But many firm prefer global outsourcing, as it covers
Larger scope and offers more choices and high efficiency.
Off-shoring
Relocation of biz. Process or entire mfg. facility to foreign country.
Relocate home country’s biz or factory plant to foreign country
Common in service sector, incl. banking, legal service, customer-service
Reasons for Outsourcing and Global Sourcing
Obtain lower prices
Getting higher technology products
Get better quality products
Obtain better delivery service
Multinational Companies
Organization with extensive international operations in two or more countries simultaneously
involves producing and selling goods & services in other countries
Consists of parent company called home country
Its two or more subsidiaries called host country
(Parent company and subsidiary) function at high degree of strategic integration
Strategic integration aims at achieving synergy through creation of compatibility and interdependence across varied organizational groups, processes, and activities that are autonomous in nature.
According to UN, “multinational corporations cover all enterprises with control assets, factories, mines, sales office and like, in two or more countries
Transnational Companies
Companies similar to multinational companies, but there is a small difference
Transnational also operate in many countries, but there isn’t centralized mgmt.
Do not have a home country to manage them
It shall start as a new company
Take decision suitable to operating context
Employs senior executives from many countries and tries to make decision from global perspective
E.g.: nestle, Toyota
Multinational company
Transnational company
Multinational companies have a centralized management system
Company that maintain significant operations in more than one country but with decentralizes management
They own a home country and its subsidiaries
They do not have subsidiaries but jus many companies
It faces barrier in decision making due to its centralized management
It is able to gain more interest in local market since they maintain their own system
Types of MNC
On basis of Management Orientation
Refers to mgmt. orientation adopted by MNC in abroad
Ethnocentric: uses home country culture, technology, mgmt.
Regio-centric: uses system of home country as a region. E.g., rules of Arab in other nations
Poly centric: adapts itself to host country’s system
E.g., Thailand people gets holiday on Buddhists holidays but (not Dashain)
Geo centric: combination of all three,
World-wide approach for global mgmt. system and culture
Eg. CEO of Microsoft, CEO of google
On the Basis of Organization Purpose
Raw material seeker: MNC estd. In search for raw materials, earliest form like British east India company
Market seeker: MNC goes for lucrative market for their goods
Common & popular form used by Unilever, Suzuki, etc.
Cost minimizing: Explores and enters in market of lower production cost,
Most recent and emerging form,
Min. cost makes more competitive in the market
ADVANTAGE
DISADVANATGE
FDI
Form monopolistic
Technology transfer
Political corruption
Developing Skill
Harm to environment
Competitiveness
Profit go back to MNC
Employment opportunity
Importing their skilled labor
Industrialization
Foreign Direct Investment
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country,
REFERS TO INVESTMENT PLACED DIRECTLY IN BUSINESS OPERATIONS IN FOREIGN COUNTRY
Constitution is main Law of Land, any law contradict constitution automatically voids IB manager analyze constitution of any country they operate , giving long term means to predict political situation State has unitary, federal structure where all power is decentralized to local level Govt- structure varies from parliamentary-democratic; presidential
Political parties
Political ideology and practice of parties Determine what type of biz. Law & rules be adopted by govt. as these political party run govt. Relationship between political parties Reln. Of political parties is aggressive political situation is highly unpredictable + damaging
Power transition mechanism
When power transition from one govt. to another is smooth/ well-plannedBiz can operate smoothly and decide new plan with new govt. policies for investment decisionElse biz. men and investor get confused. E.g. 1 year PM in Nepal since 2063
Supranatural/ Int’l org.
Supranatural agencies WTO, UNO, World Bank= influence int’l biz Their system makes heavy influence on member country relating trade/ investment WTO provide Nepal with technical/ skill support in developing govt. system/ bureaucracy
Regional trading blocs
SAFTA, BIMSTEC, EU, NAFTA, ASEAN Aim to advance economic and political interest of members Influence political agenda of both country as major political party EU has well-developed legislative, executive, judicial for heavy influence on governance of biz
Domestic competitor
Host country’s competitor firm naturally oppose entry of foreign firms into local market Lobby govt./ political parties for protecting them against competitors
Political risk:
Political risk is risk occur due to political instability
Factors may cause closure of company or
Compel company to sell itself to others
Impact of political system results from 2 sources:
General political risk
Govt. Intervention in Economy & Firm
General Political Risk:
IB entity is guest of host country,
Host country reserve right of allow access, and also Expropriation
Influence scale & dimension of operations through policies
Manager need to identify/ analyze political risk while
Evaluating nation’s potential place to enter for Int’l Biz
Risk is occurred when political climate change operating position
Govt. takeover of corporate assets
Concerned with nationalizing foreign companies
Govt. seize assets in 2 ways:
Expropriation:
Happen with/ without compensation to company
Simply govt. confiscate property without compensation
Here company’s complain for unjust compensation is not heard
Govt impose limitation on Profit, Dividend, Royalties, tech. arrangement
Simply Get out of our country
known as creeping expropriation
Domestication:
Transfer of control of foreign investment into national ownership
Gradual encroachment of freedom of operation of foreign company
3 types of domestication:
Firm-initiated (self- initiated)- firm has freedom to se discount rate of project life
Pre-determined- same as firm initiated
Govt-initiated- both variables unknown/ unplanned
Operational Restrictions:
Company’s ability to take certain biz. Actions
E.g. chile govt restricted bringing new foreigners into mgmt. of copper industry
Foreign firms were forced to take local Chileans into company mgmt.
Agitation; War, conflict, violence:
Agitation:
Disrupts sales and causes damage to property and personnel
Comes from non-govt. forces like Opposition, Labors, consumers
Involves strikes, jams, lockout to protest against foreign biz
War, conflict: they don’t impact directly. But have negative impact
Blockage of funds:
Political risk is temporary/ permanent blocking of funds
Biz may own funds + hold property right
But cannot export earning of investment/ returns
Embargo:
Official ban on export to../ import from.. particular country
Done to isolate/ punish the govt.
E.g. undeclared blockage to Nepal in 2015
Sanction:
Trade penalty imposed on 1 or more country by other country
Form of tariff, trade barrier, import duties, export quotas, etc.
Terrorism:
Threat or actual use of force/ violence
To attain political goal through fear, coercion,
Damages infrastructure and disrupt biz.
Induce fear to consumer, leading to economic recession
Govt. Intervention in economic activity and firm
Different attitude towards economic influence foreign biz. i.e. MNC, FDI
Individualistic Paradigm:
Believes in minimum govt. intervention in economic activities
Advocates least govt. interference
Argues that biz. Should be free as much possible to cope with market forces
Govt. Under democratic & economically free political system
Adopt this paradigm
Communitarian Paradigm:
Govt. tends to be authoritative, highly hierarchical
Govt. defines needs and priorities
Govt. intervention is attempt to protect community interest
Concept of Legal Environment:
Legal system has 2 main functions:
To provide enabling mechanism which individual/ org.
Exist and operate
To provide means of resolving conflicts and
Dealing of people who breaks standard of behavior
Major legal system:
Common law system:
Law based on previous court ruling or legal precedent
Based on British
Civil (Code) Law System:
Written down in Criminal, Civil Codes to
To determine all legal matters in country
Based on Roman law, developed in France
Social/ Religious (theocratic) Law system
Religious law are customized by their societies
Theocratic law is based on religious teaching
Islamic law is still in use in modern world
System based on interpretation of Quran
Actors of Legal System
Actors
Description
Government
Govt has power to enact and enforce law Regulates biz. Through complex system of institution, agencies, offices
Constitution & National Law
Constitution provides instant and long term means to provide legal system Determines shape and nature of national law National Law (law of every nation) affects biz. Within and among the countries Significant actor in any foreign country’s legal system Affects: Local biz, activity; cross-border activity; Int’l treaties and conventions
Judiciary & court system
Courts and tribunals are constitutional bodies that make sure country’s law are executedCentral elements country’s legal system Responsibility for interpreting law &Administering justice in democratic societies
Religious Power Group
In Muslim country religious group & leaders exert high pressure on govt. to adopt Sharia Law
Supranational/ Int’l Org.
Supranatural agencies WTO, UNO, World Bank= influence int’l biz Strongly influence business as their system Make heavy influence on member country’s law and legal system Provides technical and skill support in designing many laws including copyright act
Regional Trading Organization
SAFTA, BIMSTEC, EU, NAFTA, ASEAN Influence the member nation’s laws and regulation with regional bloc having economic and political goals
Competing firms
Host-country competitors often build pressures on their govt. To enact laws that would protect them from foreign competitors
E-commerce & legal System
E-commerce is biz. Transaction where internet is used to join customer and suppliers
Refers to internet based industry of buying and selling products/ services
Solved problems related to location, distance, time zone.
There are 4 types/ dimension of E-commerce:
B2B, B2C, C2B, C2C
Includes amazon, E bay, Ali express, etc.
E-business:
Doing any biz. Over the internet, embracing activities like
Service and collaboration and other buying and selling
Formally defined as exchange of product, service, info.
Intellectual property right:
Simply property of mind and knowledge
Refers to property that is product of intellectual activity
Refers to intangible, valuable assets protected by State for promotion of innovative and inventive activities
Computer software, textbook, drama, chemical formula, etc
WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Introduced IPR rules into trading system for first time
Intellectual property which is related to literacy, artistic, scientific, research work
Right to exclude others from using it without their authorization
Introduced in Nepal as Copyright Act 2002
Related Right
Also known as Neighboring Right
Created after creators’ copyright
Induce publishing rights, broadcasting rights, telecasting right, etc.
Trademark:
Sign, picture, word … used by person, firm, company,
To distinguish its goods/ product from others
Registered brand is Trademark
7 yrs. Registration
Affects interest of general people which is likely to harm goodwill of others
Geographical Indications (GIs)
Identify the place where product is made
Identifies product’s special characteristic which result product’s origin
JUJU Dhau (king of curd) needs to be protects as GI, in BKT.
Industrial design:
Must be protected for 10 yrs.
Owners able to prevent mfg., sale, import, etc.
Which is a copy design
E.g. design of Nepal carpet mfg. and export in int’l market
Patents:
Any new method of constructing, conducting, processing,
Based on new principle and formula
1. Govt. Intervention and Investment Barrier
Done to achieve political, economic, social, objectives
Create trade barrier that benefit specific interest group like
Domestic firm, industries, labor union,
Objective create jobs by protecting industries from foreign competition
Govt. intervention is motivated by Protectionism
Refers to national economic policies
To control free trade and protect domestic industries from foreign competition
Protectionism manifested by tariff, non-tariff barrier
There are 2 reasons for govt. intervention: political and economic
Political reason for govt. intervention:
Concerned with protecting interest of certain group within a nation
Achieving political objective that lies outside economic area, such as protecting ecology/ env/ human right
Protecting job and industries:
Govt. has responsibility to protect employment/ domestic industries from unfair competition
If unemployment rate increased and foreign product adversely affect domestic market
Then political protest against govt. increase
Protecting consumer/ buyer:
Protect against the unsafe/ unfair/ fake goods.
WTO permits country govt. to reject foreign imports
Being part of Sanitary/ Phyto-sanitary measures (SPS)
Ensuring national security:
Govt. intervene to protect certain industries for national security
Defense-related/ cottage scale industries
Retaliating Against Unfair Foreign Competition:
Govt. may use threat to intervene trade policy as
Bargaining tool to force foreign country to “play by rules of the game”
US govt, threat to take punitive sanctions (penalty)
Against china to protect intellectual property like copyright, patent, trademark
Furthering Foreign Policy Objective
To protect foreign policy objective, govt. may use trade policy
E.g. design its trade policy to give preferential trading facility to a country
Which it aims to build close relation.
Protecting human rights:
Govt. exercise intervention on int’l biz. Of trade and investment
to force country to recognize & protect human right in their country
Economic Reasons For Govt. Invention:
Concerned with promoting overall wealth of a nation to benefit all, both buyers and seller
Protecting infant and indigenous industries
Govt should support domestic industries because
They are not ready to compete with foreign companies
Govt. may provide subsidies and other safeguard measures
In favor of domestic firms so that they can stand strong
Implementing Strategic trade policy:
Suggests that subsidy can help domestic firm gain
First mover advantages in global industries where
Economies of scale is important
Govt.- through strategic trade policy can help to
Raise country’s national income.
2. Govt. intervention on International Trade
The instruments used by govt to create trade barriers are
1. Tariff barrier 2. Non-Tariff barrier
1. Tariff Barrier
Defined as taxes or duties levied on imported goods primarily
For purpose of raising their selling price in the importing nation’s market
To reduce competition for domestic products
Done to favor domestic producers and govt.
Done to protect domestic producer + enlarge govt. revenue
Tariff are of two types
Import duties
Official prices
Import duties/ tariff
Duties imposed by country on imported goods
Known as import duties
So tariff are mostly limited to imports
Primary Import Tariff: Apply to all transaction except when there is zero-tariff. Its types are:
An Ad Valorem Duty:
It is an import duty levied as percentage of invoice value of imported goods.
The term (ad valorem) means ” according to the value”
Specific Duty:
It is import quantity based.
It is fixed sum of money levied on physical unit of imported goods
Specific import tariff is specific to quantity of imports (1 $ per gallon, Rs. 2 per ton)
Compound Duty:
It is combination of specific and ad valorem duties
Also known as combined rates
Duties on Value-based & Quantity-based
Secondary Import Tariff: applies to specific import conditions only
Countervailing Duty (CVD):
Charged on those imported goods to which
Exporter’s country have given subsidy
Imposed by importing nation on imports
That enjoyed subsidies in exporting nation
Such duty compensates for a special competitive advantage of subsidy,
Allowed by the exporter’s govt.
Anti-dumping duty (ADD):
it is special duty imposed on imported goods to protect on affected,
domestic industry from injury caused by the sale of dumped goods,
in importing country.
WTO agreement on anti-dumping also allows member nation,
To charge same duty to discourage unfair trade practice in world
When dumping is main cause to injure local firm producing
When tariff is temporary action, it is called tariff Surcharge
B. Office Prices:
They are included in customs tariff of some nations, that
they are the basis for calculating ad valorem duty
Whenever actual invoice price of imported goods is lower
The practice is that the importer sends the difference between
False invoice price and true price of commodity
In Nepal, where under-invoicing is widespread among businessmen,
official prices should be applied to check such trade malpractice.
2. Non-tariff Barriers (NTB)
they are all forms of discrimination against imports other then import duties.
On the basis of influence, NTB is of two types
NTB with Direct Price Influence: they influence price of goods
Subsidiaries:
Subsidies are direct payment to domestic companies by govt
To compensate them for losses or expenses incurred
From selling abroad
They are basically meant for making companies or products
More competitive in int’l biz.
Aids and Loans:
Govt. also gives aid and loans to others countries to make their
Products competitive in those recipient countries.
Such fun assistance is also known as tied aids/ loan
Tied-up is imp. In winning large contracts for infrastructure: telecom, railway, hydro
Customs valuation
Since it is difficult for custom officials to determine if
Invoice prices are honest, they may arbitrarily increase value and
other valuation procedures that they control trade
NTB with Quality- Control Effect:
Import quotas:
Import quotas are numerical limits placed on
Specific classes of imports, i.e
Numerical limits for a specific kind of products; that a country
Will permit to be imported without restriction during specified period
Voluntary Export Restraints (VER)
it is self-imposed import quota. It is type of import-quota imposed by exporting nation typically at request of importing country’s govt. E.g. US requested Japan to put limitation in automobile export where Japan limited itself to 1.68 million per year.
Buy-local legislation:
By introducing ‘buy-local’ laws, govt. sometimes implements laws
For giving preference for domestic products ie.
They specify a content restriction
That a certain percentage of product is of local origin
Border regulation & standards:
Importing countries govt can do impose its rules and regulation
On border administration. Such regulation include:
Product standard certificates like ISO certification
Sanitary/ Phyto-sanitary (SPS) standard for health of human, animal, plants.
Env. Certificates like ECO-Level
Social clauses like prohibition of use of child labor
Specific permission requirement:
When countries require that potential importers or exporters
They must secure permission from govt. authority before
Conducting trade transaction,
Such requirement is known as import license.
Another requirement is foreign exchange control, which
Requires importer of certain product
To apply to govt. agency to secure foreign currency to pay for products
Reciprocal requirement:
Under this provision, exporters promise to buy goods/services
From the countries to which country to export
This requirement is common in aerospace and defense industries
Mostly because importer is short of foreign currency to purchase what it wants
3. Govt. policy Intervention (FDI) Barrier:
Foreign investment have both good/ bad impact on country’s economy and society
Govt. use this policy for promoting/ discouraging inward FDI
There are two forms: Barrier Inward/ Outward FDI
Barrier To Inward FDI
Restrict inward FDI in host country
Host country can use wide range of barrier to restrict inward investment from foreign
Ownership Restraint
To restrict flow of foreign investment
Foreign Investment and Technology Transfer Act (FITTA) prohibits foreign investor
To take investment in Handicraft and Cottage Industry, airlines, trekking, real estate, legal and mgmt. consultancy
This is done for 2 reasons
On grounds of national security and competition
Belief of local owners- maximize resource transfer and employment benefit.
Performance Requirement:
Barrier to FDI inflow that control behavior of multinational local subsidy
Concerned with Local Content Requirement (LCR), Tech. Transfer, Export,
Govt. require foreign investor to use:
Certain portion of local content
Bring in substantial technology to host country
Export certain amt of product
Hire certain no. of top-level manager
Meant for minimizing cost of FDI and max. benefits
Barrier to Outward FDI
Restrict outward investment from home to host country
One, common barrier is to limit capital outflow out of concern for country’s BOP
Second, There is occasional use tax rules to discourage investors towards investing abroad
Concept of Socio-cultural Env:
Culture:
Culture is complex set of rules, custom, values, idea, attitude, meaningful symbol ,
Created by human beings to shape human behavior,
That are transmitted from generation to generation
Culture is shared, dynamic, invented, organized, learned, etc.
A company’s need for cultural knowledge is increasing because:
No. of foreign functions increasing
No. of countries operation increasing
Movement from external to internal handling operation
Why culture matters in IB.
Varying Communication Implication:
Manager need to understand implication of various aspects of culture
Verbal communication use words and have meaning
Non-verbal are interpreted and perceived different by different cultural group
Kinesics:
Study of body’s physical movement.
Face, eyes, gestures, posture, physical appearance, etc.
E.g. Thumbs up- well done in USA, Offensive in Greece
Proxemics:
Means nearness in space and time
Involves personal space in how and what way we arrange it
Personal space language
Intimate (up to 18 inch), personal (to 4 ft.), social (12 feet), public (12 ft.+) types of distance
In USA 5-7 ft. for biz.; Latin America (3-5 ft) for biz.
Time language:
Chronemics refers to time verbal exchange
American expect quick response in biz, uncomfortable at slow response
Japanese seek quiet time for response and decision making
Physical Context:
Refers to how color & layout communicate
Context of our surrounding
E.g. Black and grey convey negative feelings; blue and yellow positive feeling
Layout/ design of surrounding
Arrangement of desk, chair, office size, cabin, furniture, etc.
Haptics:
Its about touch language
Refers to touch while talking face to face,
Latino Woman expect to touch hand, shoulders, hair, face, etc.
Which has not good message in Nepalese society.
Varying Impact of Social Attitude and Behavior on IB:
Important for IB manager to be aware of socio-cultural behavior of people in different countries
Behavioral Practice:
Social stratification (social class)
Nature of motivation
Relationship preference in org.
Risk-taking behavior
Cultural Practices:
Ethnicities as reference
Language as culture stabilizer
Religion as culture stabilizer
Varying CSR & Ethnical Standard
Society’s culture certainly can have impact on propensity of people and firm
To behave in ethical/ unethical manner
E.g. USA is not acceptable ethically, socially, legally, in arm industry biz.
Impact of Socio-cultural Nuances
Nuances means emotional/ behavioral tone of people affect their
Bargaining behavior which IB manager should understand
For doing negotiation in business
Not possible until manager have good understanding of cultures in various country.
Varying Customer Reaction to Marketing
Customer reaction to firm’s marketing and advt. across culture.
Manager need to develop good understanding of cultures in countries
They operate so that they can predict customer reaction to marketing effort
But some might hurt sentiments e.g. Buddha Pics on Boots, slippers
Managing Cultural differences:
Managing cultural shock:
Many people get frustrate when entering into new culture
Things become hard, as they need to learn and copy with vast new cultural cues
Cultural shock happening is natural, but time heals it
So recovering cultural shock is needed time
Reverse shock:
Culture shock passes if a person stays in new culture to understand it and get used to it.
Some people encounter shock when they return their home after long time gap.
This is called reverse shock.
It happens as they learnt to accept what they encountered abroad.
Managing company/ Mgmt. Orientation
:Ethnocentrism Belief that one’s own culture is superior than others/ Believe that what worked at home, should work at host countryIgnoring the environmental differences .
Regio-centrismThe firm adopts regional cultural in mgmt. Covering a group of countries which have comparable cultural characteristic E.g. in south asia, it pre-marital sex or live-in relation is discourage.
Polycentrism Fully adapts biz. Practice to foreign country’s local culture wherever it operates. Carries NO home country culture It is to adopt local culture of foreign country. Control is decentralized and manager is free to conduct biz in any way he wants .
Geo-centrism:Hybrid of Polycentrism, Ethno, Regio-centrism Uses biz. Practices that are hybrid of home and foreign norms of culture It is usually recommended E.g. if Asif had adapted himself to local requirement of Nepal, his bank would not have to lose highly valuable customer. Geocentric is recommended in case of cultural differences.
Regional Economic Integration:
WTO has emerged as rule-based global trade body
Advocating for free and fair trade,
So many countries moved towards Regional Economic Cooperation/ Integration.
E.g. SAFTA, BIMSTEC, ASEAN, etc.
It is agreement among countries in geographic region to
Reduce/ remove Tariff, non-tariff
For free flow of goods/services/ factors of production
Form a trading bloc which is preferential economic arrangement among group of countries.
Aim to achieve economic union and political union
Reasons for Regional Economic Integration:
Geographic proximity- distance goods need to travel
Consumer’s taste and preference- similar between nations of same region
Distribution channel- easily estd. In neighboring countries
Common history- neighboring have common history, to co-ordinate with policies
Common economic trade opportunity- share common economic and trade opportunity and problems
Types/ Stages of Regional Economic Integration:
Preferential Trading Area (PTA) – reduce customs tariff between members
Give preferential treatment to each other by reducing tariff
Countries reduce tariff applicable to member nations
To show that they are giving preferential trading facilities to member nation.
Doesn’t go beyond this facility limit
Free Trade Area (FTA)– free trade among members
Goal is to eliminate all tariff and other barriers
To trade in product and services within bloc
Members in PTA only reduce tariffs.
In FTA members maintain its own external tariff against non-FTA countries
Member countries agree to eliminate formal barriers to trade in product/ services
While each member maintains independent int’l trade policy outside the bloc
Custom union – common external tariff and trade policies/ free movement of capital, technology, labor
Member country adopt common tariff, non-tariff barriers on
On import from non-member countries
Harmonize external trade policies and adopt common tariff, non-tariff on import from non-member
Economic union (Monetary Union)- harmonize all economic policies
Member nation’s economic policies should be integrated
to create economic union.
Concerned to having free trade movement of goods/ services/ factors of prodn.
Common currency would be used by all members.
It can be achieved by system of fixed exchange rates. E.g. European Union.
It involves following:
Adoption of eco. Policy for regional economic integration
Single currency
Uniform monetary system with one Central Bank
Political-Economic Union: – single economic political identity
Ultimate development of economic union takes form of “Political Union”
Where member countries decide to share single political status
Perfection unification of all policies by org. and
Submerge separate national institution into regional political-economic entity
Common parliament is created with representatives from member nations
Who work in with every member nation’s legislation.
Member nations at this stage dilute their national political identity
For promoting political union at regional level
E.g. EU has separate Legislature, executive, judiciary.
Effect of Regional Economic Integration
Static Effects
Dynamic Effect
Shifting resources from inefficient to efficient companies as trade barrier is eliminated. Effects may develop when:Trade Creation: production shifts to more efficient producers for competitive advantage,; allowing consumer to access more goods at lower price Trade Diversion: trade shifts to countries in group at expenses of trade with countries (not in group). Even though non-member country’s company are more efficient in absence of trade barrier
Overall growth in the market due to expanding production and achieving greater economies of scale. It is increasing in efficiency due to increased competition.
Leading Economic Bloc/ Trading Bloc
ASEAN
Association of South East Asian Nations
BIMSTEC
Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation
ACP
African, Caribbean and Pacific Group of States
EU
European Union
FTAA
Free Trade Area of the Americans
NAFTA
North American Free Trade Area
SAFTA
South Asia Free Trade Area
SAPTA
South Asian Preferential Trade Agreement
APEC
Asian Pacific Economic Cooperation
i. BIMSTEC
Objectives of BIMSTEC are:
Create favorable env. for economic development
Promote social and economic progress
Promote collaboration and mutual assistance in economic, social, technical fields
Estd. Close cooperation with int’l & regional org.
Functions of BIMSTEC:
Admin and implement agreements of member countries (FTA)
Act as forum of cooperation among members
Provide cooperation to another members
Increase cooperation with int’l & regional org.
Features of BIMSTEC:
Regional cooperation between SAARC (Nepal, india) and ASEAN (Thailand, Myanmar) nation
Cooperation in economic and trade sectors
Special emphasis on (within, between) intra -regional investment
Impact on Nepal IB:
Positive impact
Negative impact
Trade expansion
No special privileges like SAFTA/ to LDC
Great potential for investment
Increased competition
Cooperation in infrastructure
Challenge to transit
Low cost of transaction
Challenge to find Comparative Advantage
Enhance of tourism
Limited factor of prodn.
Buddhist pilgrimage (Bhutan, India, Thailand, sri-Lanka)
ii. SAFTA, SAPTA
Estd. Free trade area to reduce tariff, non-tariff barrier in intra-regional trade
Regional special trade and investment of SAARC members.
Vision:
No quantitative and qualitative barrier (tariff, quota, non-tariff)
Special treatment to LDC
Exchange of discounts (concession) as per agreement)
No hurdle/ hassle in trade.
Impact of SAPTA/SAFTA
Positive Impact
Negative Impact
Intra-regional trade expansion (Trade within SAARC)
Increase competition
Economies of Scale (operate in large scale, min cost)
Revenue Loss (40% revenue loss in import)
Low cost transaction
Transit Problem (depend on india, not enjoy with other)
Special privileges for LDCs Duty-free access, remove NTB, Special consideration of exports of LDC, etc.
Linkage with Political Problems
Comparative Advantage (country give up less efficient for greater efficient output)
Poor mobility of people
Uniform Voice of SAARC on Trade Matter
Little investment (investor friendly climate)
Increase investment opportunities
Deficit in BOP
iii. European Union:
Institutions of EU:
European Commission- bureaucracy for day-to-day operation
European Council of Minister- Executive for policy-setting
European Parliament- representatives elected form member countries as Legislature of EU
European Court of Justice- designed to decide issues to implement EU policies, acting as Judiciary
iv. APEC (Asia-Pacific Economic Cooperation):
21 members, serves as regional vehicle for promoting open trade, headquarter at Singapore,
Purpose:
Raising living standard and education level
Sustainable economic growth
Foster sense of community and shared interest among Asia- Pacific countries
Objectives:
Resist protectionist pressure
Maintain momentum of trade liberalization
Provide ways to deal with economic conflicts
Looking towards regionalism, like EU, NAFTA
Three pillars of APEC
Trade and investment liberalization
Business facilitation
Economic and Technical Cooperation
v. ASEAN (Association of South East Asian Nations)
South east Asia- philipines, Singapore, Thailand, Myanmar, Indonesia, Malaysia, Cambodia,
Objectives of ASEAN
Accelerate economic growth, social progress, cultural development,
Promote active collaboration, mutual assist. In common interest
Ensure stability of South East Asian Region
Maintain close cooperation with int’l & regional Org.
Emerging Foreign Market:
Emerging foreign market is a country making effort
To change/ improve its economy with goal of
Raising its performance to that of advance nation.
China:
Largest population in worl
Growth and expansion has been impressive with its 2 digit improvement
China has challenges like:
Massive saving in corporate sector
Globalization of mfg. network
Vast development needs
Requirement of 20 million jobs annually to avoid jobless
Major transformation was due to socialist (communist) state.
Problem of MNC is that undervaluation of china’s currency
Continues favoring domestic country than foreign other,
So china is high risk venture
India:
World’s second largest population and
Emerging class of middle-class that can create big market for MNC
Industrialization and FDI inflow have gained big speed in recent decade.
World bank expects to have high economy in south Asia
Brazil:
Emerged as flourishing economy
GDP continued to rise inflation, employment increase
Brazil continues to attract outside investor, partly to opportunities created by Brazil’s
Privatization of power
Telecommunication
Develop of infrastructure
Int’l company show interest in doing business
UNCTAD World Investment Prospect Survey has identified brazil as
Fourth most attractive country for FDI in recent yrs.
Changing demographics of Global Economy:
Demography has been changing since 3 decades where, following is described as:
US dominance in world FDI
US dominance in World Economy and Trade
US dominance in Multinational IB
There have been changes in the demography of Global Economy:
Changing Demographics in World FDI
Changing World Economy and Trade
Changing demographics in World MNCs
Changing Demographics in World Economic Output and Trade
Foreign Exchange:
Money dominated (marked) in currency of another country/ group of country
Market in which transaction take place in foreign Exchange Market
Foreign Exchange (FOREX) is in form of Cash, Fund, Bank deposits, Traveler’s Cheque.
Exchange Rate:
Price of currency, usually in relation to another currency.
It is no. of units of 1 currency that buy 1 unit of another currency
Foreign Exchange Market:
Market where foreign exchange instruments are traded.
Firms in int’l market may not have enough foreign currency
So they seek to those parties with adequate amount of money.
There is need of FOREX market for all individual and institution
In order to contact one another for this purpose
FOREX market activities are done by banks and foreign exchange dealers
Using telephone, cell phone, mails.
Parties in FOREX market:
Exporters & Importers: they are buyer and seller of forex coz. They are exporter and importer of goods and services.
FDI: they do investing capital & pulling out dividends out of country
Portfolio Investor: they buy foreign stocks, bonds, mutual funds hoping to sell them at profitable exchange rate.
Major Segments of Forex market:
Over-the-counter (OTC) market:
Includes banks- commercial and investment banks, where forex market takes place
Security Exchanges (The Exchange-Traded Market)
Comprise of security exchanges such as: Chicago Mercantile Exchange, where certain forex instrument are traded
Characteristics of Forex Market:
Market for trading forex instruments (spot, Fx Swap, currency swap, Futures, Option)
Remarkable market for size, composition and location (UK, USA, japan, Singapore- 65% of total forex market)
Wide use & dominance of US dollars
SWIFT
Society for World-wide Interbank Financial Telecommunication
Cooperative arrangement among banks for conducting financial transaction
Through telecommunications through out the world.
Makes financial transaction between banks as swiftly as mouse-click.
Headquarter at Belgium. NABIL bank is member of this cooperative network.
Why dollar $ is widely use in trade?
Investment currency in many capital markets: New York, Bombay capital market
Reserves currency held by central banks around the world. NRB has Proportional Reserve System as Exclusive Reserve Currency
Transaction currency in int’l commodity. Value of assets, cost, transaction is measured in $
Invoice currency in many countries
Intervention currency employed by monetary authorities in market operation to influence exchange rate
Functions of FOREX market:
Transfer purchasing power
Provide for credit
Provide Hedging of Forex Risk
Foreign Exchange Rate System:
A Controlled Exchange Rate System:
Strong control on exchange rate system by govt.
System is not determined by supply & demand forces of currency
Govt- determines the rate.
Govt. controls rate as per changes in its economic and monetary policy
This system is operated with
Fixed rate (controlled Fixed rate system) or,
Floating rate (controlled Floating system)
B Fixed Exchange Rate System:
System/ Theory that maintains forex rate at fixed level
Through govt. participation in market
Goal is support country’s development plans, &
Balance its int’l biz and trade
It would change through currency devaluation/ revaluation
If rate fails to maintain BOP & BOT (trade)
Promotes greater stability and
Predictability of exchange rate movements.
Filling gaps between D/S for currency
a. Pegged Exchange Rate System:
System in which value of currency is tied up to another
Foreign currency’s value
Weaker currencies are mostly pegged to stable foreign currencies
Nepal rupees are pegged to Indian currency,
C Floating Exchange rate system:
It is opposite to controlled system
Exchange rate is determined by currencies’ D/S interaction.
Allows market to determine forex rate on priority basis,
Expecting market for correcting the disequilibrium.
Govt. do not make any systematic intervention,
Each nation’s currency float independently
When there is no govt. intervention, system is called: Free floating system
System with provision of govt. intervention in market is: Managed floating system/ Dirty System
Modes of Payment in Int’l Trade:
1. Advance Cash Payment (Cash in advance)
Cash of product is paid in advance
Most secure mode for exporter
Exporter collects payment before shipping goods to importer
Importing firm would avoid making such advance cash payment
As it involves risk for it
Typically to be made through banking channel
2. Letter of Credit (L/C)
Known as documentary letter of credit
L/c is contract between banks of importer and exporter that
Ensures payment from import to exporter upon receipt
Of an export shipment
Highly secured payment managed through banking system
For export, it secures advance cash payment
Most L/c are Irrevocable: one which cannot be cancelled once it is estd.
Bank manages payment of money in foreign currency to foreign party
There must be formal arrangement with some corresponding banks.
E.g. Everest Bank (Nepal) and Punjab National Bank (india) have int’l banking network
It is easier due to SWIFT, that allows financial transaction through telecommunication
3. Open Account
When exporter use open account,
Buyer pays exporter at some future time
Following receipt of goods, much in same way
a retailer customer pays the shop for product being purchased
exporter use this approach only with customer of
long standing/ excellent credit/ subsidiary owned by exporter
exporter simply bills customer,
who is expected to pay under agreed terms at future time
4. Counter Trade:
There is bater-trade agreement
So that country’s firm receive delivery of goods/ services
It has exported to another country’s firm.
Refers to range of barter agreement by which goods and services are
Traded for other goods and services, when currency is non-convertible
It is most unsecure, non-desirable, non-preferable
Theory of Comparative Advantage (Ricardian Theory),
Factor Endowment theory: H-O Theory,
Int’l Product Life Cycle (IPLC) Theory,
Theory of national competitive advantage,
Porter’s Diamond,
Implications of int’l trade and investment theory,
FDI-based Theories (Int’l Investment Theory),
Implications of int’l investment FDI theories.,
Contemporary issue in Int’l Trade,
Int’l trade and investment
UNO came with out of Bretton Woods Conference
To boost int’l trade and economic growth
To achieve monetary stability
They decided to set up following org.
IBRD (Int’l Bank for Reconstruction and Development) of World Bank
IMF (Int’l Monetary Fund)
ITO (Int’l Trade Org.)
Int’l Trade Theories
IB manager must understand int’l trade theory because:
Help to explain what might be produced competitively
Where company go to produce item efficiently
Understand govt. practices with free flow of trade among countries
Focus on enumerated questions like:
What product to import or export?
How much should we trade?
With whom to trade?
Int’l trade is done for comparative advantage
Country with rich in natural, human, technological resources have surplus prodn.
Country with no comparative adv. Import from surplus nation
For which int’l trade occurs.
Initially evolved trade doctrines
Mercantilism
Laissez-faire
Doctrine (Theory) of Mercantilism
Countries should export more than they import
If successful, they would receive gold form countries that run deficit
It gives importance to trade, … but to exports only
Goal was to gain from trade,
But at cost of other countries
Countries focused on accumulation of gold through export
Protectionism was developed for which
They imposed heavy tariffs on imports
Gold was form of wealth which admired and
Gold obtained through balance of trade.
This concept dominated for 200 yrs. Where,
It meant one nation could increase wealth at expense of other.
As gold is limited, trade that increase nation’s gold supply must be reduced.
It resulted fierce competition
Laissez-faire doctrine became watchword for this movement
Laissez-faire Doctrine
Today it is called “Free Market Mechanism”
Emphasis is to permit Pvt. Sector to work on its own,
Govt. must not have any type of market-intervention
It cause lawlessness, as it is to free
Theory of Absolute Advantage (Adam smith theory)
Regarded as first formal theory in int’l trade
Country’s wealth is based on its available goods/ services rather than gold
Prescribes country to specialize in that product
That give it competitive advantage.
Advantage can be Natural/ Acquired.
Natural adv. Considers climate and natural resources
Acquired adv. Considers technology/ skill development through human effort
Country
Output of X
Output of Y
A
2 units
4 units
B
1 unit
6 units
Absolute cost adv. To country A = product X, 2x>1x
Absolute cost adv. To country B = Product Y, 6Y>4Y
Specialization is recommended in respective goods.
Country A= X, Country B=y
Exchange rate:
Country A, 1x=2y
Country B, 1x=6y
Country A export… 2x for 6y, net gain= 2y (6-4)
Country B export … 6y for 2x, net gain= 1x (2-1)
Theory of Comparative Advantage (Ricardian Theory):
Gains from trade will occur even in a country
That has absolute adv. In all products because
Country must sacrifice to produce more efficient output
Also known as Comparative Cost Adv theory of int’l trade
Specifies term, TERM OF TRADE (TOT),
To advise country what quantity of imports of any product
Can be purchased through exports of
Fixed quantity of efficient product.
TOT means what quantity of imports can be purchased through
Sale of fixed quantity of exports.
TOT=
Useful to formulate national trade plans and policies
Country
Output of X (jute)
Output of Y (cotton)
A Nepal
4 units
8 units
B Bangladesh
1 unit
6 units
Country A, 1x=2y, Country B, 1x=6y
Comparative adv. For A =X is jute….
Comparative adv for B=Y is cotton…
Specialization is recommended for A in X and B in Y
Int’l exchange rate is 1x=3y
Country A exports 4 x for 12y, net gain… 4Y (12-8)
Country B exports 6Y for 2X, net gain… 1X (2-1)
Ricardo’s Assumption:
1.There are two countries and two commodities.
2.Perfect competition both in commodity and factor market.
4.Labor is the only factor of production other than natural resources.
5.Labor is homogeneous i.e. identical in efficiency, in a particular country.
6.There is free trade i.e. the movement of goods between countries is not hindered by any restrictions.
7.Production is subject to constant returns to scale.
8.There is no technological change.
9.Trade between two countries takes place on barter system.
10.Full employment exists in both countries.
11.Constant returns to scale (i.e. doubling the inputs in each country leads to a doubling of
12. No Transportation costs
Factor Endowment theory: H-O Theory
Leontief Paradox
American economist Dr. Wassily Leontief tested H-O theory under U.S.A conditions.
He found out that U.S.A exports labor intensive goods and imports capital intensive goods,
but U.S.A being a capital abundant country
must export capital intensive goods and import labor intensive goods
than to produce them at home.
This situation is called Leontief Paradox which negates H-O (Heckscher–Ohlin) Theory.
Factor endowment
H-O theory by Heckscher and Ohlin, states that,
A country should export goods which require factors in which
Country is abundant in.
It should import the goods which require the use of factor which
Country is scarce in.
This will give a country a comparative advantage in goods which are being produced.
It is not the sole factor influencing commodity price and international trade.
The H-O Theory neglects other factors like technology, technique of production, natural factors, different qualities of labor, etc., which can also influence the international trade.
Int’l Product Life Cycle (IPLC) Theory:
As the product reaches stage of maturity and decline,
Prodn. Will shift to foreign location,
Esp. to emerging economies where,
unskilled, inexpensive labor can be made efficient for standardize prodn. Process
A product passing through its death stage of PLC in one market need not die in another market.
Unwillingness of firm to write off its productive assets may force into international markets.
In market, product passes 4 stages:
Introduction, growth, maturity, decline, death
Product in dying stage can be introduced fresh in other market
Theory of national competitive advantage:
Porter’s Diamond
Explains why nation achieves int’l success in particular industry
Why japan is good in automobile? Switzerland in Luxury watches?
There are 4 attributes (characteristic) that
Shapes the env. In which local firm compete
Attributes are known as porter’s diamond
His team attempted to explain why a nation achieves int’l success
In a particular industry which could not be easily answered by H-O Theory and Comparative Theory.
Factor Endowment:
Factor of prodn. Is affected by skilled manpower/ infrastructure (Factor endowment)
Country with better factor endowment (skilled+ infra)
Can do better in given industry
Demand condition:
If knowledgeable consumer in domestic market
Pressurize firm to create high quality, useful, innovative product
This increase possibility that firm’s product enter foreign market
USA, japan, Europe has entered in many country due to better product
Related supporting industries:
Presence/ absence of such industry determine competitive adv. Of firm in nation
Availability/ efficiency of int’l bank in Nepal
Determine adv. Of Nepali manpower agency firm
Eg. Efficient tyre manufacturer impact competitive adv. In automobile industry.
Eg. German have good textile as they produce high quality sewing machine
Firm strategy, structure, rivalry:
Firm’s strategy on financial, marketing, technical areas,
Structure are condition to govern firm create, organize, manage
These all determine competitive adv. In a country
Overall, theory states that
These 4 attributes create a diamond
Firms are successful when diamond is favorable
Competitive adv is achieve when diamond is favorable
Govt. can play role of facilitator/ obstruction for the env.
Implications of int’l trade and investment theory:
IB manager must understand int’l trade theory because:
Help to explain what might be produced competitively
Where company go to produce item efficiently
Understand govt. practices with free flow of trade among countries
Focus on enumerated questions like:
What product to import or export?
How much should we trade?
With whom to trade?
Int’l trade is done for comparative advantage
Country with rich in natural, human, technological resources have surplus prodn.
Country with no comparative adv. Import from surplus nation
For which int’l trade occurs.
Following implications can be inferred based on above theories of int’l trade.
Free trade implications
Free trade promotes specializing in prodn. And
Export= For the commodity having comparative adv. And
Import= those having comparative disadvantage
Evident from Absolute/ Comparative Cost adv. Of Adam smith and David Ricardo
Trade pattern implication
Country should structure its int’l pattern in such a way that
Specialize in production and
Export=Relative abundance of factor of prodn.
Import= factor endowment is relative scarce
It is from factor endowment (HO) theory
Trade competitiveness implications
Identity commodity of national competitiveness
Not only in present and potential stage of product life-cycle in different country market
But also in condition of
Factor endowment
Market demand
Related and supporting industry
Firm’s strategy n=and rivalry
Such implications are from IPLC and Porter’s diamond theory
FDI-based Theories (Int’l Investment Theory)
Foreign direct investment:
Refers to investment places directly in biz. Operation in foreign country. Its int’l investment
Act of moving capital across border for the purpose of actively controlling
Property and ownership of company in foreign country.
When firm undertake FDI it becomes MNC or MNE
Monopolistic Advantage Theory:
Stephen Hymers proposed this theory in late 1960s which holds that
FDI is made by forms in oligopolistic industries possessing technical and other advantages
Over indigenous (local) firm
Such firm would then have advantages like economies of scale, superior technology & mgmt.
There is monopolistic benefit over local firms
Product and Factor Market Imperfection Theory:
It is expansion of monopolistic advantage theory, made by Richard Caves in 1970s
Superior knowledge permitted investing firm
To produce differentiated products so that
That buyers would prefer rather than locally made similar products
It could give firm some control over local firms.
This theory holds that investment flow into other national under imperfect condition
International product life cycle (ILAC) Theory:
Raymond Vernon’s IPLC theory maintains direct link between int’l trade and int’l investment
Explains that FDI is natural stage in a product life.
If a company tries to retain (sustain) in exporting market
It shall have to invest in overseas production activities
When other companies begin to offer similar products
Investing abroad in this way will increase during 3 and 4 stage (maturity and decline)
For this company will have to locate production activities in those countries
Where factors of production are less expensive
Internalization Theory:
It is extension of market imperfection theory,
States that to receive higher return on its investment
A firm will transfer its superior knowledge to foreign subsidiaries rather than licensing
The firm will be able to send knowledge/ tech/ mgmt. across border while maintaining it within firm
Eclectic theory/Dunning’s Eclectic Theory of int’l prodn.:
It is miscellaneous theory as it combines diverse elements of some FDI theories
This theory explains that a firm goes abroad for investment
Due to following three advantages:
Ownership specific advantage- firm get benefit of tech., knowledge, economies of scale, monopolistic adv.
Location specific advantage- profit due to location: physical, economic, political benefit
Internalization advantage- firm get higher returns in: licensing, franchising, exportation
Rather than full operation
Transfer of superior tech./ mgmt. to foreign country.
Modified Theories for third world firms:
Applicable to the firms from third world (poor, under-develop nation)
The firms from third world have been importing technology (as product)
from developed nations/ advance economies
Such technologies are designed for larger markets.
So poor nation export output after meeting domestic demand
In such case, IPLC theory doesn’t apply to the third world firms
The process by which business or other organization develops international influence or start operating on an international scale is known as Globalization.
The tendency of investment funds/ business to move beyond domestic and national market to other market around the globe is known as Globalization.
International Business:
The exchange of goods and services among individuals and business in multiple countries.
A specific entity, such as a multinational corporation or international business company that engages in business among multiple countries.
A commercial transaction across country borders is known as international business.
For example —–A company sells products in the United States, Japan, and Asia etc.
Global localization/ Glocalization:
Successful global marketer must have ability to
Think globally and act locally.
Ability to be as much of an insider as local company,
Study Pegg 