother in which no new c ompa ny is formed. ==========================================================================
5) What is legal environment? Answer:
The ec onomic environment includes the structure of the ec onomy; the industrial, agricultural, tariff, pricing, and other trade policies of the Government of the country; the growth and pattern of national income and its distribution; the conditions prevailing in the a gricultural, industrial and service sec tors; the position of the balance of trade and the balance of payments; and a host of other conditions of the ec onomy. The lega l environment refers to a large number of laws anbu-laws, rules and regulations passed by the Government from time to time to regulate and control the business in the c ountry. The succ ess of the business enterprise will greatly depend upon the condition of ec onomy's growth. The Indian ec onomy comprises three major sec tors, viz., public, private and joint sec tor. The business in general and the private sec tor business in p[articular is functioning under increasing control and regulation by the Government. The modern business has to operate in an ec onomy whic h is highly controlled and regulated by the Government. Gone are the days of laissez-faire economy when the economic activity was allowed freely without any interference of the State. After the outbreak of the First World War, various political sc ientists and economists have
attacked the concept of laissez-faire because of its anti-social an exploitative nature and consequences. The Government does play a significant role in shaping the character of the economy-even in a capitalist economy. In totalitarian countries, however, the State has gone to the extreme extent of taking over complete control of economic interests. The communist nations of the world led by Soviet Russia have adopted the communist pattern of economy under which the ownership and c ontrol of productive resourc es has been soc ialized and p laced in the hands of the State. Economic activity has been completely regimented there in the sense that neither production nor consumption goes according to individual decisions by producers and consumers, but is determined by the State. Private enterprise has been totally abolished and the whole ec onomy c onstitutes the public sec tor. In a mixed economy where the private enterprise co-exists with State enterprise, the State plays a dual role in relation to private business. On the one hand, it acts as an instrument to aid and benefit industry with the object of inducing the accelerating the growth of the economy. In this role, the State provides finance and facilities to industrial entrepreneurs and tires to look after and further their interests through polic ies like protection and export promotion. Some aspects of this have already been examined in the sec tion on C ompany Financ e. In the sec ond role, the State a cts as a restraining force on business curbing the anti-soc ial aspec ts of business, laying down the side-rails within which private business must function and pulling up private enterprise (in fact, sometimes even superseding and taking over control of an individual enterprise or a whole industry). The object of the Government regulation and control of business espec ially the private enterprise is to steer the wheel of the ec onomy in the direc tion of maximum soc ial good, without replacing the present economic set-up. This can be achieved through regulatory action a t all important points in the economic system.
ASSIGNMENT – II 6) Discuss the factors affecting the international busin ess environment Answer:
International business comprises all commercial transac tions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political bounda ries. Usually, private companies undertake such transac tions for profit; governments undertake them for profit and for politic al rea sons It refers to all those business activities which involve c ross border transac tions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc .[2] A multinational enterprise (MNE) is a compa ny that has a worldwide approa ch to markets and produc tion or one with operations in more than a country. An MNE is often called multinational corporation (MNC ) or transnational compa ny (TNC ). Well known MNCs include fast food companies such as Mc Donald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor C ompa ny and Toyota, consumer elec tronics compa nies like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national markets. Areas of study within this topic include differences in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local culture, corporate culture, foreign exchange market, tariffs, import and export regulations, trade agreements, climate, education and many more topics. Eac h of these fac tors requires signific ant changes in how individual business units operate from one country to the next. Physica l and soc ietal fac tors of c ompetitive Business soc ial environment: The conduc t of international operations depends on companies' objec tives and the means with which they carry them out. The operations affect and are a ffected by the physical and societal factors and the competitive environment. Operations of business Objec tives: sales expansion, resource a cquisition, risk minimization, Diversify their revenue stream Means of businesses – Mod es: importing and exporting, tourism and transportation, licensing and franchising, turnkey operations, management contracts, direct investment and portfolio investments.
– Functions: marketing, globa l manufac turing and supply chain management, accounting, financ e, human resources – Overlaying alternatives: mechanisms
choice
of
countries,
organization
and
control
Physical and societal factors of business : – Political policies and legal practices Policy is a statement of intent, and is implemented as a procedure or protocol. Policies are generally adopted by the Board of or senior governance body within an organization whereas procedures or protocols would be developed and adopted by senior executive officers. Policies can assist in both subjective and objective decision making. Polic ies to assist in subjec tive dec ision ma king would usually assist senior management with dec isions that must c onsider the relative merits of a number of factors before making decisions and as a result are often hard to objectively test e.g. work-life balance policy. In contrast policies to assist in objective decision making are usually operational in nature and can be objec tively tested e.g. pa ssword policy.
The term may apply to government, private sec tor organizations a nd groups, and individuals. Presidential executive orders, corporate privacy policies, and parliamentary rules of order are a ll examples of policy. Polic y differs from rules or law. While law can compel or prohibit behaviors (e.g. a law requiring the payment of taxes on income), policy merely guides actions toward those that are most likely to achieve a desired outcome. Policy or policy study may also refer to the proc ess of ma king important orga nizationa l dec isions, including the identification of different alternatives such a s programs or spending priorities, and choosing among them on the basis of the impact they will have. Policies can be understood as political, management, financial, and administrative mechanisms arranged to reach explicit goals. In public corporate finance, a critical accounting policy is a policy for a firm/company or an industry which is considered to have a notably high subjective element, and that has a material impac t on the financial statements – Cultural fac tors In the 20th century, "culture" emerged as a central concept in anthropology, encompassing the range of human phenomena that cannot be directly attributed to genetic inheritance. Spec ific ally, the term "c ulture" in Americ an anthrop ology had two meanings: 1. The evolved human capacity to classify and represent experiences with symbols, and to a ct imaginatively and crea tively; and 2. The distinct ways that people, who live differently, classified and represented their experienc es, and a cted crea tively.Hoebel describes culture a s an integrated system of learned behavior pa tterns which are c harac teristic of the members of a soc iety and
which are not a result of biological inheritance.Distinctions are currently made between the physic al artifac ts c rea ted by a soc iety, its so-c alled material c ulture, and everything else, the intangibles such as language, customs, etc. that are the main referent of the term "culture". – Economic forces: These fac tors determine a n enterprise’s volume of demand for its product a nd a ffec t its marketing strategies and ac tivities. The economic system is made up of three main steps. The first one being prod uction and then there is distribution of the produced goods and then the last step is consumption of the same. Now all this is possible because of two factors- Human resource and Natural resource. Natural resources include the raw material whic h is generally used in the production proc ess, and human resourc es help to convert the raw materials to finished prod ucts which are then ready for distribution. Competitive factors of business :
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Major advantage in price, marketing, innovation or other factors. Number and c omparative capa bilities of c ompetitors C ompetitive differenc es by c ountry Local taxes
Risk of business – Strategic risk – Operational risk – Political risk – Tec hnological Risk – Environmental Risk – Economic Risk – Financ ial risk – Terrorism Risk – Planning risk Factors that influenced the growth in globalization of international business There has been growth in globalization in rec ent decad es due to (at least) the following eight factors:
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Tec hnology is expa nding, espec ially in transportation and communic ations. Governments are removing internationa l business restrictions. Institutions provide services to ease the conduct of international business. C onsumers know about and want foreign goods and services. C ompetition has bec ome more global. Political relationships have improved among some major economic powers. C ountries cooperate more on transnationa l issues. C ross-national cooperation a nd agreements.
Importance of International Business Education – Most companies are either international or compete with international companies. – Modes of operation may differ from those used domestically. – The best way of conducting business may differ by country. – An understanding helps you make better career decisions. – An understanding helps you decide what governmental policies to support. – Managers in international business must understand soc ial scienc e disciplines and how they affec t all functiona l business fields. Importance of studying International Business The International Business standards focus on the following:
– Raising awareness of the interrelatedness of one country's political policies and ec onomic practices on another; – Learning to improve international business relations through appropriate communication strategies; – Understanding the global business environment—that is, the interconnectedness of c ultural, politica l, lega l, ec onomic, and ethical systems; – Exploring ba sic c onc epts underlying international financ e, management, marketing, and trade relations; and identifying forms of business ownership and international business opportunities. – These are tools that would help future business peop le bridge the ec onomic and political gap between countries. ===========================================================================
7) How does FII force affect capi tal market of a nation? Ill ust rate wit h an example Answer:
FOREIGN INSTITUTIONAL INVESTOR: The term Foreign Institutional Investor is defined by SEBI as under:"Means an institution established or incorporated outside India which proposes to make investment in India in securities. Provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a subaccount, shall be deemed to be a Foreign Institutional Investor." Foreign Investment refers to investments mad e by residents of a c ountry in financ ial assets and production process of another country.
Entities covered by the term ‘FII’ include “Oversea s pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts,
charitable societies etc .(fund ha ving more than 20 investors with no single investor holding more than 10 per cent of the shares or units of the fund)” (GOI (2005)). FIIs can invest their own funds as well as invest on behalf of their overseas clients registered as such with SEBI. These c lient ac counts that the FII manages are known as ‘sub-accounts’. The term is used most commonly in India to refer to outside companies investing in the financ ial markets of India. Internationa l institutiona l investors must register with Securities & Exchange Board of India (SEBI) to participate in the market. One of the major market regulations pertaining to FII involves placing limits on FII ownership in Indian companies. They ac tually evaluate the shares and deposits in a portfolio. FII is required for following reasons: FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direc t investment) a re insufficient. Following are the some advantages of FIIs. – It lowers cost of capital, ac c ess to cheap global c redit. – It supplements domestic savings and investments. – It leads to higher asset prices in the Indian market. – And has also led to c onsiderable amount of reforms in capital market and financial sector. INFLUENCE OF FII ON INDIAN MARKET Positive fundamentals combined with fast growing markets have made India an attractive destination for foreign institutional investors (FIIs). Portfolio investments brought in by FIIs have been the most dynamic source of capital to emerging markets in 1990s. At the same time there is unease over the volatility in foreign institutional investment flows and its impa ct on the stoc k market and the Indian economy. Apa rt from the impa c t they crea te on the market, their holdings will influenc e firm performanc e. For instanc e, when foreign institutional investors red uced their holdings in Dr.Reddy’s Lab by 7% to less than 18%, the company dropped from a high of around US$30 to the current level of below US$15. This 50% drop is apparently because of conc erns about shrinking profit margins and financial performance. These instanc es made analysts to generally claim that foreign portfolio investment has a short term investment horizon. G rowth is the only inc lination for their investment.
Some major impa ct of FII on stoc k market: • They increa sed depth and brea dth of the market. • They played major role in expanding securities business. • Their policy on focusing on fundamentals of share had caused efficient pricing of share. These impac ts made the Indian stock market more attrac tive to FII & also domestic investors. The impact of FII is so high that whenever FII tend to withdraw the money from market, the domestic investors fearful and they also withdraw from market.
Effects on Indian Economy: POSITIVE IMPACT: It has been emphasized upon the fac t that the stoc k market reforms like improved market transparency, automation, dematerialization and regulations on reporting and disclosure standards were initiated bec ause of the presence of the FIIs. But FII flows can be considered both as the c ause a nd the effec t of the stock market reforms. The market reforms were initiated bec ause of the presenc e of them and this in turn has led to increa sed flows. ENHANCED FLLOWS OF EEQUITY CAAPITAL: FFIIs are well known for aa grea ter appetite for equity than debt in their asset structure. For example, pension funds in the United Kingdom and United States had 68 per cent and 64 per cent, respectively, off their portfolios in equity in 1998. Not only it can help in supplementing the domestic savings for the purpose of development projects like building economic and social infrastructure but can also help in growth of rate of investment, it boosts the produc tion, employment and income of the host country. MANAGING UNCERTAINNTY AND CONTROLLLING RISKS: FIIs promote financial innovation and development of hedging instruments. These because of their interest in hedging risks, are known to have contributed to the development of zero-coupon bonds and index futures. FIIs not only enhance competition in financ ial markets, but a lso improve the alignment of asset prices to fundamentals. FIIs in particular are known to have good information and low transaction costs. By aligning asset prices closer to fundamentals, they stabilize markets. In addition, a variety of FIIs with a variety of risk-return preferences also help in dampening volatility. IMPROVING CAPITAL MARKETS: FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increa sing the availability of riskier long term c apital for projec ts, and increa sing firms’ incentives to supply more information about them, the FIIs can help in the process of economic development. IMPROVED CORPORATE GOVERNANCE: Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. Bad corporate governance makes equity finance a costly option. With boards often captured by managers or passive, ensuring the rights of shareholders is a problem that needs to be a ddressed effic iently in any economy. Incentives for shareholders to monitor firms and enforce their legal rights are limited and individuals with small share-holdings often do not address the issue since others can free-ride on their endeavor. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms’ operations, improve corporate governance. Among the four models of corporate c ontrol - takeover or market c ontrol via equity, leveraged control or market
control via d ebt, direc t control via equity, and direc t control via d ebt or relationship banking-the third model, which is known as corporate governance movement, has institutional investors at its core. In this third model, boa rd representation is supplemented by direct c ontacts by institutional investors. NEGATIVE IMPACT: If we see the market trends of past few rec ent yea rs it is quite evident that Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. And this dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the fac tors are: POTENTIAL CAPITAL OUTFLOWS: “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. These investors sc an the market for shortterm, high interest rate investment opportunities. “Hot money” can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the ba nking institution will experienc e a shortage of funds. INFLATION: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods. PROBLEM TO SMALL INVESTORS: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the country’s stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stoc k market the downward path. This c reates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. ADVERSE IMPAC T ON EXPORTS: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. ===========================================================================
8: Write note on the mechanism for s ettlements of international trade disputes. Answer:
The Dispute Settlement Understanding (DSU), formally known as the Understanding on Rules and Procedures Governing the Settlement of Disputes, establishes rules and procedures that manage various disputes arising under the Covered Agreements of
the Final Act of the Uruguay Round. All WTO member nation-states are subject to it and a re the only legal entities that may bring a nd file cases to the WTO. The DSU c reated the Dispute Settlement Body (DSB), c onsisting of all WTO members, which administers dispute settlement proc ed ures.It provides strict time frames for the dispute settlement process and establishes an appeals system to standardize the interpretation of specific clauses of the agreements.It also provides for the automatic establishment of a panel and automatic adoption of a panel report to prevent nations from stopping ac tion by simply ignoring complaints. Strengthened rules and proc ed ures with strict time limits for the dispute settlement proc ess aim at providing "security and predictability to the multilateral trading system" and achieving " solution mutually acceptable to the parties to a dispute and consistent with the covered agreements." The ba sic stages of dispute resolution covered in the understanding include consultation, good offices, conciliation and mediation, a panel phase, Appellate Bod y review, a nd remedies. Consultation: A member-country may request consultations when it considers another membercountry to have "infringed upon the ob ligations assumed under a C overed Agreement. “If the respondent fails to respond within ten days or enter into consultations within thirty days, the complaint "may proc eed direc tly to request the establishment of a panel." Good Offices, Conciliation and Mediation:
Unlike consultation in which "a complainant has the power to force a respondent to reply and consult or face a panel," good offices, conciliation and mediation "are undertaken voluntarily if the parties to the dispute so agree." No requirements on form, time, or proc edure for them exist. Any party may initiate or terminate them at any time. The complaining party may request the formation of panel, "if the parties to the dispute jointly consider that the good offices, conciliation or mediation process has failed to settle the dispute. Thus the DSU rec ognized that what was important wa s that the nations involved in a dispute come to a workable understanding on how to proceed, and that sometimes the formal WTO dispute resolution process would not be the best way to find such an accord. Still, no nation c ould simply ignore its obliga tions under international trade agreements without taking the risk that a WTO panel would take note of its behavior. Panel Phase If consultation, good offices, conc iliation or mediation fails to settle the dispute, the complaining party may request the formation of panel. The DSB shall form a panel, unless at that meeting the DSB decides by consensus not to establish a panel. Panels shall be composed of well-qualified governmental and/or non-governmental
individuals with a view to ensuring the independence of the members, and whose governments are not the parties to the dispute, unless the parties to the dispute a gree otherwise. Three panelists compose a panel unless the parties agree to have five panelists. The Secretariat proposes nominations for panels that the parties shall not oppose except for compelling reasons. If the parties disagree on the panelists, upon the request of either party, the director-general in consultation with the chairman of the DSB and the chairman of the relevant council or committees shall appoint the panelists. When multiple parties request the establishment of a panel with regard to the same matter, the DSU suggests a strong preference for a single panel to be established to examine these complaints taking into a ccount the rights of a ll members concerned. The DSU gives any member that has a substantial interest in a matter before a panel (and notifies its interest to the DSB) an opportunity to be heard by the panel and to make written submissions to the panel. The panel shall submit its findings in the form of written report to the DSB. As a general rule, it shall not exceed six months from the formation of the panel to submission of the report to the DSB. In interim review stage, the panel submits an interim report to the parties. The pa nel shall hold a further meeting with the parties if the parties present written comments. If no comments are provided by the parties within the comment period, the report shall be the final report and circ ulated promptly to the members. Within sixty days after the report is circ ulated to the members, the report shall be adopted at a DSB meeting unless a party to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adapt the report. Appellate Body Review The DSB establishes a standing A ppellate Body that will hear the ap peals from panel cases. The Appellate Body shall be composed of seven persons, three of whom shall serve on any one c ase. Those persons serving on the App ellate Body are to be persons of recognized authority, with demonstrated expertise in law, international trade and the subjec t matter of the C overed Agreements generally. The Body shall consider only issues of law covered in the panel report and legal interpretations developed by the panel. Its proceedings shall be c onfidential, and its reports anonymous. This provision is important because, unlike judges in the United States, the members of the appellate panel do not serve for life. This mea ns that if their dec isions were public, they would be subjec t to persona l retaliation by governments unhappy with decisions, thus corrupting the fairness of the process. Decisions made by the Appellate Body "may uphold, modify, or reverse the legal findings and conclusions of the panel. The DSB and the parties shall accept the report by the Appellate Body without amendments unless the DSB decides by consensus not to adopt the Appellate Body report within thirty days following its circulation to the members. Remedies There are c onsequences for the member whose measure or trad e prac tice is found to violate the Covered Agreements by a panel or Appellate Body. The dispute panel issues recommendations with suggestions of how a nation is to come into compliance with the trade agreements. If the member fails to do so within the determined
reasonable period of time, the complainant may request negotiations for compensation. Within twenty days after the expiration of the reasonable period of time, if satisfactory compensation is not agreed, the complaining party may request authorization from the DSB to suspend the application to the member concerned of conc essions or other obliga tions under the C overed Agreements. Retaliation shall be first limited to the same sec tor(s). If the c omplaining party considers the retaliation insufficient, it may seek retaliation across sec tors. The DSB shall grant authorization to suspend conc essions or other obligations within thirty days of the expiry of the reasonable time unless the DSB decides by consensus to reject the request. The defendant may object to the level of suspension proposed. The original panel, if members are available, or an arbitrator appointed by the director-general may c onduct arbitration. Arbitration Members may seek arbitration within the WTO as an alternative means of dispute settlement "to facilitate the solution of certain disputes that concern issues that are clea rly defined by both parties. Those pa rties must rea ch mutual agreement to arbitration and the procedures to be followed. Agreed a rbitration must be notified to all members prior to the beginning of the arbitration proc ess. Third parties may become party to the arbitration only upon the agreement of the parties that have agreed to have rec ourse to arbitration. The parties to the proc eeding must agree to abide by the arbitration award. Arbitration awards shall be notified to the DSB and the Council or Committee of any relevant agreement where any member may raise any point relating thereto. ===========================================================================
9) What is busi ness ethics ? Examine the subsid y compon ent practiced in some countri es from the point of ethics Answer:
Ethic s are moral guidelines which govern good behavior. So behaving ethically isdoing what is morally right. Beha ving ethically in business is widely regarded as good business prac tice. Ethical principles and standards in business: o Define a c ceptable c onduc t in business Should underpin how management make dec isions o An important distinction to remember is that beha ving ethically is not quite the same thing as beha ving lawfully: Ethics are a bout what is right and what is wrong Law is about what is lawful and what is unlawful
An ethical decision is one that is both legal and meets the shared ethical standards of the c ommunity Businesses fac e ethica l issues and decisions almost every day – in some industries the issues are very significant. For example: Should businesses profit from problem gambling? Should supermarkets sell lager chea per than bottled water? Is ethical shopping a luxury we can’t afford? Business ethics and corporate soc ial responsibility (CSR)are c losely linked: A socially responsible firm should be a n ethical firm An ethical firm should be socially responsible However there is also a distinction between the two: C SR is about responsibility to a ll stakeholders and not just shareholders Ethics is about morally correc t behaviour Ethical cod es are increa singly popular – pa rticularly with larger businesses and c over area s such as: C orporate soc ial responsibility Dealings with customers and supply chain Environmental policy & ac tions Rules for persona l and corporate integrity ===========================================================================
10) What do you mean by Lex Causae? Explain it s dimensions Answer:
The lex causae is the system of law which is ap plied to determine substantive issues of law in international litigation, i.e. the substantive law of the legal system that determines dispute. Where both of the litiga nts are local to the jurisdiction of English Courts, and there is no foreign element involved, the lex causae will be English law (and the same as the lexfori). In international disputes, the lex causae will likely be different to English law. The applicable law is depends upon the resolution in accorda nce with rules of conflicts of laws. For Member States (ie countries and territories) of the Europea n Economic Area, questions of jurisdiction are most often determined by reference to the Rome C onvention, which is annexure to the C ontracts (App lica ble Law) Ac t 1990. The Rome C onvention is interpreted by principles of European law, a s interpreted by the Europea n Court of J ustice. Where an international contractual dispute relating to a contract governed by the laws of a State of the United States of America is heard in the courts of England, the lex c ausae will be the laws of the relevant State of the United States and the lexfori will be the laws of England.