Content Outline
Introduction
--- Content provided by FirstRanker.com ---
Definition and meaning of international business
Scope of international business
--- Content provided by FirstRanker.com ---
Special difficulties in international businessBenefits of international business
Understanding of international business environment
--- Content provided by FirstRanker.com ---
Framework for analyzing the international business environmentSummary
Review Questions
--- Content provided by FirstRanker.com ---
INTRODUCTION
--- Content provided by FirstRanker.com ---
One of the most dramatic and significant world trends in the past two decadeshas been the rapid, sustained growth of international business. Markets have
become truly global for most goods, many services, and especially for financial
--- Content provided by FirstRanker.com ---
instruments of all types. World product trade has expanded by more than 6
percent a year since 1950, which is more than 50 percent faster than growth of
--- Content provided by FirstRanker.com ---
output the most dramatic increase in globalization, has occurred in financialmarkets. In the global forex markets, billions of dollars are transacted each day,
of which more than 90 percent represent financial transactions unrelated to trade
--- Content provided by FirstRanker.com ---
or investment. Much of this activity takes place in the so-called Euromarkets,
markets outside the country whose currency is used.
--- Content provided by FirstRanker.com ---
This pervasive growth in market interpenetration makes it increasingly difficultfor any country to avoid substantial external impacts on its economy. In
particular massive capital flows can push exchange rates away from levels that
--- Content provided by FirstRanker.com ---
accurately reflect competitive relationships among nations if national economic
policies or performances diverse in short run. The rapid dissemination rate of
--- Content provided by FirstRanker.com ---
new technologies speeds the pace at which countries must adjust to externalevents. Smaller, more open countries, long ago gave up illusion of domestic
policy autonomy. But even the largest and most apparently self-contained
--- Content provided by FirstRanker.com ---
economies, including the US, are now significantly affected by the globaleconomy. Global integration in trade, investment, and factor flows, technology,
and communication has been tying economies together.
--- Content provided by FirstRanker.com ---
Why then are these changes coming about, and what exactly are they? It is in
practice, easier to identify the former than interpret the latter. The reason is that
--- Content provided by FirstRanker.com ---
during the past few decades, the emergence of corporate empires in the worldeconomy, based on the contemporary scientific and technological developments,
has led to globalization of production. As a result of international production,
--- Content provided by FirstRanker.com ---
co-operation among global productive units, the large-scale capital exports, the
export of production or production abroad has come into prominence as
--- Content provided by FirstRanker.com ---
against commodity export in world economy in recent years. Globalcorporations consider the whole of the world their production place, as well as
their market and move factors of production to wherever they can optimally be
--- Content provided by FirstRanker.com ---
combined. They avail fully of the revolution that has brought about instant
worldwide communication, and near instant-transformation. Their ownership is
--- Content provided by FirstRanker.com ---
transnational; their management is transnational. Their freely mobilemanagement, technology and capital, the modern agent for stepped-up economic
growth, transcend individual national boundaries. They are domestic in every
--- Content provided by FirstRanker.com ---
place, foreign in none-a true corporate citizen of the world. The greater
interdependence among nations has already reduced economic insularity of the
--- Content provided by FirstRanker.com ---
peoples of the world, as well as their social and political insularity.DEFINITION OF INTERNATIONAL BUSINESS:
International business includes any type of business activity that crosses national
--- Content provided by FirstRanker.com ---
borders. Though a number of definitions in the business literature can be found
but no simple or universally accepted definition exists for the term international
--- Content provided by FirstRanker.com ---
business. At one end of the definitional spectrum, international business isdefined as organization that buys and/or sells goods and services across two or
more national boundaries, even if management is located in a single country. At
--- Content provided by FirstRanker.com ---
the other end of the spectrum, international business is equated only with thosebig enterprises, which have operating units outside their own country. In the
middle are institutional arrangements that provide for some managerial direction
--- Content provided by FirstRanker.com ---
of economic activity taking place abroad but stop short of controlling ownership
of the business carrying on the activity, for example joint ventures with locally
--- Content provided by FirstRanker.com ---
owned business or with foreign governments.In its traditional form of international trade and finance as well as its newest
form of multinational business operations, international business has become
--- Content provided by FirstRanker.com ---
massive in scale and has come to exercise a major influence over political,
economic and social from many types of comparative business studies and from
--- Content provided by FirstRanker.com ---
a knowledge of many aspects of foreign business operations. In fact, sometimesthe foreign operations and the comparative business are used as synonymous for
international business. Foreign business refers to domestic operations within a
--- Content provided by FirstRanker.com ---
foreign country. Comparative business focuses on similarities and differences
among countries and business systems for focuses on similarities and differences
--- Content provided by FirstRanker.com ---
among countries and business operations and comparative business as fields ofenquiry do not have as their major point of interest the special problems that
arise when business activities cross national boundaries. For example, the vital
--- Content provided by FirstRanker.com ---
question of potential conflicts between the nation-state and the multinational
firm, which receives major attention is international business, is not like to be
--- Content provided by FirstRanker.com ---
centered or even peripheral in foreign operations and comparative business.SCOPE OF INTERNATIONAL BUSINESS ACTIVITIES
The study of international business focus on the particular problems and
--- Content provided by FirstRanker.com ---
opportunities that emerge because a firm is operating in more than one country.
In a very real sense, international business involves the broadest and most
--- Content provided by FirstRanker.com ---
generalized study of the field of business, adapted to a fairly unique across theborder environment. Many of the parameters and environmental variables that
are very important in international business (such as foreign legal systems,
--- Content provided by FirstRanker.com ---
foreign exchange markets, cultural differences, and different rates of inflation)are either largely irrelevant to domestic business or are so reduced in range and
complexity as to be of greatly diminished significance. Thus, it might be said
--- Content provided by FirstRanker.com ---
that domestic business is a special limited case of international business.
The distinguishing feature of international business is that international firms
--- Content provided by FirstRanker.com ---
operate in environments that are highly uncertain and where the rules of thegame are often ambiguous, contradictory, and subject to rapid change, as
compared to the domestic environment. In fact, conducting international
--- Content provided by FirstRanker.com ---
business is really not like playing a whole new ball game, however, it is like
playing in a different ballpark, where international managers have to learn the
--- Content provided by FirstRanker.com ---
factors unique to the playing field. Managers who are astute in identifying newways of doing business that satisfy the changing priorities of foreign
governments have an obvious and major competitive advantage over their
--- Content provided by FirstRanker.com ---
competitors who cannot or will not adapt to these changing priorities.
The guiding principles of a firm engaged in (or commencing) international
--- Content provided by FirstRanker.com ---
business activities should incorporate a global perspective. A firm`s guidingprinciples can be defined in terms of three board categories products
offered/market served, capabilities, and results. However, their perspective of
--- Content provided by FirstRanker.com ---
the international business is critical to understand the full meaning of
international business. That is, the firm`s senior management should explicitly
--- Content provided by FirstRanker.com ---
define the firm`s guiding principles in terms of an international mandate ratherthan allow the firm`s guiding principles in terms as an incidental adjunct to its
domestic activities. Incorporating an international outlook into the firm`s basic
--- Content provided by FirstRanker.com ---
statement of purpose will help focus the attention of managers (at all levels of
the organization) on the opportunities (and hazards) outside the domestic
--- Content provided by FirstRanker.com ---
economy.It must be stressed that the impacts of the dynamic factors unique to the playing
field for international business are felt in all relevant stages of evolving and
--- Content provided by FirstRanker.com ---
implementing business plans. The first broad stage of the process is to
formulate corporate guiding principles. As outlined below the first step in
formulating and implementing a set of business plans is to define the firm`s
--- Content provided by FirstRanker.com ---
guiding principles in the market place. The guiding principles should, among
other things, provide a long-term view of what the firm is striving to become
--- Content provided by FirstRanker.com ---
and provide direction to divisional and subsidiary managers vehicle, some firmsuse the decision circle which is simply an interrelated set of strategic choices
forced upon any firm faced with the internationalization of its markets. These
--- Content provided by FirstRanker.com ---
choices have to do with marketing, sourcing, labor, management, ownership,
finance, law, control, and public affairs. Here the first two marketing and
--- Content provided by FirstRanker.com ---
sourcing-constitute the basic strategies that encompass a firm`s initialconsiderations. Essentially, management is answering two questions: to whom
are we going to sell what, and from where and how will we supply that market?
--- Content provided by FirstRanker.com ---
We then have a series of input strategies-labor, management, ownership, and
financial. They are in their efforts to develop their own business plans. As an
--- Content provided by FirstRanker.com ---
obligation addressed essentially to the query, with what resources are we goingto implement the basic strategies? That is, where will we find the right people,
willingness to carry the risk, and the necessary funds? A third set of strategies-
--- Content provided by FirstRanker.com ---
legal and control-respond to the problem of how the firm is to structure itself of
implement the basic strategies, given the resources it can muster. A final
--- Content provided by FirstRanker.com ---
strategic area, public affairs, is shown as a basic strategy simply because itplaces a restraint on all other strategy choices.
--- Content provided by FirstRanker.com ---
Each strategy area contains a number of subsidiary strategy options. The
decision process that normally starts in the marketing strategy area is an iterative
--- Content provided by FirstRanker.com ---
one. As the decision maker proceeds around the decision circle, previousselected strategies must be readjusted. Only a portion of the possible feedback
adjustment loops is shown here.
--- Content provided by FirstRanker.com ---
Although these strategy areas are shown separately but they obviously do not
stand-alone. There must be constant reiteration as one moves around the
decision circle. The sourcing obviously influences marketing strategy, as well
--- Content provided by FirstRanker.com ---
as the reverse. The target market may enjoy certain preferential relationships
with other markets. That is, everything influences everything else. Inasmuch as
--- Content provided by FirstRanker.com ---
the number of options a firm faces is multiplied as it moves into internationalmarket, decision-making becomes increasingly complex the deeper the firm
becomes involved internationally. One is dealing with multiple currency, legal,
--- Content provided by FirstRanker.com ---
marketing, economic, political, and cultural systems. Geographic and
demographic factors differ widely. In fact, as one moves geographically,
--- Content provided by FirstRanker.com ---
virtually everything becomes a variable: there are few fixed factors.For our purposes here, a strategy is defined as an element in a consciously
devised overall plan of corporate development that, once made and
--- Content provided by FirstRanker.com ---
implemented, is difficult (i.e. costly) to change in the short run. By way of
contrast, an operational or tactical decision is one that sets up little or no
--- Content provided by FirstRanker.com ---
institutionalized resistance to making a different decision in the near future.Some theorists have differentiated among strategic, tactical, and operational,
with the first being defined as those decisions, that imply multi-year
--- Content provided by FirstRanker.com ---
commitments; a tactical decision, one that can be shifted in roughly a year`s
time; an operational decision, one subject to change in less that a year. In the
--- Content provided by FirstRanker.com ---
international context, we suggest that the tactical decision, as the phrase is usedhere, is elevated to the strategic level because of the rigidities in the international
environment not present in the purely domestic-for example, work force
--- Content provided by FirstRanker.com ---
planning and overall distribution decisions. Changes may be implemented
domestically in a few months, but if one is operating internationally, law,
--- Content provided by FirstRanker.com ---
contract, and custom may intervene to render change difficult unlessimplemented over several years.
SPECIAL DIFFICULTIES IN INTERNATIONAL BUSINESS
--- Content provided by FirstRanker.com ---
What make international business strategy different from the domestic are the
differences in the marketing environment. The important special problems in
--- Content provided by FirstRanker.com ---
international marketing are given below:1. POLITICAL AND LEGAL DIFFERENCES
The political and legal environment of foreign markets is different from that of
--- Content provided by FirstRanker.com ---
the domestic. The complexity generally increases as the number of countries inwhich a company does business increases. It should also be noted that the
political and legal environment is not the same in all provinces of many home
--- Content provided by FirstRanker.com ---
markets. For example, the political and legal environment is not exactly the
same in all the states of India.
--- Content provided by FirstRanker.com ---
2. CULTURAL DIFFERENCESThe cultural differences, is one of the most difficult problems in international
marketing. Many domestic markets, however, are also not free from cultural
--- Content provided by FirstRanker.com ---
diversity.
3. ECONOMIC DIFFERENCES
--- Content provided by FirstRanker.com ---
The economic environment may vary from country to country.4. DIFFERENCES IN THE CURRENCY UNIT
The currency unit varies from nation to nation. This may sometimes cause
--- Content provided by FirstRanker.com ---
problems of currency convertibility, besides the problems of exchange rate
fluctuations. The monetary system and regulations may also vary.
--- Content provided by FirstRanker.com ---
5. DIFFERENCES IN THE LANGUAGEAn international marketer often encounters problems arising out of the
differences in the language. Even when the same language is used in different
--- Content provided by FirstRanker.com ---
countries, the same words of terms may have different meanings. The language
problem, however, is not something peculiar to the international marketing. For
--- Content provided by FirstRanker.com ---
example: the multiplicity of languages in India.6. DIFFERENCES IN THE MARKETING INFRASTRUCTURE
The availability and nature of the marketing facilities available in different
--- Content provided by FirstRanker.com ---
countries may vary widely. For example, an advertising medium very effective
in one market may not be available or may be underdeveloped in another
--- Content provided by FirstRanker.com ---
market.7. TRADE RESTRICTIONS
A trade restriction, particularly import controls, is a very important problem,
--- Content provided by FirstRanker.com ---
which an international marketer faces.8. HIGH COSTS OF DISTANCE
When the markets are far removed by distance, the transport cost becomes high
--- Content provided by FirstRanker.com ---
and the time required for affecting the delivery tends to become longer.
Distance tends to increase certain other costs also.
--- Content provided by FirstRanker.com ---
9. DIFFERENCES IN TRADE PRACTICESTrade practices and customs may differ between two countries.
BENEFITS OF INTERNATIONAL BUSINESS
--- Content provided by FirstRanker.com ---
SURVIVAL
Because most of the countries are not as fortunate as the United States in terms
--- Content provided by FirstRanker.com ---
of market size, resources, and opportunities, they must trade with others tosurvive; Hong Kong, has historically underscored this point well, for without
food and water from china proper, the British colony would not have survived
--- Content provided by FirstRanker.com ---
along. The countries of Europe have had similar experience, since most
European nations are relatively small in size. Without foreign markets,
--- Content provided by FirstRanker.com ---
European firms would not have sufficient economies of scale to allow them tobe competitive with US firms. Nestle mentions in one of its advertisements that
its own country, Switzerland, lacks natural resources, forcing it to depend on
--- Content provided by FirstRanker.com ---
trade and adopt the geocentric perspective. International competition may not
be matter of choice when survival is at stake. However, only firms with
--- Content provided by FirstRanker.com ---
previously substantial market share and international experience could expandsuccessfully.
GROWTH OF OVERSEAS MARKETS
--- Content provided by FirstRanker.com ---
Developing countries, in spite of economic and marketing problems, are
excellent markets. According to a report prepared for the U.S. CONGRESS by
--- Content provided by FirstRanker.com ---
the U.S. trade representative, Latin America and Asia/Pacific are experiencingthe strongest economic growth. American markets cannot ignore the vast
potential of international markets. The world is more than four times larger than
--- Content provided by FirstRanker.com ---
the U.S. market. In the case of Amway corps., a privately held U.S.manufacturer of cosmetics, soaps and vitamins, Japan represents a larger market
than the United States.
--- Content provided by FirstRanker.com ---
SALES AND PROFIT
Foreign markets constitute a larger share of the total business of many firms that
--- Content provided by FirstRanker.com ---
have wisely cultivated markets aboard. Many large U.S. companies have donewell because of their overseas customers. IBM and Compaq, foe ex, sell more
computers aboard than at home. According to the US dept of commerce,
--- Content provided by FirstRanker.com ---
foreign profits of American firms rose at a compound annual rate of 10%
between 1982 and 1991, almost twice as fast as domestic profits of the same
--- Content provided by FirstRanker.com ---
companies.DIVERSIFICATION
Demand for mast products is affected by such cyclical factors as recession and
--- Content provided by FirstRanker.com ---
such seasonal factors as climate. The unfortunate consequence of these
variables is sales fluctuation, which can frequently be substantial enough to
--- Content provided by FirstRanker.com ---
cause lay offs of personnel. One way to diversify a companies` risk is toconsider foreign markets as a solution for variable demand. Such markets, even
out fluctuations by providing outlets for excess production capacity. Cold
--- Content provided by FirstRanker.com ---
weather, for instance may depress soft drink consumption. Yet not all countries
enter the winter season at the same time, and some countries are relatively warm
--- Content provided by FirstRanker.com ---
year round. Bird, USA, inc., a Nebraska manufacturer of go carts, and minicars, for promotional purposes has found that global selling has enabled the
company to have year round production. It may be winter in Nebraska but its
--- Content provided by FirstRanker.com ---
summer in the southern hemisphere-somewhere there is a demand and that
stabilizes the business.
--- Content provided by FirstRanker.com ---
INFLATION AND PRICE MODERATIONThe benefits of export are readily self-evident. Imports can also be highly
beneficial to a country because they constitute reserve capacity for the local
--- Content provided by FirstRanker.com ---
economy. Without imports, there is no incentive for domestic firms to moderate
their prices. The lack of imported product alternatives forces consumers to pay
more, resulting in inflation and excessive profits for local firms. This
--- Content provided by FirstRanker.com ---
development usually acts a s prelude to workers demand for higher wages,
further exacerbating the problem of inflation.
--- Content provided by FirstRanker.com ---
Import quotas imposed on Japanese automobiles in the 1980`s saved 46200 USproduction jobs but at a cost of $160,000 per job per year. This cost was a result
of the addition of $400 to the prices of US cars, and $1000 to the prices of
--- Content provided by FirstRanker.com ---
Japanese imports. This windfall for Detroit resulted in record high profits for
US automakers. Not only do trade restrictions depress price competition in the
--- Content provided by FirstRanker.com ---
short run, but they also can adversely affect demand for year to come.EMPLOYMENT
Trade restrictions, such as high tariffs caused by the 1930`s smoot-hawley bill,
--- Content provided by FirstRanker.com ---
which forced the average tariff rates across the board to climb above 60%,
contributed significantly to the great depression and have the potential to cause
--- Content provided by FirstRanker.com ---
wide spread unemployment again. Unrestricted trade on the other handimproves the world`s GNP and enhances employment generally for all nations.
--- Content provided by FirstRanker.com ---
Importing products and foreign ownership can provide benefits to a nation.
According to the institute for international Economics-a private, non- profit
--- Content provided by FirstRanker.com ---
research institute ? the growth of foreign ownership has not resulted in a loss ofjobs for Americans; and foreign firms have paid their American workers the
same, as have domestic firms.
--- Content provided by FirstRanker.com ---
20
--- Content provided by FirstRanker.com ---
15
--- Content provided by FirstRanker.com ---
10
Series1
--- Content provided by FirstRanker.com ---
5
--- Content provided by FirstRanker.com ---
0 1986-1990 1990-1994 1994-1998 1998-2002
--- Content provided by FirstRanker.com ---
STANDARDS OF LIVING
Trade affords countries and their citizen`s higher standards of living than other
--- Content provided by FirstRanker.com ---
wise possible. Without trade, product shortages force people to pay more forless, products taken for granted, such as coffee and bananas may become
unavailable overnight. Life in most countries would be much more difficult
--- Content provided by FirstRanker.com ---
were it not for the many strategic metals that must be imported. Trade also
makes it easier for industries to specialize and gain access to raw materials,
--- Content provided by FirstRanker.com ---
while at the same time fostering competition and efficiency. A diffusion ofinnovations across national boundaries is useful by-products of international
trade. A lack of such trade would inhibit the flow innovative ideas.
--- Content provided by FirstRanker.com ---
FRAMEWORK FOR ANALYSING INTERNATIONAL BUSINESS
ENVIRONMENT
--- Content provided by FirstRanker.com ---
Environmental analysis is defined as the process by which strategists monitorthe economic, governmental/legal, market/competitive, supplier/technological,
geographic, and social settings to determine opportunities and threats to their
--- Content provided by FirstRanker.com ---
firms.
Environmental diagnosis consists of managerial decisions made by analyzing
--- Content provided by FirstRanker.com ---
the significance of the data (opportunities and threats) of the environmentalanalysis.
The definition of environmental analysis given above has been made in the
--- Content provided by FirstRanker.com ---
context of the strategic management process for an existing firm. It is, however,
quite obvious that environmental analysis is the cornerstone of new business
--- Content provided by FirstRanker.com ---
opportunity analysis too.Indeed, today a much more greater emphasis is given than in the past to the fact
that environmental analysis is an essential prerequisite for strategic management
--- Content provided by FirstRanker.com ---
decision-making. For instance, in his recent editions of Marketing Management,
Philip Kotler, the world-renowned professor and author, describes Marketing
--- Content provided by FirstRanker.com ---
Environment Audit as the first component of a Marketing Audit, whereas in theearlier editions of this book, the definition of Marketing Audit does not have any
reference to the environment.
--- Content provided by FirstRanker.com ---
It is now unquestionably accepted that the prospects of a business depend notonly on its resources but also on the environment. An analysis of the strengths,
weaknesses, opportunities and threats (SWOT) is very much essential for the
--- Content provided by FirstRanker.com ---
business policy formulation.
Just as the life and success of an individual depend on his innate capability,
--- Content provided by FirstRanker.com ---
including physiological factors, traits and skills, to cope with the environment,the survival and success of a business firm depend on its innate strength ? the
resources as its command, including physical resources, financial resources, skill
--- Content provided by FirstRanker.com ---
and organization ? and its adaptability to the environment.
Every business enterprise, thus, consists of a set of internal factors and is
--- Content provided by FirstRanker.com ---
confronted with a set of external factors.The internal factors are generally regarded as controllable factors because the
company has control over these factors; it can alter or modify such factors as its
--- Content provided by FirstRanker.com ---
personnel, physical facilities, organization and functional means, such as the
marketing mix, to suit the environment.
--- Content provided by FirstRanker.com ---
The external factors, on the other hand, are by and large, beyond the control of acompany. The external or environmental factors such as the economic factors,
socio-cultural factors, government and legal factors, demographic factors, geo-
--- Content provided by FirstRanker.com ---
physical factors etc. are, therefore, generally regarded as uncontrollable factors.
As the environmental factors are beyond the control of a firm, its success will
--- Content provided by FirstRanker.com ---
depend to a very large extent on its adaptability to the environment, i.e. itsability to properly design and adjust the internal (the controllable) variables to
take advantage of the opportunities and to combat the threats in the
--- Content provided by FirstRanker.com ---
environment.
The business environment comprises a microenvironment and a macro
--- Content provided by FirstRanker.com ---
environment.MICRO ENVIRONMENT
The micro environment consists of the actors in the company`s immediate
--- Content provided by FirstRanker.com ---
environment that effect the performance of the company. These include the
suppliers, marketing intermediaries, competitors, customers, and publics. The
macro environment consists of the larger societal forces that affect all the actors
--- Content provided by FirstRanker.com ---
in the company`s micro environment namely, the demographic, economic,
natural, technological, political and cultural forces.
--- Content provided by FirstRanker.com ---
It is quite obvious that the micro environmental factors are more intimatelylinked with the company than the macro factors. The micro forces need not
necessarily affect all the firms in a particular industry in the same way. Some of
--- Content provided by FirstRanker.com ---
the micro factors may be particular to a firm. For example, a firm, which
depends on a supplier, may have a supplier environment, which is entirely
--- Content provided by FirstRanker.com ---
different from that of a firm whose supply source is different. When competingfirms in an industry have the same microelements, the relative success of the
firms depends on their relative effectiveness in dealing with these elements.
--- Content provided by FirstRanker.com ---
Suppliers
An important force in the microenvironment of a company is the supplier, i.e.,
--- Content provided by FirstRanker.com ---
those who supply the inputs like raw materials and components to the company.The importance of reliable source/sources of supply to the smooth functioning
of the business is obvious. Uncertainty regarding the supply or other supply
--- Content provided by FirstRanker.com ---
constraints often compels companies to maintain high inventories causing cost
increases. It has been pointed out that factories in India maintain indigenous
--- Content provided by FirstRanker.com ---
stocks of 3-4 months and imported stocks of 9 months as against an average of afew hours to two weeks in Japan.
Because of the sensitivity of the supply, many companies give high importance
--- Content provided by FirstRanker.com ---
to vendor development. Vertical integration, where feasible, helps solve the
supply problem.
--- Content provided by FirstRanker.com ---
It is very risky to depend on a single because a strike, lock out or any otherproduction problem with that supplier may seriously affect the company.
Similarly, a change in the attitude or behavior of the supplier may also affect the
--- Content provided by FirstRanker.com ---
company. Hence, multiple sources of supply often help reduce such risks.
The supply management assumes more importance in a scarcity environment.
Company purchasing agents are learning how to wine and dine suppliers to
--- Content provided by FirstRanker.com ---
obtain favorable treatment during periods of shortages. In other words, the
purchasing department might have to market itself to suppliers.
--- Content provided by FirstRanker.com ---
CUSTOMERSAs it is often, exhorted, the major task of a business is to create and sustain
customers. A business exists only because of its customers. Monitoring the
--- Content provided by FirstRanker.com ---
customer sensitivity is, therefore, a prerequisite for the business success.
A company may have different categories of consumers like individuals,
--- Content provided by FirstRanker.com ---
households, industries and other commercial establishments, and governmentand other institutions. For example, the customers of a tyre company may
include individual automobile owners, automobile manufacturers, public sector
--- Content provided by FirstRanker.com ---
transport undertakings and other transport operators.
Depending on a single customer is often too risky because it may place the
--- Content provided by FirstRanker.com ---
company in a poor bargaining position, apart from the risks of losing businessconsequent to the winding up of business by the customer or due to the
customer`s switching over the competitors of the company.
--- Content provided by FirstRanker.com ---
The choice of the customer segments should be made by considering a number
of factors including the relative profitability, dependability, stability of demand,
--- Content provided by FirstRanker.com ---
growth prospects and the extent of competition.COMPETITORS
A firm`s competitors include not only the other firms, which market the same or
--- Content provided by FirstRanker.com ---
similar products, but also all those who compete for the discretionary income of
the consumers. For example, the competition for a company`s televisions may
--- Content provided by FirstRanker.com ---
come not only from other T.V. manufacturers but also from two-wheelers,refrigerators, cooking ranges, stereo sets and so on and from firms offering
savings and investment schemes like banks, Unit Trust of India, companies
--- Content provided by FirstRanker.com ---
accepting public deposits or issuing shares or debentures etc. This competition
among these products may be described as desire competition as the primary
task here is to influence the basic desire of the consumer. Such desire
--- Content provided by FirstRanker.com ---
competition is generally very high in countries characterized by limited
disposable incomes and many unsatisfied desires (and, of course, with many
--- Content provided by FirstRanker.com ---
alternatives for spending/investing the disposable income).If the consumer decides to spend his discretionary income on recreation (or
recreation cum education) he will still confronted with a number of alternatives
--- Content provided by FirstRanker.com ---
choose from like T.V., stereo, two-in-one, three ?in-one etc. The competition
among such alternatives, which satisfy a particular category of desire, is called
--- Content provided by FirstRanker.com ---
generic competition.If the consumer decides to go in for a T.V. the next question is which form of
--- Content provided by FirstRanker.com ---
the T.V. ? black and white or colour, with remote-control or without it etc. In
other words, there is a product form competition. Finally the consumer
--- Content provided by FirstRanker.com ---
encounters the brand competition i.e., the competition between the differentbrands of the same product form.
An implication of these different demands is that a marketer should strive to
--- Content provided by FirstRanker.com ---
create primary and selective demand for his products.
MARKETING INTERMEDIARIES
--- Content provided by FirstRanker.com ---
The immediate environment of a company may consist of a number ofmarketing intermediaries which are firms that aid the company in promoting,
selling and distributing its goods to final buyers.
--- Content provided by FirstRanker.com ---
The marketing intermediaries include middlemen such as agents and merchants
who help the company find customers or close sales with them, physical
--- Content provided by FirstRanker.com ---
distribution firms which assist the company in stocking and moving goodsform their origin to their destination such as warehouses and transportation
firms; marketing service agencies which assist the company in targeting and
--- Content provided by FirstRanker.com ---
promoting its products to the right markets such as advertising agencies,
marketing research firms, media firms and consulting firms; and financial
--- Content provided by FirstRanker.com ---
intermediaries which finance marketing activities and insure business risks.Marketing intermediaries are vital links between the company and the final
consumers. A dislocation or disturbance of this link, or a wrong choice of the
--- Content provided by FirstRanker.com ---
link, may cost the company very heavily. Retail chemists and druggists in Indiaonce decided to boycott the products of a leading company on some issue such
as poor retail margin. This move for collective boycott was, however, objected
--- Content provided by FirstRanker.com ---
to by the MRTP commission; but for this company would, perhaps, have been in
trouble.
--- Content provided by FirstRanker.com ---
DEMOCRATIC
A company may encounter certain publics in its environment. A public is any
--- Content provided by FirstRanker.com ---
group that has an actual or potential interest in or impact on an organisation`s
ability to achieve its interests. Media publics, citizens action publics and local
--- Content provided by FirstRanker.com ---
publics are some examples.For example, one of the leading companies in India was frequently under attack
by the media public, particularly by a leading daily, which was allegedly bent on
--- Content provided by FirstRanker.com ---
bringing down the share prices of the company by tarnishing its image. Such
exposures or campaigns by the media might even influence the government
--- Content provided by FirstRanker.com ---
decisions affecting the company. The local public also affects many companies.Environmental pollution is an issue often taken up by a number of local publics.
Actions by local publics on the issue have caused some companies to suspend
--- Content provided by FirstRanker.com ---
operations and/or take pollution abatement measures.
GROWTH OF CONSUMER PUBLIC IS AN
--- Content provided by FirstRanker.com ---
IMPORTANTDEVELOPMENT AFFECTING BUSINESS.
It is wrong to think that all publics are threats to business. Some of the actions
--- Content provided by FirstRanker.com ---
of the publics may cause problems for companies. However, some publics are
an opportunity for the business. Some businessmen, for example, regard
--- Content provided by FirstRanker.com ---
consumerism as an opportunity for the business. The media public may be usedto disseminate useful information. Similarly, fruitful cooperation between a
company and the local publics may be established for the mutual benefit of the
--- Content provided by FirstRanker.com ---
company and the local community.MACRO ENVIRONMENT
As stated earlier, a company and the forces in its microenvironment operate in a
--- Content provided by FirstRanker.com ---
larger macro environment of forces that shape opportunities and pose threats to
the company. The macro forces are, generally, more uncontrollable than the
--- Content provided by FirstRanker.com ---
micro forces. A sketch picture of the important macro-environmental forces isgiven below.
ECONOMIC ENVIRONMENT
--- Content provided by FirstRanker.com ---
Economic conditions, economic policies and the economic system are the
important external factors that constitute the economic environment of a
--- Content provided by FirstRanker.com ---
business.The economic conditions of a country-for example, the nature of the economy,
the stage of development of the economy, economic resources, the level of
--- Content provided by FirstRanker.com ---
income, the distribution of income and assets, etc- are among the very important
determinants of business strategies.
--- Content provided by FirstRanker.com ---
In a developing country, the low income may be the reason for the very lowdemand for a product. The sale of a product for which the demand is income-
elastic naturally increases with an increase in income. But a firm is unable to
--- Content provided by FirstRanker.com ---
increase the purchasing power of the people to generate a higher demand for its
product. Hence, it may have to reduce the price of the product to increase the
--- Content provided by FirstRanker.com ---
sales. The reduction in the cost of production may have to be effected tofacilitate price reduction. It may even be necessary to invent or develop a new
low-cost product to suit the low-income market. Thus Colgate designed a
--- Content provided by FirstRanker.com ---
simple, hand-driven, inexpensive ($10) washing machine for low-income buyers
in less developed countries. Similarly, the National Cash Register Company
--- Content provided by FirstRanker.com ---
took an innovative step backward by developing a crank-operated cash registerthat would sell at half the cost of a modern cash register and this was well
received in a number of developing countries.
--- Content provided by FirstRanker.com ---
In countries where investment and income are steadily and rapidly rising,business prospects are generally bright, and further investments are encouraged.
There are a number of economists and businessmen who feel that the developed
--- Content provided by FirstRanker.com ---
countries are no longer worthwhile propositions for investment because these
economies have reached more or less saturation levels in certain respects.
--- Content provided by FirstRanker.com ---
In developed economies, replacement demand accounts for a considerable partof the total demand for many consumer durables whereas the replacement
demand is negligible in the developing economies.
--- Content provided by FirstRanker.com ---
The economic policy of the government, needless to say, has a very great impact
on business. Some types or categories of business are favorably affected by
--- Content provided by FirstRanker.com ---
government policy, some adversely affected, while it is neutral in respect ofothers. For example, a restrictive import policy, or a policy of protecting the
home industries, may greatly help the import-competing industries.
--- Content provided by FirstRanker.com ---
Similarly, an industry that falls within the priority sector in terms of the
government policy may get a number of incentives and other positive support
--- Content provided by FirstRanker.com ---
from the government, whereas those industries which are regarded as inessentialmay have the odds against them.
In India, the government`s concern about the concentration of economic power
--- Content provided by FirstRanker.com ---
restricted the role of the large industrial houses and foreign concerns to the core
sector, the heavy investment sector, the export sector and backward regions.
--- Content provided by FirstRanker.com ---
The monetary and fiscal policies, by the incentives and disincentives they offerand by their neutrality, also affect the business in different ways.
An industrial undertaking may be able to take advantage of external economies
--- Content provided by FirstRanker.com ---
by locating itself in a large city; but the Government of India`s policy was to
discourage industrial location in such places and constrain or persuade industries
--- Content provided by FirstRanker.com ---
undertaking, a backward area location may have many disadvantages. However,the incentives available for units located in these backward areas many
compensate them for these disadvantages, at least to some extent.
--- Content provided by FirstRanker.com ---
According to the industrial policy of the Government of India until July 1991,the development of 17 of the most important industries were reserved for the
state. In the development of another 12 major industries, the state was to play a
--- Content provided by FirstRanker.com ---
dominant role. In the remaining industries, co-operative enterprises, joint sector
enterprises and small scale units were to get preferential treatment over large
--- Content provided by FirstRanker.com ---
entrepreneurs in the private sector. The government policy, thus limited thescope of private business. However, the new policy ushered in since July 1991
has wide opened many of the industries for the private sector.
--- Content provided by FirstRanker.com ---
The scope of international business depends, to a large extent, on the economic
system. At one end, there are the free market economies or capitalist
--- Content provided by FirstRanker.com ---
economies, and at the other end are the centrally planned economies orcommunist countries. In between these two are the mixed economies. Within
the mixed economic system itself, there are wide variations.
--- Content provided by FirstRanker.com ---
The freedom of private enterprise is the greatest in the free market economy,
which is characterized by the following assumptions:
--- Content provided by FirstRanker.com ---
(i)The factors of production (labor, land, capital) are privately owned,
and production occurs at the initiative of the private enterprise.
--- Content provided by FirstRanker.com ---
(ii)
Income is received in monetary form by the sale of services of the
--- Content provided by FirstRanker.com ---
factors of production and from the profits of the private enterprise.(iii)
Members of the free market economy have freedom of choice in so
--- Content provided by FirstRanker.com ---
far as consumption, occupation, savings and investment are
concerned.
--- Content provided by FirstRanker.com ---
(iv)The free market economy is not planned controlled or regulated by
the government. The government satisfies community or collective
--- Content provided by FirstRanker.com ---
wants, but does not compete with private firms, nor does it tell the
people where to work or what to produce.
--- Content provided by FirstRanker.com ---
The completely free market economy, however, is an abstract system rather thana real one. Today, even the so-called market economies are subject to a number
of government regulations. Countries like the United States, Japan, Australia,
--- Content provided by FirstRanker.com ---
Canada and member countries of the EEC are regarded as market economies.The communist countries have, by and large, a centrally planned economic
system. Under the rule of a communist or authoritarian socialist government,
--- Content provided by FirstRanker.com ---
the state owns all the means of production, determines the goals of production
and controls the economy according to a central master plan. There is hardly
--- Content provided by FirstRanker.com ---
any consumer sovereignty in a centrally planned economy, unlike in the freemarket economy. The consumption pattern in a centrally planned economy is
dictated by the state.
--- Content provided by FirstRanker.com ---
China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland etc., had
centrally planned economies. However, recently several of these countries have
--- Content provided by FirstRanker.com ---
discarded communist system and have moved towards the market economy.In between the capitalist system and the centrally planned system falls the
system of the mixed economy, under which both the public and private sectors
--- Content provided by FirstRanker.com ---
co-exist, as in India. The extent of state participation varies widely between the
mixed economies. However, in many mixed economies, the strategic and other
--- Content provided by FirstRanker.com ---
nationally very important industries are fully owned or dominated by the state.The economic system, thus, is a very important determinant of the scope of
private business. The economic system and policy are, therefore, very important
--- Content provided by FirstRanker.com ---
external constraints on business.
POLITICAL AND LEGAL ENVIRONMENT
--- Content provided by FirstRanker.com ---
Political and government environment has close relationship with the economicsystem and economic policy. For example, the communist countries had a
centrally planned economic system. In most countries, apart from those laws
--- Content provided by FirstRanker.com ---
that control investment and related matters, there are a number of laws that
regulate the conduct of the business. These laws cover such matters as standards
--- Content provided by FirstRanker.com ---
of products, packaging, promotion etc.In many countries, with a view to protecting consumer interests, regulations
have become stronger. Regulations to protect the purity of the environment and
--- Content provided by FirstRanker.com ---
preserve the ecological balance have assumed great importance in manycountries.
Some governments specify certain standards for the products (including
--- Content provided by FirstRanker.com ---
packaging) to be marketed in the country; some even prohibit the marketing of
certain products. In most nations, promotional activities are subject to various
--- Content provided by FirstRanker.com ---
types of controls. Media advertising is not permitted in Libya. SeveralEuropean countries restrain the use of children in commercial advertisements.
In a number of countries, including India, the advertisement of alcoholic liquor
--- Content provided by FirstRanker.com ---
is prohibited. Advertisements, including packaging, of cigarettes must carry the
statutory warning that cigarette smoking is injurious to health. Similarly,
--- Content provided by FirstRanker.com ---
advertisements of baby food must necessarily inform the potential buyer thatbreast-feeding in the best. In countries like Germany, product comparison
advertisements and the use of superlatives like best` or excellent` in
--- Content provided by FirstRanker.com ---
advertisements is not allowed In the United States, the Federal Trade
Commission is empowered to require a company to provide the quality,
--- Content provided by FirstRanker.com ---
performance or comparative prices of its products.What is being asked of the drug industry and of American business in general
is a fuller disclosure of the relevant facts about products. For drugs, food
--- Content provided by FirstRanker.com ---
additives, some cosmetic preparations, and so forth, a full disclosure requires
more knowledge of the long-range side effects of materials ingested into the
--- Content provided by FirstRanker.com ---
complex human body. For American industry as a whole, greater candour hasbeen called for under such legislation as Truth in Lending and Fair Packaging
Act, under administrative decrees such as the warning requirement on cigarette
--- Content provided by FirstRanker.com ---
packages and advertising, under the threats of private damage suits using the
common-law concepts of warranty, and under voluntary programmes such as
--- Content provided by FirstRanker.com ---
unit pricing and listing nutritional content of foods. The increasing complexityof products and the variety of product choices suggest further moves away from
caveat emptor` or let the buyer beware` doctrines, moves which on the whole
--- Content provided by FirstRanker.com ---
should prove a welcome although sometimes inconvenient challenge forbusiness.
There are a host of statutory controls on business in India. If the MRTP
--- Content provided by FirstRanker.com ---
companies wanted to expand their business substantially, they had to convince
the government that such expansion was in the public interest. Indeed, the
--- Content provided by FirstRanker.com ---
Government in India has an all-pervasive and predominantly restrictiveinfluence over various aspects of business, e.g, industrial licensing which
decides location, capacity and process; import licensing for machinery and
--- Content provided by FirstRanker.com ---
materials; size and price of capital issue; loan finance; pricing; managerial
remuneration; expansion plans; distribution restrictions and a host of other
--- Content provided by FirstRanker.com ---
enactments. Therefore, a considerable part of attention of a Chief Executive andhis senior colleagues has to be devoted to a continuous dialogue with various
government agencies to ensure growth and profitability within the framework of
--- Content provided by FirstRanker.com ---
controls and restraints.
Many countries today have laws to regulate competition in the public interest.
--- Content provided by FirstRanker.com ---
Elimination of unfair competition and dilution of monopoly power are theimportant objectives of these regulations. In India, the monopolistic
undertakings, dominants undertakings and large industrial houses are subject to
--- Content provided by FirstRanker.com ---
a number of regulations which prevent the concentration of economic power to
the common detriment. The MRTP Act also controls monopolistic, restrictive
--- Content provided by FirstRanker.com ---
and unfair trade practices which are prejudicial to public interest. Suchregulations brighten the prospects of small and new firms. They also increase
the scope of some of the existing firms to venture into new areas of business.
--- Content provided by FirstRanker.com ---
The special privileges available to the small scale sector have also contributed to
the phenomenal success of the Nirma.
--- Content provided by FirstRanker.com ---
Certain changes in government policies such as the industrial policy, fiscalpolicy, tariff policy etc. may have profound impact on business. Some policy
developments create opportunities as well as threats. In other words, a
--- Content provided by FirstRanker.com ---
development which brightens the prospects of some enterprises may pose a
threat to some others. For example, the industrial policy liberalizations in India,
particularly around the mid-eighties have opened up new opportunities and
--- Content provided by FirstRanker.com ---
threats. They have provided a lot of opportunities to a large number of
enterprises to diversify and to make their product mix better. But they have also
--- Content provided by FirstRanker.com ---
given rise to serious threat to many existing products by way of increasedcompetitions; many seller`s markets have given way to buyer`s markets. Even
products which were seldom advertised have come to be promoted very heavily.
--- Content provided by FirstRanker.com ---
This battle for the market has provided a splendid opportunity for the advertising
industry. Advertising billing has been increasing substantially.
--- Content provided by FirstRanker.com ---
That an estimated cost savings of about Rs. 200 crores per year have accrued tothe Reliance Industries as a result of the changes in duties on some of the
material inputs used by them is just an indication of the tremendous impact the
--- Content provided by FirstRanker.com ---
fiscal and tariff policies can have on the business.
SOCIO-CULTURAL ENVIRONMENT
--- Content provided by FirstRanker.com ---
The socio-cultural fabric is an important environmental factor that should beanalysed while formulating business strategies. The cost of ignoring the
customs, traditions, taboos, tastes and preferences, etc., of people could be very
--- Content provided by FirstRanker.com ---
high.
The buying and consumption habits of the people, their language, beliefs and
--- Content provided by FirstRanker.com ---
values, customs and traditions, tastes and preferences, education are all factorsthat affect business.
For a business to be successful, its strategy should be the one that is appropriate
--- Content provided by FirstRanker.com ---
in the socio-cultural environment. The marketing mix will have to be so
designed as best to suit the environmental characteristics of the market. In
--- Content provided by FirstRanker.com ---
Thailand, Helene Curtis switched to black shampoo because Thai women feltthat it made their hair look glossier. Nestle, a Swiss multinational company,
today brews more than forty varieties of instant coffee to satisfy different
--- Content provided by FirstRanker.com ---
national tastes.
Even when people of different cultures use the same basic product, the mode of
consumption, conditions of use, purpose of use or the perceptions of the product
--- Content provided by FirstRanker.com ---
attributes may vary so much so that the product attributes method of
presentation, positioning, or method of promoting the product may have to be
--- Content provided by FirstRanker.com ---
varied to suit the characteristics of different markets. For example, the two mostimportant foreign markets for Indian shrimp are the U.S and Japan. The product
attributes for the success of the product in these two markets differ. In the U.S.
--- Content provided by FirstRanker.com ---
market, correct weight and bacteriological factors are more important rather than
eye appeal, colour, uniformity of size and arrangement of the shrimp which are
--- Content provided by FirstRanker.com ---
very important in Japan. Similarly, the mode of consumption of tuna, anotherseafood export from India, differs between the U.S. and European countries.
Tuna fish sandwiches, an American favourite which accounts for about 80 per
--- Content provided by FirstRanker.com ---
cent of American tuna consumption, have little appeal in high tuna consumption
European countries where people eat it right from the can. A very interesting
--- Content provided by FirstRanker.com ---
example is that of the Vicks Vaporub, the popular pain balm, which is used as amosquito repellant in some of the tropical areas.
The differences in languages sometimes pose a serious problem, even
--- Content provided by FirstRanker.com ---
necessitating a change in the brand name. Preett was, perhaps, a good brand
name in India, but it did not suit in the overseas market; and hence it was
--- Content provided by FirstRanker.com ---
appropriate to adopt Prestige` for the overseas markets. Chevrolet`s brandname Nova` in Spanish means it doesn`t go. In Japanese, General Motors`
Body by Fisher translates as corpse by Fisher. In Japanese, again, 3M`s
--- Content provided by FirstRanker.com ---
slogan sticks like crazy translates as sticks foolishly. In some languages,
Pepsi-Cola`s slogan come alive translates as come out of the grave.
--- Content provided by FirstRanker.com ---
The values and beliefs associated with colour vary significantly betweendifferent cultures. Blue, considered feminine and warm in Holland, is regarded
as masculine and cold in Sweden. Green is a favourite colour in the Muslim
--- Content provided by FirstRanker.com ---
world; but in Malaysia, it is associated with illness. White indicates death and
mourning in China and Korea; but in some countries, it expresses happiness and
is the colour of the wedding dress of the bride. Red is a popular colour in the
--- Content provided by FirstRanker.com ---
communist countries; but many African countries have a national distaste for red
colour.
--- Content provided by FirstRanker.com ---
Social inertia and associated factors come in the way of the promotion of certainproducts, services or ideas. We come across such social stigmas in the
marketing of family planning ideas, use of bio-gas for cooking, etc. In such
--- Content provided by FirstRanker.com ---
circumstances, the success of marketing depends, to a very large extent, on the
success in changing social attitudes or value systems.
--- Content provided by FirstRanker.com ---
There are also a number of demographic factors, such as the age, and sexcomposition of population, family size, habitat, religion, etc., which influence
the business.
--- Content provided by FirstRanker.com ---
While dealing with the social environment, we must also consider the social
environment of the business which encompasses its social responsibility and the
--- Content provided by FirstRanker.com ---
alertness or vigilance of the consumers and of society at large.The societal environment has assumed great importance in recent years. As
Barker observes, business traditionally has been held responsible for quantities-
--- Content provided by FirstRanker.com ---
for the supply of goods and jobs, for costs, prices, wages, hours of works, and
for standards of living. Today, however, business is being asked to take a
--- Content provided by FirstRanker.com ---
responsibility for the quality of life in our society. The expectation is thatbusiness- in addition to its traditional accountability for economic performance
and results ? will concern itself with the health of the society, that it will come
--- Content provided by FirstRanker.com ---
up with the cures for the ills that currently beset us and, indeed, will find ways
of anticipating and preventing future problems in these areas.
--- Content provided by FirstRanker.com ---
As Stern succinctly points out, the more educated the society becomes, themore interdependent it becomes, and the more discretionary the use of its
resources, the more marketing will become enmeshed in social issues.
--- Content provided by FirstRanker.com ---
Marketing personnel are at interface between company and society. In this
position, they have the responsibility not merely for designing a competitive
marketing strategy, but for sensitizing business to the social, as well as the
--- Content provided by FirstRanker.com ---
product demand of society.
DEMOGRAPHIC ENVIRONMENT
--- Content provided by FirstRanker.com ---
Demographic factors like the size, growth rate, age composition, sexcomposition, etc. of the population, family size, economic stratification of the
population, educational levels, languages, caste, religion etc. Are all factors that
--- Content provided by FirstRanker.com ---
are relevant to business?
Demographic factors such as size of the population, population growth rate, age
--- Content provided by FirstRanker.com ---
composition, life expectancy, family size, spatial dispersal, occupational status,employment pattern etc, affect the demand for goods and services. Markets with
growing population and income are growth markets. But the decline in the birth
--- Content provided by FirstRanker.com ---
rates in countries like the United States have affected the demand for baby
products. Johnson and Johnson have overcome this problem by repositioning
--- Content provided by FirstRanker.com ---
their products like baby shampoo and baby soap, promoting them also to theadult segment, particularly to the females.
A rapidly increasing population indicates a growing demand for many products.
--- Content provided by FirstRanker.com ---
High population growth rate also indicates an enormous increase in labour
supply. When the Western countries experienced the industrial revolution, they
--- Content provided by FirstRanker.com ---
had the problem of labour supply, for the population growth rate wascomparatively low. Labour shortage and rising wages encouraged the growth of
labour-saving technologies and automation. But most developing countries of
--- Content provided by FirstRanker.com ---
today are experiencing a population explosion and a situation of labour surplus.
The governments of developing countries, therefore, encourage labour intensive
--- Content provided by FirstRanker.com ---
methods of production. Capital intensive methods, automation and evenrationalization are apposed by labour and many sociologists, politicians and
economists in these countries. The population growth rate, thus, is an important
--- Content provided by FirstRanker.com ---
environmental factor which affects business. Cheap labour and a growing
market have encouraged many multinational corporations to invest in
--- Content provided by FirstRanker.com ---
developing countries.The occupational and spatial mobilities of population have implications for
business. If labour is easily mobile between different occupations and regions,
--- Content provided by FirstRanker.com ---
its supply will be relatively smooth, and this will affect the wage rate.If labour is highly heterogeneous in respect of language, caste and religion,
ethnicity, etc., personnel management is likely to become a more complex task.
--- Content provided by FirstRanker.com ---
The heterogeneous population with its varied tastes, preferences, beliefs,
temperaments, etc. gives rise to differing demand patterns and calls for different
--- Content provided by FirstRanker.com ---
marketing strategies.References to a number of demographic factors that have business implications
have already been made under socio-cultural environment.
--- Content provided by FirstRanker.com ---
NATURAL ENVIRONMENT
Geographical and ecological factors, such as natural resource endowments,
--- Content provided by FirstRanker.com ---
weather and climatic conditions, topographical factors, locational aspects in theglobal context, port facilities, etc., are all relevant to business.
Differences in geographical conditions between markets may sometimes call for
--- Content provided by FirstRanker.com ---
changes in the marketing mix. Geographical and ecological factors also
influence the location of certain industries. For example, industries with high
--- Content provided by FirstRanker.com ---
material index tend to be located near the raw material sources. Climatic andweather conditions affect the location of certain industries like the cotton textile
industry. Topographical factors may, affect the demand pattern. For example, in
--- Content provided by FirstRanker.com ---
hilly areas with a difficult terrain, jeeps may be in greater demand than cars.
Ecological factors have recently assumed great importance. The depletion of
--- Content provided by FirstRanker.com ---
natural resources, environmental pollution and the disturbance of the ecologicalbalance has caused great concern. Government policies aimed at the
preservation of environmental purity and ecological balance, conservation of
--- Content provided by FirstRanker.com ---
non-replenishale resources, etc., have resulted in additional responsibilities and
problems for business, and some of these have the effect of increasing the cost
--- Content provided by FirstRanker.com ---
of production and marketing. Externalities have become an important problemthe business has to confront with.
PHYSICAL AND TECHNOLOGICAL ENVIRONMENT
--- Content provided by FirstRanker.com ---
Physical Factors, such as geographical factors, weather and climatic conditionsmay call for modifications in the product, etc., to suit the environment because
these environmental factors are uncontrollable. For example, Esso adapted its
--- Content provided by FirstRanker.com ---
gasoline formulations to suit the weather conditions prevailing in different
markets.
--- Content provided by FirstRanker.com ---
Business prospects depend also on the availability of certain physical facilities.Some products, like many consumer durables, have certain use facility
characteristics. The sale of television sets, for example, is limited by the extent
--- Content provided by FirstRanker.com ---
of the coverage of the telecasting. Similarly, the demand for refrigerators and
other electrical appliances is affected by the extent of electrification and the
--- Content provided by FirstRanker.com ---
reliability of power supply. The demand for LPG gas stoves is affected by therate of growth of gas connections.
Technological factors sometimes pose problems. A firm, which is unable to
--- Content provided by FirstRanker.com ---
cope with the technological changes, may not survive. Further, the differing
technological environment of different markets or countires may call for product
--- Content provided by FirstRanker.com ---
modifications. For example, many appliances and instruments in the U.S.A. aredesigned for 110 volts but this needs to be converted into 240 volts in countries
which have that power system. Technological developments may increase the
--- Content provided by FirstRanker.com ---
demand for some existing products. For example, voltage stabilisers help
increase the sale of electrical appliances in markets characterised by frequent
--- Content provided by FirstRanker.com ---
voltage fluctuations I power supply. However, the introduction of TV`s, Fridgesetc, with in built voltage stabilizer adversely affects the demand for voltage
stabilizers.
--- Content provided by FirstRanker.com ---
Advances in the technologies of food processing and preservation, packaging
etc., have facilitated product improvements and introduction of new products
--- Content provided by FirstRanker.com ---
and have considerably improved the marketability of products.The television has added a new dimension to product promotion. The advent of
TV and VCP/VCR has, however, adversely affected the cinema theatres.
--- Content provided by FirstRanker.com ---
The fast changes in technologies also create problems for enterprises as theyrender plants and products obsolete quickly. Product-market-technology matrix
generally has a much shorter life today than in the past. It is particularly so in
--- Content provided by FirstRanker.com ---
the international marketing context. It may be interesting to note that almost
half of Hindustan Lever`s 1980 export business did not exist in 1987. In fact, as
--- Content provided by FirstRanker.com ---
much as a third of the company`s 1987 turnover was from products and markets,which were under three years of age.
INTERNATIONAL ENVIRONMENT
--- Content provided by FirstRanker.com ---
The international environment is very important from the point of view of
certain categories of business. It is particularly important for industries directly
--- Content provided by FirstRanker.com ---
depending on imports or exports and import-competing industries. For example,a recession in foreign markets, or the adoption of protectionist policies by
foreign nations, may create difficulties for industries depending on exports. On
--- Content provided by FirstRanker.com ---
the other hand, a boom in the export market or a relaxation of the protectionist
policies may help the export-oriented industries. A liberalization of imports
--- Content provided by FirstRanker.com ---
may help some industries which use imported items, but may adversely affectimport-competing industries.
It has been observed that major international developments have their spread
--- Content provided by FirstRanker.com ---
effects on domestic business. The Great Depression in the United States sent its
shock waves to a number of other countries. Oil price hikes have seriously
--- Content provided by FirstRanker.com ---
affected a number of economies. These hikes have increased the cost ofproduction and the prices of certain products, such as fertilizers, synthetic fibres,
etc. The high oil price has led to an increase in the demand for automobile
--- Content provided by FirstRanker.com ---
models that economise energy consumption. The demand for natural fibres
increased because of the oil crisis.
--- Content provided by FirstRanker.com ---
The oil crisis also prompted some companies to resort to demarketing.Demarketing refers to the process of cutting consumer demand for a product
back to level that can be supplied by the firm. Some oil companies-the Indian
--- Content provided by FirstRanker.com ---
Oil Corporation, for example-have publicized tips o how to cut oil consumption.
When the fertilizer price shot up following the oil crisis, some fertilizer
companies appealed to the farmers to use fertilizers only for important and
--- Content provided by FirstRanker.com ---
remunerative crops. The importance of natural manure like compost as a
substitute for chemical fertilizers was also emphasized.
--- Content provided by FirstRanker.com ---
The oil crisis led to a reorientation of the Government of India`s energy policy.Such developments affect the demand, consumption and investment pattern.
A good export market enables a firm to develop a more profitable product mix
--- Content provided by FirstRanker.com ---
and to consolidate its position in the domestic market. Many companies now
plan production capacities and investment taking into account also the foreign
--- Content provided by FirstRanker.com ---
markets. Export marketing facilitates the attainment of optimum capacityutilization; a company may be able to mitigate the effects of domestic recession
by exporting. However, a company which depends on the export market to a
--- Content provided by FirstRanker.com ---
considerable extent has also to face the impact of adverse developments in
foreign markets.
--- Content provided by FirstRanker.com ---
SUMMARYInternational business is a necessity in today`s world. The gains for greater
awareness and knowledge of international business fare immense for nations,
--- Content provided by FirstRanker.com ---
multi-national enterprises, trading companies, exporters and even individuals.
To go global, the first step would be to understand the international business
--- Content provided by FirstRanker.com ---
environment. International business in nothing but extending the areas ofactivities of business across the boundaries. We have discussed about the
importance of understanding international business environment in detail. The
--- Content provided by FirstRanker.com ---
concepts of microenvironment and macro environment with reference to the
political, legal, economical and cultural background are also discussed.
--- Content provided by FirstRanker.com ---
Understanding international business environment requires greater research andinformation. The fulfillment of this research could happen with greater
understanding of the framework for analyzing the international business
--- Content provided by FirstRanker.com ---
environment.
REVIEW QUESTIONS
1. Define international business and discuss the scope of international
--- Content provided by FirstRanker.com ---
business
2. What is meant by international business environment? Discuss briefly
--- Content provided by FirstRanker.com ---
the importance of understanding the international business environment.3. Discuss the concepts of micro and macro environment
4. Explain the framework for analyzing the international business
--- Content provided by FirstRanker.com ---
environment in detail.
5. Companies cannot bypass the knowledge of operations of businesses
--- Content provided by FirstRanker.com ---
internationally ? Comment.UNIT II
Structure:
--- Content provided by FirstRanker.com ---
1.Introduction
2.0
--- Content provided by FirstRanker.com ---
Objective
3.0
--- Content provided by FirstRanker.com ---
Presentation of Contents3.1
International Economic Environment
--- Content provided by FirstRanker.com ---
3.2
WTO
--- Content provided by FirstRanker.com ---
3.3United Nations Conference on Trade And Development
3.4
--- Content provided by FirstRanker.com ---
International Monetary Fund (IMF)
3.5
--- Content provided by FirstRanker.com ---
World Bank4.0
Summary
--- Content provided by FirstRanker.com ---
5.0
Self Assessment Questions
--- Content provided by FirstRanker.com ---
6.0Suggested Reading
--- Content provided by FirstRanker.com ---
1.
Introduction
--- Content provided by FirstRanker.com ---
The economic environment has the most profound influence on the business.The globalization of economy has brought the nations together. We are moving
towards a closely knot economy, from the era of protectionism and self-
--- Content provided by FirstRanker.com ---
sufficiency. Therefore, there is a need to study the current economic
environment and the variables that shape the same.
--- Content provided by FirstRanker.com ---
2.Objective
The objective of this unit is to acquaint the students with the economic
--- Content provided by FirstRanker.com ---
environment and its various constituents that influence the international business
environment. The impact of global trade and business institutions is also
--- Content provided by FirstRanker.com ---
explained.3.
Presentation of Contents
--- Content provided by FirstRanker.com ---
3.1
International Economic Environment
--- Content provided by FirstRanker.com ---
The most radical changes have happened on the economic front in the last twodecades, which have changed the entire mathematics of international business
environment. The political events such as the disintegration of USSR have made
--- Content provided by FirstRanker.com ---
the world a multi-polar entity. At the same time, the technological advances,
particularly those in the field of information technology have made the world a
smaller place. The strengthening of the global economic institutions, particularly
--- Content provided by FirstRanker.com ---
WTO have led to a major integration of the nations. However, the main driving
force behind these developments remains the economic environment.
--- Content provided by FirstRanker.com ---
Irrespective of the nature and size of business, no business entity is left insulatedfrom the global changes. The competition is right on the door of every business.
Therefore, anyone aspiring to excel in business needs to understand these
--- Content provided by FirstRanker.com ---
economic environmental variables and master, with dexterity, the techniques to
gain maximum advantage out of them. The most profound of the changes is the
--- Content provided by FirstRanker.com ---
dislocation of local competition. Some of major changes in the past decades are:Capital movement rather than trade have become the driving force of
--- Content provided by FirstRanker.com ---
the world economy.
--- Content provided by FirstRanker.com ---
Production has become disassociated from employment.Primary products have lost their traditional association from the
--- Content provided by FirstRanker.com ---
industrial economy.
--- Content provided by FirstRanker.com ---
The economics seems to have a greater influence on the politics, thanvice versa.
--- Content provided by FirstRanker.com ---
The ideology of nation controlling the economy is primarily rejected.
There is a realization of the benefits of free market economy.
--- Content provided by FirstRanker.com ---
The established principles of economics have been redefined and we understandthe economics of interdependence and cooperation instead of protectionism. The
old rules of competition are also undergoing a change. From a direct head on
--- Content provided by FirstRanker.com ---
confrontation, the businesses are developing the niches where each of the
players grows and excels.
--- Content provided by FirstRanker.com ---
Macroeconomic trendsThis unit focuses only on the most recent economic situation, particularly the
status in the last five years. The students are advised to refer to standard text
--- Content provided by FirstRanker.com ---
books on the subject to have an overview of the economic situation of the
yesteryears. Focusing on the years gone bye shall divert the focus of this unit.
The present status of the world economy can best be defined as beginning on a
--- Content provided by FirstRanker.com ---
strong note. As a number of major developed economies managed to rebound
from the notable slowdown in late 2005, many developing countries maintained
--- Content provided by FirstRanker.com ---
the momentum of broad and solid growth. A measurable moderation isexpected, however, in the second half of 2006, with the annual growth of world
gross product (WGP) for 2006 as a whole at about 3.6 per cent the same pace as
--- Content provided by FirstRanker.com ---
in 2005 and marginally. The global projections are based on the weighted
average of projected individual-country growth rates using the gross domestic
--- Content provided by FirstRanker.com ---
product (GDP) valued in 2000 dollar prices for each country. Other globalprojections tend to use GDP valued in purchasing power parity (PPP) dollars.
When using those weights, the United Nations global forecast for world
--- Content provided by FirstRanker.com ---
economic growth would be 4.8 per cent for 2006.
Table 1.
--- Content provided by FirstRanker.com ---
Growth of world output, 2001-2006ual percentage changeYear
2001
--- Content provided by FirstRanker.com ---
2002
2003
--- Content provided by FirstRanker.com ---
20042005
2006
--- Content provided by FirstRanker.com ---
2006
World output
--- Content provided by FirstRanker.com ---
1.61.9
2.8
--- Content provided by FirstRanker.com ---
4.1
3.6
--- Content provided by FirstRanker.com ---
3.63.3
Developed
--- Content provided by FirstRanker.com ---
1.2
1.3
--- Content provided by FirstRanker.com ---
2.03.2
2.7
--- Content provided by FirstRanker.com ---
2.7
2.5
--- Content provided by FirstRanker.com ---
economiesNorthern
0.8
--- Content provided by FirstRanker.com ---
1.72.7
4.2
--- Content provided by FirstRanker.com ---
3.5
3.1
--- Content provided by FirstRanker.com ---
3.1America
Western
--- Content provided by FirstRanker.com ---
1.91.2
1.2
--- Content provided by FirstRanker.com ---
2.4
1.6
--- Content provided by FirstRanker.com ---
2.32.1
Europee
--- Content provided by FirstRanker.com ---
Asia and0.7
0.4
--- Content provided by FirstRanker.com ---
2.0
2.3
--- Content provided by FirstRanker.com ---
2.72.8
1.9
--- Content provided by FirstRanker.com ---
Oceaniaf
Economies in
5.7
--- Content provided by FirstRanker.com ---
5.0
7.0
--- Content provided by FirstRanker.com ---
7.66.3
6.0
--- Content provided by FirstRanker.com ---
5.9
transition
Southern and
--- Content provided by FirstRanker.com ---
4.8
4.8
--- Content provided by FirstRanker.com ---
4.66.6
4.6
--- Content provided by FirstRanker.com ---
4.8
4.4
--- Content provided by FirstRanker.com ---
Eastern EuropeCommonwealth 6.0
5.1
--- Content provided by FirstRanker.com ---
7.67.8
6.8
--- Content provided by FirstRanker.com ---
6.3
6.2
--- Content provided by FirstRanker.com ---
of IndependentStates
Developing
2.7
--- Content provided by FirstRanker.com ---
3.9
5.2
--- Content provided by FirstRanker.com ---
6.96.1
6.2
--- Content provided by FirstRanker.com ---
5.6
economies
Africa
--- Content provided by FirstRanker.com ---
3.6
3.3
--- Content provided by FirstRanker.com ---
4.75.0
5.3
--- Content provided by FirstRanker.com ---
5.9
5.5
--- Content provided by FirstRanker.com ---
East Asia4.5
6.9
--- Content provided by FirstRanker.com ---
6.8
7.9
--- Content provided by FirstRanker.com ---
7.37.3
6.5
--- Content provided by FirstRanker.com ---
South Asia4.1
5.6
--- Content provided by FirstRanker.com ---
7.0
7.0
--- Content provided by FirstRanker.com ---
6.76.3
6.4
--- Content provided by FirstRanker.com ---
Western Asia
0.3
--- Content provided by FirstRanker.com ---
3.04.7
6.5
--- Content provided by FirstRanker.com ---
5.1
5.2
--- Content provided by FirstRanker.com ---
5.1Latin America
0.3
--- Content provided by FirstRanker.com ---
-0.8
2.0
--- Content provided by FirstRanker.com ---
5.84.5
4.6
--- Content provided by FirstRanker.com ---
3.9
and the
Caribbean
--- Content provided by FirstRanker.com ---
Landlocked5.6
4.5
--- Content provided by FirstRanker.com ---
4.6
6.1
--- Content provided by FirstRanker.com ---
7.26.8
--
--- Content provided by FirstRanker.com ---
countries
Least
6.5
--- Content provided by FirstRanker.com ---
6.3
6.7
--- Content provided by FirstRanker.com ---
6.76.9
7.3
--- Content provided by FirstRanker.com ---
6.6
developed
countries
--- Content provided by FirstRanker.com ---
Small island0.5
3.4
--- Content provided by FirstRanker.com ---
2.8
5.7
--- Content provided by FirstRanker.com ---
5.95.5
--
--- Content provided by FirstRanker.com ---
developing
States
Sub-Saharan
--- Content provided by FirstRanker.com ---
4.83.9
3.4
--- Content provided by FirstRanker.com ---
5.7
5.5
--- Content provided by FirstRanker.com ---
6.65.3
Africa
--- Content provided by FirstRanker.com ---
Source: Department of Economic and Social Affairs of the United NationsSecretariat.
World Economic Situation and Prospects as of mid-2006 higher than what was
--- Content provided by FirstRanker.com ---
projected at the beginning of the year in World Economic Situation and
Prospects 2006. A number of downside risks have heightened most recently and
--- Content provided by FirstRanker.com ---
they will weigh on the world economy in the near to medium future. The largeglobal imbalances remain the primary source of uncertainty for the stability of
the world economy, but there are other sources of uncertainties that are not
--- Content provided by FirstRanker.com ---
negligible, such as the persistence of higher oil prices, the cooling o. in the
housing sector in a number of economies, the risk of avian influenza`s turning
--- Content provided by FirstRanker.com ---
into a pandemic, and the rising interest rates worldwide, as well as somegeopolitical uncertainties. One salient feature of the global economic expansion
of the past two years has been the improvement in the breadth of growth
--- Content provided by FirstRanker.com ---
performance among developing countries: a large number of developing
countries have registered solid growth. During 2004- 2005 about half of the 107
--- Content provided by FirstRanker.com ---
developing countries for which data were available had managed to registerGDP per capita growth above 3 per cent, which by a rule of thumb is considered
to be the threshold of the growth needed in order for a developing country to
--- Content provided by FirstRanker.com ---
reduce poverty meaningfully.
Meanwhile, only about a dozen developing countries experienced a decline in
per capita GDP during 2004-2005, the smallest number in decades. Such a trend
--- Content provided by FirstRanker.com ---
is expected to continue in 2006. The employment situation worldwide is
improving, but is far from satisfactory. Employment creation has lagged behind
--- Content provided by FirstRanker.com ---
output growth in the global recovery of the past few years. Despite somenoticeable improvement, most recently in 2006, unemployment rates in a large
number of countries are still higher than their levels prior to the global downturn
--- Content provided by FirstRanker.com ---
of 2000-2001. Many developing countries are also facing high levels of
structural unemployment and underemployment, limiting the e. ectiveness of
--- Content provided by FirstRanker.com ---
growth in reducing poverty. A gradual recovery in employment continues inmost developed countries. In the United States of America, the average monthly
increase in wage employment has strengthened in 2006, with the unemployment
--- Content provided by FirstRanker.com ---
rate dropping below 5 per cent. In Eastern Europe, unemployment rates are still
about 1 percentage point above their low levels of 2001, but a gradual
--- Content provided by FirstRanker.com ---
improvement is discernible. The unemployment rate in Japan has been decliningsteadily, and labour markets in Australia, Canada and New Zealand are
exceptionally strong.
--- Content provided by FirstRanker.com ---
The unemployment situation in developing countries and economies in
transition is more pressing, in both cyclical and structural terms. Official
--- Content provided by FirstRanker.com ---
unemployment data, which often cover only urban areas, in general,underestimate by a large margin the severity of unemployment and, particularly,
the underemployment situation in most developing countries. Nonetheless, even
--- Content provided by FirstRanker.com ---
by this measure, only a small number of countries in Asia, in Latin America and
in the group of economies in transition registered a notable reduction in
--- Content provided by FirstRanker.com ---
unemployment rates in 2005.Unemployment rates for most Asian economies are still above their levels prior
to the Asian . - financial crisis of the late 1990s. In China and many Asian
--- Content provided by FirstRanker.com ---
economies, where people in rural areas still account for a large share of the
population, surplus labour and high rates of underemployment in the rural areas
remain a long-term policy concern. In South Asia, for example, the formal
--- Content provided by FirstRanker.com ---
sector is unable to absorb a rapidly growing workforce and unemployment is
highest among the young -- which is also the case for many other developing
--- Content provided by FirstRanker.com ---
countries. Despite some improvement, unemployment rates in most LatinAmerican countries and economies in transition are still high -- near 10 per
cent. Structural unemployment and underemployment problems are particularly
--- Content provided by FirstRanker.com ---
acute in Africa despite its recent growth recovery. Official rates of
unemployment are at 10 per cent or higher in some of these economies.
--- Content provided by FirstRanker.com ---
3.2WTO
Introduction
--- Content provided by FirstRanker.com ---
The World War?II, which lasted from 1939 to 1945, left many countries in
Europe and Asia totally ravaged. Their economies were shattered; there was
--- Content provided by FirstRanker.com ---
tremendous stain on political and social systems resulting in wide spreadannihilation and migration of people. Intentional peace was ruffled. Something
had to be done to put these war-ravaged economies back in shape.
--- Content provided by FirstRanker.com ---
Simultaneously, the various colonies in Asia and Africa were acquiring political
freedom. And there was urgent pressure on them for rapid economic
--- Content provided by FirstRanker.com ---
development and political stabilization. In this background the United NationsOrganisation (UNO) was born on the collective wisdom of the world.
Progressively, the UNO came to encompass the concerns for development in
--- Content provided by FirstRanker.com ---
economic, commercial, scientific, social and cultural sphere of the member
nations. It formed various forums and agencies. One such forum under the UNO
--- Content provided by FirstRanker.com ---
was the General Agreement on Tariffs and Trade (GATT) which wasestablished in 1947.
GATT emerged from the ashes of the Havana Charter. In International
--- Content provided by FirstRanker.com ---
Conference on Trade and Employment in Havana in the winter of 1947-48,
fifty-three nations drew up and signed a charter for establishing an International
Trade Organisation (ITO). But the US Congress did not ratify the Havana
--- Content provided by FirstRanker.com ---
Charter with the result that the ITO never came into existence.
Simultaneously, twenty-three nations agreed to continue extensive tariff
--- Content provided by FirstRanker.com ---
negotiations for trade concessions at Geneva, which were incorporated in aGeneral Agreement of Tariffs and Trade. This was signed on 30th October 1947
and came into force form 1st January 1948 when other nations had also signed it.
--- Content provided by FirstRanker.com ---
The critical juncture was reached during the Uruguay Round of multilateral
trade negotiations, which may be called the final act. It was signed by 12
--- Content provided by FirstRanker.com ---
countries in which India was signatory. Popularly known as Dunkel agreement,It finally emerged as the World Trade Organisation (WTO) on 1st January, 1995.
What is GATT
--- Content provided by FirstRanker.com ---
The General Agreement on Tariffs and Trade (GATT) is neither an organisation
nor a court of justice. It is simply a multinational treaty which now covers eighty
--- Content provided by FirstRanker.com ---
per cent of the world trade. It is a decision making body with a code of rules forthe conduct of international trade and a mechanism for trade liberalisation. It is a
forum where the contracting parties meet from time to time to discuss and solve
--- Content provided by FirstRanker.com ---
their trade problems, and also negotiate to enlarge their trade. The GATT rules
provide for the settlement of trade disputes, call for consultations, waive trade
--- Content provided by FirstRanker.com ---
obligations, and even authorize retaliatory measures.The GATT has been a permanent international organisation having a permanent
Council of Representative with headquarters at Geneva. 25 governments have
--- Content provided by FirstRanker.com ---
signed it. Its function is to call International conferences to decide on trade
liberalizations on a multilateral basis.
--- Content provided by FirstRanker.com ---
GATT `Rounds' of Global Trade NegotiationsThe brief particulars of the various GATT Rounds` (conferences) for global
trade negotiations are discussed below:
--- Content provided by FirstRanker.com ---
1.First Round:- The earlier rounds of GATT have achieved a limited
measure of success. In the first round of talks held in Havana in 1947, 23
--- Content provided by FirstRanker.com ---
countries, which had formed GATT, exchanged tariff concessions on
45,000 products worth 10 billion US dollars of trade per annum.
--- Content provided by FirstRanker.com ---
2.Second Round:- Ten more countries had joined GATT when its second
round was held in Annecy (France) in 1949. In this round, customs and
--- Content provided by FirstRanker.com ---
tariffs on 5000 additional items of international trade were reduced.
3.
--- Content provided by FirstRanker.com ---
Third Round:- The Third round was organized in Torquay (England) in1950-51. 38 member countries of GATT participated in it and they
adopted tariff reduction on 8700 items.
--- Content provided by FirstRanker.com ---
4.
Fourth Round:- The fourth round of world trade negotiations were held
--- Content provided by FirstRanker.com ---
in Geneva in 1955-56. In this round countries decided to further cutduties on goods entering international trade. The value of merchandise
trade subjected to tariff cut was estimated at $ 2.5b.
--- Content provided by FirstRanker.com ---
5.
Fifth Round:- The fifth round took place during 1960-62 at Geneva. In
--- Content provided by FirstRanker.com ---
this round the negotiations covered the approval of common externaltariff (CET) of the European countries and cut in custom duties
amounting to US $ 5 billion on 4400 items. Twenty-six countries
--- Content provided by FirstRanker.com ---
participated in this round.
6.
--- Content provided by FirstRanker.com ---
Sixth Round or the Kennedy Round:- With the formation EEC, the UShad been put at a disadvantage. As a reaction to this, the US Congress
passed the Trade Expansion Act in October 1962 which authorised the
--- Content provided by FirstRanker.com ---
Kennedy administration to make 50 per cent tariff reduction in all
commodities. This paved the way for the opening of the Kennedy round
--- Content provided by FirstRanker.com ---
of trade negotiations at Geneva in May 1964, which were to becompleted by 30 June 1967.
This round had the participation of 62 countries and negotiated tariff reductions
--- Content provided by FirstRanker.com ---
of approximately $ 40 billion, covering about four-fifths of the world trade. Themajor industrial countries in this group applied substantial cuts on their dutiable
imports, e.g. as much as 64 per cent cuts in the case of the United States, 3 per
--- Content provided by FirstRanker.com ---
cent in case of Britain, 30 per cent in case of Japan, 24 per cent in case of
Canada. They left the US and European tariff on the manufactured goods in the
--- Content provided by FirstRanker.com ---
range of 5 to 15 per cent.However, with regard to agricultural products, the negotiations had lesser
success. They agreed on an average duty reduction of 25 per cent on agricultural
--- Content provided by FirstRanker.com ---
items. Non-tariff obstacles, too remained untouched and scant attention was paid
to the problems of developing countries.
--- Content provided by FirstRanker.com ---
An IMF study revealed that weighted average tariff for all industrial productshad been reduced to 7.7 per cent, 9.8 per cent on finished manufactured
products, 8 per cent on semi-finished products and 2 per cent on raw materials.
--- Content provided by FirstRanker.com ---
Thus trade in industrial products after the completion of Kennedy Round was
substantially free of restrictions.
--- Content provided by FirstRanker.com ---
7.Seventh Round or Tokyo Round:- The Seventh Round of Multilateral
Trade Negotiations (MTN) was launched in September 1973 under the
--- Content provided by FirstRanker.com ---
auspices of GATT. Its objectives were laid down in the Tokyo
Declaration. The Declaration set out a far-reaching programme for the
--- Content provided by FirstRanker.com ---
negotiations in six areas. These are (i) tariff reduction; (ii) reduction ofelimination of non-tariff barriers; (iii) coordinated reduction of all trade
barriers in selected sectors; (iv) discussion on the multilateral safeguard
--- Content provided by FirstRanker.com ---
system; (v) trade liberalisation in the agricultural sector taking into
account the special characteristics and (vi) special treatment of tropical
--- Content provided by FirstRanker.com ---
products. It also emphasized that MTN must take into account thespecial, interests and problems of developing countries.
8. Eight Round or the Uruguay Round:- The Eighth Round of GATT
--- Content provided by FirstRanker.com ---
negotiations which began at Punta Del Esta in Uruguay in September 1986ought to have been concluded by the end of 1990. But at the ministerial
meeting in Brussels in December 1990, an impasse was reached over the
--- Content provided by FirstRanker.com ---
area of agriculture and the talks broke down.
The talks were restarted in February 1991 and continued till August 1991. On 20
--- Content provided by FirstRanker.com ---
December 1991. Aurthur Dunkel, the then Director-General of GATT tabled aDraft Final Act of the Uruguay Round, known as the Dunkel Draft Text. This
was a take-it-or-leave-it document which was hotly discussed at various fora
--- Content provided by FirstRanker.com ---
in the member countries through 1992 till July 1993 when the then Director
General, Sutherland relaunched the negotiations in Geneva. On 31 August 1993,
--- Content provided by FirstRanker.com ---
the Trade Negotiations Committee (TNC) passed a resolution to conclude theUruguay Round by 15 December. On 15 December 1993 at the final session,
Chairman Sutherland declared that seven years of Uruguay Round negotiations
--- Content provided by FirstRanker.com ---
had come to an end. Finally, on 15 April 1994, 123 Ministers of member
countries ratified the results of the Uruguay Round at Marrakesh (Morocco) and
--- Content provided by FirstRanker.com ---
the GATT disappeared and passed into history and it was absorbed by the WorldTrade Organization (WTO) on 1 January 1995.
The Uruguay Round of trade negotiations undertaken by the GATT since its
--- Content provided by FirstRanker.com ---
establishment in 1947 had a wide agenda. The GATT originally covered
international trade rules in the goods sector only. Domestic policies were outside
--- Content provided by FirstRanker.com ---
the GATT purview and it operated only at international border. In the UruguayRound, the GATT extended to three new areas, viz. Intellectual property rights
services and investment. It also covered agriculture and textiles, which were
--- Content provided by FirstRanker.com ---
outside the GATT jurisdiction.
The final year embodying the results of the Uruguay Round of Multilateral
--- Content provided by FirstRanker.com ---
Trade Negotiations comprises 28 Agreements. It had two components: the WTOAgreement and the Ministerial decisions and declarations. The WTO Agreement
covers the formation of the organisation and the rules governing its working. Its
--- Content provided by FirstRanker.com ---
Annexures contain the Agreements covering trade in goods, services,intellectual property rights, plurilateral trade, GATT Rules 1994, dispute
settlement rules and trade policy review.
--- Content provided by FirstRanker.com ---
The Uruguay Round was concerned with two aspects of trade in goods and
services. The first related to increasing market access by reducing or eliminating
--- Content provided by FirstRanker.com ---
trade barriers. Reductions in tariffs, reductions in non-tariff support inagriculture, the elimination of bilateral quantitative restrictions, and reductions
in barriers to trade in services met this. The second related to increasing the
--- Content provided by FirstRanker.com ---
legal security of the new levels of market access by strengthening and expanding
rules and procedures and institutions.
--- Content provided by FirstRanker.com ---
WORLD TRADE ORGANISATION (WTO)The WTO was established on January 1, 1995. It is the embodiment of the
Uruguay Round results and the successor to GATT. 76 Governments became
--- Content provided by FirstRanker.com ---
members of WTO on its first day. It has now 146 members, India being one of
the founder members. It has a legal status and enjoys privileges and immunities
--- Content provided by FirstRanker.com ---
on the same footing as the IMF and the World Bank. It is composed of theMinisterial Conference and the General Council. The Ministerial Conference
(MC) is the highest body. It is composed of the representatives of all the
--- Content provided by FirstRanker.com ---
Members. The Ministerial Conference is the executive of the WTO and
responsible for carrying out the functions of the WTO. The MC meets at least
--- Content provided by FirstRanker.com ---
once every two years.The General Council (GC) is an executive forum composed of representatives of
all the Members. The GC discharges the functions of MC during the intervals
--- Content provided by FirstRanker.com ---
between meetings of MC. The GC has three functional councils working under
its guidance and supervision namely:
--- Content provided by FirstRanker.com ---
a)Council for Trade in Goods.
b)
--- Content provided by FirstRanker.com ---
Council for Trade in Services.c)
Council for Trade Related Aspects of Intellectual Property Rights
--- Content provided by FirstRanker.com ---
(TRIPs).
Director-General heads the secretariat of WTO. He is responsible for preparing
--- Content provided by FirstRanker.com ---
budgets and financial statements of the WTO. WTO has now become the thirdpillar of United Nations Organization (UNO) after World Bank and International
Monetary Fund.
--- Content provided by FirstRanker.com ---
Objectives Of WTO
In its preamble, the Agreement establishing the WTO lays down the following
--- Content provided by FirstRanker.com ---
objectives of the WTO.1.
Its relation in the field of trade and economic endeavor shall be
--- Content provided by FirstRanker.com ---
conducted with a view to raising standards of living, ensuring fullemployment and large and steadily growing volume of real income and
effective demand, and expanding the production and trade in goods and
services.
--- Content provided by FirstRanker.com ---
2.To allow for the optimal use of the world`s resources in accordance with
the objective of sustainable development, seeking both (a) to protect and
preserve the environment, and (b) to enhance the means for doing so in a
--- Content provided by FirstRanker.com ---
manner consistent with respective needs and concerns at different levelsof economic development.
3.
--- Content provided by FirstRanker.com ---
To make positive efforts designed to ensure that developing countriesespecially the least developed among them, secure a share in the growth
in international trade commensurate with the needs of their economic
development.
--- Content provided by FirstRanker.com ---
4.To achieve these objectives by entering into reciprocal and mutually
advantageous arrangements directed towards substantial reduction of
tariffs and other barriers to trade and the elimination of discriminatory
--- Content provided by FirstRanker.com ---
treatment in international trade relations.5.
To develop an integrated, more viable and durable multilateral trading
--- Content provided by FirstRanker.com ---
system encompassing the GATT, the results of past trade liberalisationefforts, and all the results of the Uruguay Round of multilateral trade
negotiations.
6.
--- Content provided by FirstRanker.com ---
To ensure linkages between trade policies, environment policies andsustainable development.
Functions of WTO
--- Content provided by FirstRanker.com ---
The following are the functions of the WTO:1.
It facilitates the implementation, administration and operation of the
--- Content provided by FirstRanker.com ---
objectives of the Agreement and of the Multilateral Trade Agreements.2.
It provides the framework for the implementation, administration and
--- Content provided by FirstRanker.com ---
operation of the Plurilateral Trade Agreements relating to trade in civilaircraft, government procurement, trade in diary products and bovine
meat.
3.
--- Content provided by FirstRanker.com ---
It provides the forum for negotiations among its members concerning
their multilateral trade relations in matters relating to the agreements and
a framework for the implementation of the result of such negotiations, as
decided by the Ministerial Conference.
--- Content provided by FirstRanker.com ---
4.
It administers the Understanding on Rules and Procedures governing the
Settlement of Disputes of the Agreement.
--- Content provided by FirstRanker.com ---
5.
It cooperates with the IMF and the World Bank and its affiliated
agencies with a view to achieving greater coherence in global economic
--- Content provided by FirstRanker.com ---
policy-making.Differences Between GATT And WTO
The WTO is not an extension of the GATT but succession to the GATT. It
--- Content provided by FirstRanker.com ---
completely replaces GATT and has a very different character. The major
differences between the two are:
--- Content provided by FirstRanker.com ---
1.The GATT had no status whereas the WTO has a legal status. It has been
created a by international treaty ratified by governments and legislatures
of member states.
--- Content provided by FirstRanker.com ---
2.
The GATT was a set of rules and procedures relating to multilateral
agreements of selective nature. There were separate agreements on
--- Content provided by FirstRanker.com ---
separate issues, which were not binding on members. Any member couldstay out of the agreement. The agreements, which form part of the WTO,
are permanent and binding on all members.
3.
--- Content provided by FirstRanker.com ---
The GATT dispute settlement system was dilatory and not binding on
the parties to the dispute. The WTO dispute settlement mechanism is
faster and binding on all parties.
4.
--- Content provided by FirstRanker.com ---
GATT was a forum where the member countries met once in a decade to
discuss and solve world trade problems. The WTO, on the other hand, is
a properly established rule based World Trade Organization where
decisions on agreement are time bound.
--- Content provided by FirstRanker.com ---
5.
The GATT rules applied to trade in goods. Trade in services was
included in the Uruguay Round but no agreement was arrived at. The
--- Content provided by FirstRanker.com ---
WTO covers both trade in goods and trade in services.6.
The GATT had a small secretariat managed by a Director General. But
--- Content provided by FirstRanker.com ---
the WTO has a large secretariat and a huge organizational setup.Implications for India
After the Uruguay Round, India was one of the first 76 Governments that
--- Content provided by FirstRanker.com ---
became member of the WTO on its first day. Different views have been
expressed in support and against our country becoming a member of the WTO.
--- Content provided by FirstRanker.com ---
Favourable Factors1.
Benefits from reduction of tariffs on exports.
--- Content provided by FirstRanker.com ---
2.
Improved prospects for agricultural exports because the prices of
agricultural products in the world market will increase due to reduction
--- Content provided by FirstRanker.com ---
in domestic subsidies and barriers to trade.3.
Likely increase in the exports of textiles and clothing due to the phasing
--- Content provided by FirstRanker.com ---
out of MFA by 2005.4.
Advantages from greater security and predictability of the international
--- Content provided by FirstRanker.com ---
trading system.5.
Compulsions imposed on India to be competitive in the world market.
--- Content provided by FirstRanker.com ---
Unfavourable Factors
1. Tariff reductions on goods of export interest to India are very small.
2.
--- Content provided by FirstRanker.com ---
Less prospects of increase in agricultural exports due to the limited
extent of agricultural liberalisation.
3.
--- Content provided by FirstRanker.com ---
There will be hardly any liberalisation of our textile exports during the
next 10 years.
4.
--- Content provided by FirstRanker.com ---
India will be under pressure to liberalize the services industries.
5.
--- Content provided by FirstRanker.com ---
There will be only marginal liberalisation to the movement of labourservices in which it is competitive.
6.
Increased outflows of foreign exchange due to commitments undertaken
--- Content provided by FirstRanker.com ---
in the fields of TRIPS, TRIMS and services.7.
Technological dependence on foreign firms will increase as the R & D
--- Content provided by FirstRanker.com ---
required to take advantages of Uruguay Round agreement may not beundertaken on adequate scale due to paucity of funds.
8.
--- Content provided by FirstRanker.com ---
Only a few large firms or transnational corporations may benefit andsmaller firms may disappear.
9.
--- Content provided by FirstRanker.com ---
Increasing intrusion in our domestic space in TRIPs, TRIMs and servicesand agriculture.
10.
--- Content provided by FirstRanker.com ---
The Uruguay Round has paved way for similar other institutions infuture through linkage between trade, environment, labour standard and
treatment of foreign capital.
11.
--- Content provided by FirstRanker.com ---
Trend towards neo-protectionism in developed countries against our
exports.
To conclude, we may say that WTO membership is going to be beneficial to
--- Content provided by FirstRanker.com ---
India in terms of global market thrown open to its goods and services. We must
know how to take advantage of this situation. We should try to strengthen our
--- Content provided by FirstRanker.com ---
position to sell our products abroad. For that we have to improve the quality ofgoods and services, cut down costs and wastage and improve our competitive
strength.
--- Content provided by FirstRanker.com ---
Evaluation of WTO
WTO has been in action for about nine years now. During this period of time,
--- Content provided by FirstRanker.com ---
the WTO has proved that it is very different from its predecessor, GATT, in thefollowing ways:
(a) GATT did not have any powers, whereas WTO with its dispute settlement
--- Content provided by FirstRanker.com ---
mechanism has been an outstanding success. WTO has brought to book even
USA in several cases.
(b) GATT negotiating rounds took place once in a decade or so. What used to
--- Content provided by FirstRanker.com ---
take decades to complete has been done in a few years by the WTO.
Following are the achievements of WTO in the short period it has been in
--- Content provided by FirstRanker.com ---
existence:1.
WTO has helped in making greater market orientations a general rule.
--- Content provided by FirstRanker.com ---
2.Tariff based protection has become the rule.
3.
--- Content provided by FirstRanker.com ---
Restrictive measures, which were being used for balance of payments
purposes, have declined markedly.
4.
--- Content provided by FirstRanker.com ---
WTO has brought services trade into the multilateral system. Many
countries are opening their markets for trade and investment either
unilaterally or through regional or multilateral negotiations.
--- Content provided by FirstRanker.com ---
5.Many underdeveloped countries have promoted economic growth in
their countries. They have undergone radical trade, exchange and
domestic reforms, which have improved the efficiency of resource use
--- Content provided by FirstRanker.com ---
and opened new investment opportunities.6.
Bilateralism has been, to a great extent, placed under control by the
--- Content provided by FirstRanker.com ---
extension of WTO provisions to services, TRIPS and TRIMS and by theunified dispute settlement mechanism, in which the possibility of
unilaterally blocking the adoption of panel decisions no longer exists.
7.
--- Content provided by FirstRanker.com ---
The Trade Policy Review Mechanism has created a process of
continuous monitoring of trade policy developments, which by
promoting greater transparency has assisted in the process of
liberalisation and reform.
--- Content provided by FirstRanker.com ---
The WTO, however, has still to make progress on the following issues:
1.
--- Content provided by FirstRanker.com ---
The trade reform process is incomplete in many countries, some tariffpeaks remain, and negotiations are still proceedings in various areas,
notably in basic telecommunications and financial services.
2.
--- Content provided by FirstRanker.com ---
There have been at least some reversals in the overall liberalisation
process in some developing countries. Examples may be increasing of
antidumping measures, selective tariff increases and investment related
measures.
--- Content provided by FirstRanker.com ---
3.
The combination of globalisation and technological change creates a
premium on high skill as against low skill. Concerns have been raised
--- Content provided by FirstRanker.com ---
that this will amount to growing social divisions.4.
The major share of the benefits of the WTO has gone to the countries of
--- Content provided by FirstRanker.com ---
the North. WTO has been much more beneficial to the developedcountries where the benefits of free trade accrue primarily to the
underdeveloped countries, the progress has been much slower.
5.
--- Content provided by FirstRanker.com ---
The WTO has not done much for the development of non-tariff barriers
to imports from the underdeveloped countries such as anti dumping
duties.
6.
--- Content provided by FirstRanker.com ---
One size fits all approach is increasingly getting embedded in the
WTO rules and disciplines. The policies and rules appropriate or
advantages to the industrialized world are getting established as common
rules to be obeyed by the developing countries as well. As a result, the
--- Content provided by FirstRanker.com ---
multilateral trade rules are increasingly becoming a codification of thepolicies, perceptions, laws and regulations of the industrialized countries.
7.
--- Content provided by FirstRanker.com ---
As a result of pressures resulting from WTO, the interests ofinternational trade, which are primarily the interests of transnational
corporations take precedence over local concerns and policies even if
such a course exposes the local population to serious health and security
risks.
--- Content provided by FirstRanker.com ---
8.
All the WTO members are not equally integrated in the multilateral
system.
--- Content provided by FirstRanker.com ---
9.
As brought out in the last Ministerial Meeting at Mexico in September
2003, the implementation related issues are becoming a source of serious
--- Content provided by FirstRanker.com ---
concern.The implementation issues cover a whole range of demands. The issues
requiring WTO attention relate to:
--- Content provided by FirstRanker.com ---
(i)
TRIPS
--- Content provided by FirstRanker.com ---
(ii)TRIMS
(i)
--- Content provided by FirstRanker.com ---
Anti-dumping
(ii)
--- Content provided by FirstRanker.com ---
Movement of natural persons(iii)
Agriculture
--- Content provided by FirstRanker.com ---
(iv)
Textiles
--- Content provided by FirstRanker.com ---
(v)Industrial tariffs including peak tariffs
(vi)
--- Content provided by FirstRanker.com ---
Services
(vii) Rules to protect investments
(viii) Competition policy
--- Content provided by FirstRanker.com ---
(ix)Transparency in government procurement
(x)
--- Content provided by FirstRanker.com ---
Trade facilitation
WTO has now become a forum for perpetual negotiations on newer and newer
--- Content provided by FirstRanker.com ---
subjects and for using trade rules to establish standards and enforce complianceeven in non-trade areas. Everything now seems to require the hand of WTO, be
it foreign investment, environmental or labour standards, child labour, good
--- Content provided by FirstRanker.com ---
governance or human rights.However, efforts should be made to see that WTO is not expanded into a sort of
world government covering every economic subject under the sum and then
--- Content provided by FirstRanker.com ---
using the threat of trade sanctions to bring about a new World Order.
Trade Related Intellectual Property Rights
--- Content provided by FirstRanker.com ---
The Trade Related Intellectual Property Rights (TRIPs) Agreement covers thefollowing seven categories of intellectual property:
1.
--- Content provided by FirstRanker.com ---
Copyright and Related Rights: The members are required to comply
with the Berne Convention for the protection of literary and artistic
works. Computer Programmes are included in literary works. Authors of
computer programmes and broadcasting organisations are to be given the
--- Content provided by FirstRanker.com ---
right to authorize or prohibit the commercial rental of their works topublic. This protection is extended for 50 years.
2.
--- Content provided by FirstRanker.com ---
Trademarks: The owner of a registered trademark has the inclusiveright to prevent all third parties not having the owner`s consent from
using in the course of trade identical or similar signs for goods or
services. Registration and renewal of a trademark is for a period of not
less than seven years.
--- Content provided by FirstRanker.com ---
3.
Geographical Indications: Members are required to provide the legal
means for interested parties to prevent the use of any indication which
--- Content provided by FirstRanker.com ---
misleads the consumer as to the origin of goods and any use whichwould constitute an act of unfair competition. Additional protection is
applied for geographical indications for wines and spirits.
4.
--- Content provided by FirstRanker.com ---
Industrial Designs: Industrial designs are protected for a period of 10
years. Owners of protected designs would be able to prevent the
manufacture, sale or importation of articles bearing or embodying a
design, which is a copy of the protected design for commercial purposes.
--- Content provided by FirstRanker.com ---
5.
Patents: Patents shall be available for any inventions, whether products
or processes, in all fields of technology, provided they are new, involve
--- Content provided by FirstRanker.com ---
an inventive step and are capable of industrial application. Patent ownershall have the right to assign or transfer by succession, the patent and to
conclude licensing contracts. The Agreement requires 20 years
protection. The Agreement requires both process and product patent. It
provides for 20 years product patent and a successive 20 years process
--- Content provided by FirstRanker.com ---
patent.6.
Integrated Circuits: The TRIPs Agreement provides protection to the
layout designs (topographies) of integrated circuits for a period of 10
--- Content provided by FirstRanker.com ---
years. But the protection shall lapse after 15 of the creation of the layoutdesign.
7.
--- Content provided by FirstRanker.com ---
Trade Secrets: Trade secrets and know-how having commercial valueshall be protected against breach of confidence and other acts. Test data
submitted to governments in order to obtain marketing approval for
pharmaceuticals or agricultural chemicals shall be protected against
unfair commercial use.
--- Content provided by FirstRanker.com ---
This Agreement refers to the control of anti-competitive practices in contractual
licenses pertaining to intellectual property rights. It provides for consultations
--- Content provided by FirstRanker.com ---
between governments in order to protect intellectual property rights from beingabused.
The Agreement requires a one-year transition period for developed countries to
--- Content provided by FirstRanker.com ---
bring their legislation and practices into conformity with TRIPs. Developing
countries will have 5 year transition period whereas the least developed
--- Content provided by FirstRanker.com ---
countries will have a 11 year transition period. Those developing countrieswhich do not provide product patent protection have been given 10 years.
Trade Related Investment Measures
--- Content provided by FirstRanker.com ---
This agreement calls for the removal at all trade related investment measureswithin a period of five years. These measures are confined to quantitative
restorations and national treatment. In particular, they relate to such measures as
--- Content provided by FirstRanker.com ---
investment in identified areas, level of foreign investments for treating foreign
companies at par with the national companies, export obligation, and use of
--- Content provided by FirstRanker.com ---
local raw materials. It prevents the imposition of any performance clauses onforeign investors in respect of earnings of foreign exchange, foreign equity
participation, and transfer of technology. It requires foreign investment
--- Content provided by FirstRanker.com ---
companies to be treated at par with national companies. It requires free import of
raw material, components and intermediates.
The Agreement recognizes that certain investment measures restrict and distort
--- Content provided by FirstRanker.com ---
trade. It, therefore, requires mandatory notification of all non-conforming Trade
Related Investment measures and their removal within seven years for
--- Content provided by FirstRanker.com ---
developed countries, within five years for developing countries and within sevenyears for the least developed countries. It establishes a committee on Trade
Related Investment Measures which will monitor the implementation of these
--- Content provided by FirstRanker.com ---
commitments and report to the Council of Trade in Goods annually.
Agreement on Trade in Services
--- Content provided by FirstRanker.com ---
This Agreement covers all internationally traded services. Foreign services andservice suppliers would be treated on equal footings with domestic and service
suppliers. However, governments may indicate Most Favoured Nation (MFN)
--- Content provided by FirstRanker.com ---
exemptions, which will be reviewed after 5 years, with a normal limit of 10
years.
--- Content provided by FirstRanker.com ---
It requires transparency, which includes the publication of all-relevant laws andregulations relating to services trade. International payments and transfers
relating to trade in services shall not be restricted, except in the event of balance
--- Content provided by FirstRanker.com ---
of payments difficulties where such restrictions will be temporary limited and
subjected to conditions. Any liberalization of trade in services would be
--- Content provided by FirstRanker.com ---
progressive in character. It would be through negotiations at five-year intervalsin order to reduce or remove the adverse effects of measures on trade in services
and to increase the general level of specific commitments by the governments.
--- Content provided by FirstRanker.com ---
WTO 6th Ministerial conferences - Hong Kong (13?18 December, 2005)
Ministers from the WTO`s 149 member governments approved a declaration
--- Content provided by FirstRanker.com ---
that many described as significant progress both since the July 2004 packageand after six days of intensive negotiations in Hong Kong which the chairperson
described as working like a dog.
--- Content provided by FirstRanker.com ---
Despite the long hours and hard work, it was worth it, WTO Director-General
Pascal Lamy told a press conference late in the evening of the final day. We
have managed to put the Round back on track after a period of hibernation.
--- Content provided by FirstRanker.com ---
Hong Kong`s Commerce, Industry and Technology Secretary John Tsang, who
chaired the conference, outlined the achievements in the declaration:
--- Content provided by FirstRanker.com ---
We have secured an end date for all export subsidies in agriculture,even if it is not in a form to everybody`s liking.
We have an agreement on cotton.
--- Content provided by FirstRanker.com ---
We have a very solid duty-free, quota-free access for the 32 least-
developed country members.
--- Content provided by FirstRanker.com ---
In agriculture and NAMA (non-agricultural market access), we havefleshed out a significant framework for full modalities.
And in services, we now have an agreed text that points positively to
--- Content provided by FirstRanker.com ---
the way forward.
The declaration was agreed after several days of meetings late into the night, the
--- Content provided by FirstRanker.com ---
last two continuing to the morning. It`s been a hard day`s night. And I`ve beenworking like a dog, Secretary Tsang said, quoting John Lennon and Paul
McCartney.
--- Content provided by FirstRanker.com ---
With the 44-page document now agreed, members face intense pressure in the
new year to complete full modalities in agriculture and non-agricultural
--- Content provided by FirstRanker.com ---
market access by the new deadline they have set themselves, 30 April 2006.Compared to the draft forwarded to Hong Kong from Geneva, a number of
issues have been settled or partly settled. The most straightforward is the
--- Content provided by FirstRanker.com ---
agreement to end export subsidies in agriculture by 2013, but this was only
agreed at the last minute, and members paid tribute to the European Union
--- Content provided by FirstRanker.com ---
which had the greatest difficulty on this issue. The declaration makes clear thatthe agreed date is conditional. Loopholes have to be plugged to avoid hidden
export subsidies in credit, food aid and the sales of exporting state enterprises.
--- Content provided by FirstRanker.com ---
For cotton the elimination is accelerated to the end of 2006. In addition, cotton
exports from least-developed countries will be allowed into developed countries
--- Content provided by FirstRanker.com ---
without duty or quotas from the start of the period for implementing the newagriculture agreement. Ministers have also agreed to aim to cut trade-distorting
domestic subsidies on cotton by more than would normally apply under the new
--- Content provided by FirstRanker.com ---
agreement, and to do so more quickly.The two sides negotiating this difficult subject paid tribute to each other for
what they described as the spirit of compromise: United States and the four
--- Content provided by FirstRanker.com ---
countries pushing for an agreement on cotton (Benin, Burkina Faso, Chad and
Mali).
--- Content provided by FirstRanker.com ---
A number of other details have been agreed in agriculture, non-agriculturalmarket access and services.
3.3
--- Content provided by FirstRanker.com ---
UNITED NATIONS CONFERENCE ON TRADE AND
DEVELOPMENT
Introduction
--- Content provided by FirstRanker.com ---
The International trade is considered to be the engine of economic growth.
There has been continuous and rapid growth in world trade due to liberalisation
--- Content provided by FirstRanker.com ---
of tariffs, quotas and other restrictions. The share of manufacturers in worldtrade has increased from about 50 per cent to 70 per cent over the last few
decades. The developed countries dominate the world trade though the share of
--- Content provided by FirstRanker.com ---
developing countries has increased over the years. World trade in services has
been increasing fast. World trade has become increasingly multilateral due to the
--- Content provided by FirstRanker.com ---
efforts of various international trading blocks, which exercise a significantinfluence on world trade.
The United Nations Conference on Trade and Development (UNCTAD) was
--- Content provided by FirstRanker.com ---
established by U.N. General Assembly in 1964 in order to provide a forum
where the developing countries could discuss the problems relating to their
--- Content provided by FirstRanker.com ---
economic development. It was set up essentially because it was felt that the thenexisting institutions like IMF and GATT were not properly organized to handle
the peculiar problems related to the developing countries. These institutions
--- Content provided by FirstRanker.com ---
favored the developed countries and failed to tackle the special trade and
development problems of less developed countries. With more than 170
members, UNCTAD presently is the only body where developed as well as
--- Content provided by FirstRanker.com ---
erstwhile centrally planned countries are its members.
Since 1964, eleven rounds or conferences of UNCTAD have taken place, i.e.
--- Content provided by FirstRanker.com ---
UNCTAD I held at Geneva in 1964, UNCTAD II at New Delhi in 1968,UNCTAD III at Santiago in 1972, UNCTAD IV at Nairobi in 1976, UNCTAD
V at Manila in 1979, UNCTAD VI at Belgrade in 1983, UNCTAD VII at
--- Content provided by FirstRanker.com ---
Geneva in 1987, UNCTAD VIII at Cartagena (Columbia) in 1992, UNCTAD IX
at Midland (South Africa) in 1996, UNCADX at Bangkok in 2000, and UNCAD
--- Content provided by FirstRanker.com ---
XI at Sao Paulo (Brazil) in 2004.Organisation Of UNCTAD
The UNCTAD was established as a permanent organ of General Assembly of
--- Content provided by FirstRanker.com ---
the United Nations. However, it has its own subsidiary bodies and also a full
time secretariat to serve it. It has permanent organ called Trade and
--- Content provided by FirstRanker.com ---
Development Board as the main executive body. The Board functions betweenthe plenary sessions of the conference. It meets twice annually. It is composed
of 55 members on the basis of equitable geographical distribution.
--- Content provided by FirstRanker.com ---
The Trade and Development Board have four subsidiary organs to assist it in its
functions. These are:
--- Content provided by FirstRanker.com ---
1.The Committee on Commodities.
2.
--- Content provided by FirstRanker.com ---
The Committee on Manufacturers.
3.
--- Content provided by FirstRanker.com ---
The Committee on Shipping.4.
The Committee on Invisible Items and Financing related to Trade.
--- Content provided by FirstRanker.com ---
Generally, these committees meet annually. However, they may be called in
special session to consider urgent matters.
Functions of UNCTAD
--- Content provided by FirstRanker.com ---
The UNCTAD was instituted mainly to reduce and eventually eliminate the gap
between the developed and developing countries and to accelerate the economic
--- Content provided by FirstRanker.com ---
growth of the developing world. Its main functions are as follows:1.
To promote international trade between the developed and the
--- Content provided by FirstRanker.com ---
developing countries with special emphasis on the development ofunderdeveloped countries.
2.
--- Content provided by FirstRanker.com ---
To formulate principles and policies of international trade and relatedproblems of economic development.
3.
--- Content provided by FirstRanker.com ---
To make proposals for putting the said principles and policies into effectand to take such steps which may be relevant towards this end.
4.
--- Content provided by FirstRanker.com ---
To negotiate multilateral trade agreements to review and facilitate thecoordination of activities of other institutions within the fold of United
Nations related to international trade and related problems of economic
development.
--- Content provided by FirstRanker.com ---
5.To be available as a center for harmonious trade related development
policies of governments, and regional economic groupings in pursuance
of Article 7 of the charter of the United Nations.
--- Content provided by FirstRanker.com ---
Major Activities of UNCTAD
The major activities of UNCTAD as follows:
--- Content provided by FirstRanker.com ---
1.Research and support in connection with the negotiation of commodity
agreements.
--- Content provided by FirstRanker.com ---
2.Technical elaboration of new trade schemes, such as a new import
preference system.
--- Content provided by FirstRanker.com ---
3.Various promotional activities designed to assist developing countries in
the area of trade and capital flows.
--- Content provided by FirstRanker.com ---
Basic Principles of UNCTADUNCTAD action programme and priorities have been laid down in the various
recommendations adopted by the first conference in 1964. These
--- Content provided by FirstRanker.com ---
recommendations are based on the following basic principles:
(a)
Every country has the sovereign right to freely dispose its natural
--- Content provided by FirstRanker.com ---
resources in the interest of the economic development and well being ofits own people and freely to trade with other countries.
(b)
--- Content provided by FirstRanker.com ---
Economic relations between countries, including trade relations, shall bebased on respect for the principles of sovereign equality of states, self-
determination of people, and non-interference in the internal affairs of
other countries, and
--- Content provided by FirstRanker.com ---
(c)There shall be no discrimination on the basis of differences in socio-
economic systems, and the adoption of various methods and trading
policies shall be consistent with this principle.
--- Content provided by FirstRanker.com ---
UNCTAD and GATT
The UNCTAD may be distinguished from the GATT as follows:
--- Content provided by FirstRanker.com ---
1.The UNCTAD is a formal, reflecting, deliberating, constructing and
conciliating body while the GATT is a negotiating, committing and
controlling organization.
--- Content provided by FirstRanker.com ---
2.
The UNCTAD in essence is a dynamic, initiating body dedicated to
economic growth and equity while the GATT poses a somewhat static
--- Content provided by FirstRanker.com ---
view of commercial policy relations.Appraisal of Recommendations of UNCTAD
UNCTAD-I
--- Content provided by FirstRanker.com ---
UNCTAD`s action programme and priorities have been laid down in the various
recommendations adopted by the first conference in 1964. It was realized that
--- Content provided by FirstRanker.com ---
the prime responsibility for the economic advancement of developing countrieslay on their shoulders only. The main purpose of the recommendations made by
the conference was to adopt a new international division of labour and make the
--- Content provided by FirstRanker.com ---
external sector conducive to the developing countries. As such, the conference
made a standstill recommendations to the developed nations, not to erect further
--- Content provided by FirstRanker.com ---
tariff walls and other barriers to the import of products of export interest todeveloping nations. Further, the developed nations were recommended to
progressively reduce the exports from the developing nations without insisting
--- Content provided by FirstRanker.com ---
on reciprocity of concessions. It also recommended to the developing countries
some positive measures of export promotion. Particularly, the conference
suggested the recognition of international commodity agreements as an integral
--- Content provided by FirstRanker.com ---
part of international trade policies, which aimed at securing remunerative,
equitable and stable prices for the developing nations.
--- Content provided by FirstRanker.com ---
The conference further realized that the developing nations must progressivelydiversify their economies (from primary producing to industrial) and develop
new lines of manufactured exports. Appreciating the difficulties of developing
--- Content provided by FirstRanker.com ---
countries in this respect, the conference adopted certain guidelines for the
elimination of tariffs and such other barriers in respect of manufactured exports
--- Content provided by FirstRanker.com ---
from these countries.The conference also recommended that each developed nation should transfer
annually at least 1 per cent of its income to developing countries by way of
--- Content provided by FirstRanker.com ---
foreign aid. The conference also put forward a number of recommendations to
improve the invisible trade of developing countries through development of
--- Content provided by FirstRanker.com ---
shipping, tourism etc.Out of these laudable recommendations of UNCTAD, nothing was, however,
substantially translated into practice. Though there has been some progress in
--- Content provided by FirstRanker.com ---
the matter of international trade arrangements and a notion is created among the
rich nations for giving tariff preference to the poor counties in the western
--- Content provided by FirstRanker.com ---
markets, no action for the same has been taken so far. There has been a lot ofdisagreement prevailing among the rich countries in giving generalised
preferences to the poor nations. In short, the first UNCTAD conference
--- Content provided by FirstRanker.com ---
programmes made vary slow progress in terms of concrete action.
UNCTAD-II
UNCTAD was formed as a plenary body of the U.N. members, which were to
--- Content provided by FirstRanker.com ---
meet normally at intervals of not more than three years. However, the second
meeting of UNCTAD took place four years after the first conference in Geneva.
--- Content provided by FirstRanker.com ---
UNCTAD II was held in New Delhi from February 1st to March 28th, 1968. Thissession had an ambitious agenda to confront the problems of the less developed
countries and other major issues relating to world trade and develop merit. The
--- Content provided by FirstRanker.com ---
broad objectives of this conference were as follows:-1.
To reappraise the economic situation and its implications in
--- Content provided by FirstRanker.com ---
implementing the recommendations of the UNCTAD-I.2.
To achieve specific results by initiating appropriate negotiations which
--- Content provided by FirstRanker.com ---
ensure real progress in international co-operation for development, and3.
To explore and investigate matters requiring thorough study before
--- Content provided by FirstRanker.com ---
fruitful agreements can be envisaged.With these objectives in view, the various items on the agenda of the conference
were grouped into the following major categories: -
--- Content provided by FirstRanker.com ---
1.
Trends and problems in world trade and development.
--- Content provided by FirstRanker.com ---
2.Commodity problems and policies of different nations.
3.
--- Content provided by FirstRanker.com ---
Problems of growth, development finance and aid to developing nations
and synchronization of national and international policies in this regard.
4.
--- Content provided by FirstRanker.com ---
Specific problems of developing nation regarding:
(a)
Expansion and diversification of exports of finished
--- Content provided by FirstRanker.com ---
(manufactured) and semi-finished goods.(b)
Invisible, including shipping.
--- Content provided by FirstRanker.com ---
5.
Problems and measures of economic integration and trade development
among developing nations.
--- Content provided by FirstRanker.com ---
6.
Special measures for economic and social upliftment of the least
developed among the developing nations.
--- Content provided by FirstRanker.com ---
7.
General review of the work and functions of UNCTAD.
--- Content provided by FirstRanker.com ---
During the New Delhi round of UNCTAD, several aspects of trade preferencesand concessions were discussed. The conference re-assumed that for prosperity
as a whole, a generalised, non-reciprocal and non-discriminatory system of
--- Content provided by FirstRanker.com ---
preferences in favour of the less developed countries should be implemented as
soon as possible which would assist them in increasing their export earnings and
--- Content provided by FirstRanker.com ---
thus contribute to the acceleration of their rate of economic growth. It has beenrealized by the developed countries that if export earnings of developing
countries decline, their external purchasing power is reduced. As a consequence,
--- Content provided by FirstRanker.com ---
their importing capacity also declines and as a result, the exports of developednations to these countries may fall and the world trade may experience a down
turn. To avoid such a situation, it is imperative that export earnings of the
--- Content provided by FirstRanker.com ---
developing nations should be augmented through a deliberate liberalisation
policy adopted by the developed nations. Tariff and non-tariff barriers should be
--- Content provided by FirstRanker.com ---
removed and free-trade should be encouraged by the developed nations. Further,to enhance and maintain world prosperity, developed nations should also give
necessary technological and financial assistance to developing countries for their
--- Content provided by FirstRanker.com ---
rapid economic expansion.
The final resolution of the conference, therefore, stressed that a mutually
--- Content provided by FirstRanker.com ---
acceptable system of generalised, non-reciprocal and non-discriminatorypreferences beneficial to developing countries should be immediately
established. It is popularly known as Generalised Scheme of Preferences (GSP).
--- Content provided by FirstRanker.com ---
The objectives of such a system of preferences has been :
1.
--- Content provided by FirstRanker.com ---
To increase export earnings of the less developed nations.2.
To promote their industrialization, and
--- Content provided by FirstRanker.com ---
3.
To accelerate their rates of economic growth.
--- Content provided by FirstRanker.com ---
To meet this end, the conference established a special committee on preferencesas a subsidiary organ of the Trade & Development Board, which was to pay
special attentions to this matter. Further, during the conference, the developed
--- Content provided by FirstRanker.com ---
nations reaffirmed their desire to transfer at least 1 per cent of their GNP
resources to the developing countries through their aid programmes. The
--- Content provided by FirstRanker.com ---
developed countries also agreed to provide concessional terms of officiallending and to liberalize the terms of international lending and finance. The
conference adopted a charter of development, which offers permanent protection
--- Content provided by FirstRanker.com ---
against economic deterioration of developed nations and increased opportunities
of development for the developing nations. With regard to commodity
agreements, it was decided that the conference should be reconvened before
--- Content provided by FirstRanker.com ---
June 1968 to evolve an international agreement on cocoa. Similarly, it was laid
down that Sugar Agreement should come into operation before January 1969.
--- Content provided by FirstRanker.com ---
The less developed nations conference, however, urged at the conference thatthe advanced countries should remove all trade barriers in their markets to the
entry of poor nations commodities in primary, processed or semi-processed
--- Content provided by FirstRanker.com ---
forms. But due attention was not paid to this plea.
The conference did not deal with the possibilities of agreed solutions to the
--- Content provided by FirstRanker.com ---
problems of prices, trade liberalization and increased access to the markets ofadvanced countries for the products exported by the less developed nations. The
conference, however, urged that the socialist countries should expand and
--- Content provided by FirstRanker.com ---
diversify their trade with developing countries by according special preferences
to the products of these countries. The permanent machinery of UNCTAD was
--- Content provided by FirstRanker.com ---
entrusted with the responsibility of promoting trade relations between socialistand developing nations. The conference also stressed the need for trade
expansions and economic integration among the developing countries. Thus,
--- Content provided by FirstRanker.com ---
under the skeleton of UNCTAD, the declaration of intent` by the poor nations
was matched by the declaration of support` by the rich nations.
--- Content provided by FirstRanker.com ---
It may, however, be said that the New Delhi session of UNCTAD could notmake any significant achievements and concluded with disillusionment writ
large all over. Most of the problems remained unsolved, as there was no
--- Content provided by FirstRanker.com ---
consensus on them. In short, UNCTAD-II, though hopeful, had remained
unsuccessful in achieving the goal.
--- Content provided by FirstRanker.com ---
UNCTAD-IIIUNCTAD-III meeting was held at Santiago in Chile from 13th April to 17th May
1972. 120 member nations participated in the meeting of which 96 were
--- Content provided by FirstRanker.com ---
developing countries, forming the so-called G-77 or Group of 77. At this
meeting, these underdeveloped nations vehemently attacked to developed world
for their unsympathetic attitude towards helping the poorer nations through
--- Content provided by FirstRanker.com ---
trade. Attention was drawn to the fact while the world trade had grown
considerably during the last decade, the trade of the developing countries rose at
--- Content provided by FirstRanker.com ---
a slower rate than that of the developed countries. The developed countriesexports amounted to 67 per cent of the world exports in 1960, which further
increased to 71 per cent in 1970, whereas, during the same period, the export
--- Content provided by FirstRanker.com ---
share of the developing countries declined from 21 per cent to 18 per cent ? that
too mainly consisting of primary products. At the Santiago session, many
--- Content provided by FirstRanker.com ---
important issues were discussed. Some of them are:-1. Continuance of foreign aid,
2. Low-rated unconditional loans,
3. Some relief`s in debt burden,
--- Content provided by FirstRanker.com ---
4. Shipping freights problem,
5. A link between the SDR`s and development finance.
As such, the resolution of UNCTAD-III finally incorporated key issues like:
--- Content provided by FirstRanker.com ---
1. Transfer of technology,
2. International monetary reforms,
3. General preferences,
--- Content provided by FirstRanker.com ---
4. Reform of the UNCTAD machinery,5. An international code of conduct of liner conference.
From the point of view of developed countries, UNCTAD-III was a successful
--- Content provided by FirstRanker.com ---
event because on a number of key issues, developing countries could reach acompromise. From the view point of developing countries, however, UNCTAD-
III was a big failure. Due to indifference of the developed nations, the G-77 did
--- Content provided by FirstRanker.com ---
not succeed in establishing institution links between UNCTAD, on the one hand,
and the IMF and GATT, on the other. Yet, there was some hope for monetary
--- Content provided by FirstRanker.com ---
reform as a result of this meeting. A major issue, which was raised at theSantiago conference, was that of the problem of changes in shipping freights. It
was estimated that 1/3 of total deficit in the balance of payment of LDC`s was
--- Content provided by FirstRanker.com ---
due to high shipping freights. Further, at present the rich nations own 92 per centof the world`s merchant marine, when nearly 2/3 of weight originates from the
developing countries. This definitely imposes a drain on their foreign exchange
--- Content provided by FirstRanker.com ---
resources and puts up their cost of imports and exports. There has been a
positive gain on the subject of shipping at the Santiago Session in so far on its
--- Content provided by FirstRanker.com ---
greatest achievement has been the agreement reached on an international code ofconduct. The two fundamental objects of code of conduct were:
1. Promotion of world trade, and
--- Content provided by FirstRanker.com ---
2. A new structure of world shipping in which the merchant marine of thedeveloping countries would play an increasing and substantial role.
It was also stressed that the conference practices should not involve any
--- Content provided by FirstRanker.com ---
discrimination against the trade and shipping interests of the developing
countries. The developed countries, however, favored the principle of self-
--- Content provided by FirstRanker.com ---
discipline and self-regulation, but the developing countries emphasizedenactment of legislation in support of the code of conduct. Ultimately, it was
resolved that a preparatory committee should be set up to study and recommend
--- Content provided by FirstRanker.com ---
on the points of disagreement and evolve a code of conduct for submission to
the General Assembly of UNCTAD. Further, it was decided in the resolution,
--- Content provided by FirstRanker.com ---
that by 1980, the developing nations should at least own 10 per cent of the totalworld dead weight tonnage. The conference also specified that there should be a
minimum interval of two years between freight hikes and that freight rates
--- Content provided by FirstRanker.com ---
should be at as a low level as commercially feasible.
In short, it can be said that the urgent demands of the developing countries had
--- Content provided by FirstRanker.com ---
been denied there was some hope of getting some benefits as an outcome ofUNCTAD-III.
UNCAD-IV
--- Content provided by FirstRanker.com ---
In May 1976, the UNCTAD-IV meeting was held at Nairobi. In this conference,the widening gap between developed and developing nations was pinpointed and
it was desired that the developed nations should be more generous in helping the
--- Content provided by FirstRanker.com ---
poor nations. It was also suggested that some kind of taxes may be imposed by
the advanced nations to raise funds for helping and assisting the developmental
--- Content provided by FirstRanker.com ---
process of the countries belonging to the third world. Further, a common fund of6 thousand billion dollars may be created for the purpose of stabilizing the
prices of 10 primary products exported by the less developed countries. This
--- Content provided by FirstRanker.com ---
fund was meant to make provisions to finance buffer stocks of such products for
this purpose. The representatives of developing nations advocated the expansion
--- Content provided by FirstRanker.com ---
of Generalised System of Preferences (GSP) by the indexation of export items.The representatives of the developing countries did agree to give debt relief and
set re-scheduling in favour of the poor countries. However, with respect to the
--- Content provided by FirstRanker.com ---
integrated commodity programme, the participants of the conference failed to
come to any settlement, so the matter was kept pending for the future
--- Content provided by FirstRanker.com ---
conference.UNCTAD?V
From May 7, 1979 a meeting of UNCTAD-V was held in Manila for nearly a
--- Content provided by FirstRanker.com ---
month, 150 member countries participated in this conference. But on the core
issues no concrete resolutions were passed. One major achievements has been
--- Content provided by FirstRanker.com ---
the contribution by several countries to the creation of the commoditydevelopment facility, which aims at the development of product adaptation
processing and marketing skills and infrastructure in the developing countries.
--- Content provided by FirstRanker.com ---
However, some agreements were unanimously made on the issues like transfer
of resources to developing countries, protectionism etc. Some ideas about
--- Content provided by FirstRanker.com ---
monetary reforms were referred for future consideration. It also recommendedall members to refrain from exploiting resources until the adoption of an
international regime by the U.N. conference.
--- Content provided by FirstRanker.com ---
UNCTAD-VIIn July 1983, the sixth session of the UNCTAD was held at Belgrade, its focus
was on the attainment of a new international economic order. It reiterated its full
--- Content provided by FirstRanker.com ---
support to earlier programmes approved in previous UNCTAD Sessions.
Monetary issues such as SDR allocation, adequacy of fund resources,
--- Content provided by FirstRanker.com ---
conditionality etc. were discussed. Question of improvement in the quality of aidwas examined. Improvements in institutional arrangements were suggested.
Developed countries in this session insisted on liberalisation of trade policies by
--- Content provided by FirstRanker.com ---
the developing nations.
UNCTAD-VII
--- Content provided by FirstRanker.com ---
UNCTAD VII took place in Geneva during 1987. The UNCTAD VII also couldnot achieve any substantial progress. It only emphasized that external financing
from official and private sources be increased on appropriate terms and
--- Content provided by FirstRanker.com ---
conditions to facilitate growth in the developing countries. It recommended that
a judicious combination of measures be worked out to reduce the debt burden,
--- Content provided by FirstRanker.com ---
such as debt-equity swaps and other non-debt-creating flows. The Conferenceurged the developed countries to convert their official loans into grants. It also
asked for concerned efforts to achieve the Internationally agreed target of 0.7
--- Content provided by FirstRanker.com ---
per cent of GNP being given as official development assistance by the
developed to the developing countries.
--- Content provided by FirstRanker.com ---
UNCTAD VIIIUNCTAD VIII took place in Cartegena De Hidios, Colombia, during Feb. 1992.
The major issue at UNCTAD VIII was the role of UNCTAD itself. 170
--- Content provided by FirstRanker.com ---
members agreed on broad features of revitalizing UNCTAD and to make it more
effective in dealing with development related issues. UNCTAD VIII agreed on a
new structure. It was agreed to create Trade and Development Board (TDB)
--- Content provided by FirstRanker.com ---
which would meet twice a year in regular session, and in special session as
required. An Executive Committee of the permanent representative to UNCTAD
--- Content provided by FirstRanker.com ---
in Geneva was formed and was to meet periodically to guide UNCTAD workprogramme. Other decisions related to the creation of new standing committee
on poverty alleviation, economic co-operation among developing countries and
--- Content provided by FirstRanker.com ---
services, establishment of five adhoc working groups to support the committees
and the TDB. The ad hoc working groups were to deal with the areas on
--- Content provided by FirstRanker.com ---
Investment and financial flow, non-debt creating finance for development, newmechanics for creating or increasing investments and financial flow, non-debt
creating finance flow development, trade efficiency, comparative experiences
--- Content provided by FirstRanker.com ---
with privatization, expansion of trading opportunities for developing countries,
interrelationship between investment and technology transfers. With new
--- Content provided by FirstRanker.com ---
structure and sincere efforts, it was hoped UNCTAD may render some usefulservices in improving the conditions of developing nations in the progressive
global economy soon marching towards the 21st century.
--- Content provided by FirstRanker.com ---
UNCTAD-IX
The UNCTAD-IX held at Midrand, South Africa in May 1996 urged its
--- Content provided by FirstRanker.com ---
members to provide more resources for sustainable development and debt reliefto developing countries and to carry on the issues relating to technology,
services and commodities in the light of the W.T.O. agreement of 1994 and the
--- Content provided by FirstRanker.com ---
General Agreement on Tariffs and Trade.
To ensure that all countries benefit from a mutually beneficial multilateral
--- Content provided by FirstRanker.com ---
trading system through Partnership for Development, the member-States agreedupon the establishment of following common objectives and development of
joint action:
--- Content provided by FirstRanker.com ---
(a)
Strengthening inter-governmental cooperation between developed and
developing countries;
--- Content provided by FirstRanker.com ---
(b)Enhanced cooperation between developing countries with special
attention to LDCs;
--- Content provided by FirstRanker.com ---
(c)More effective coordination and complementarily of multilateral
institutions;
--- Content provided by FirstRanker.com ---
(d)The mobilization of human and material resources towards development
through dialogue and common action between Governments and civil
society;
--- Content provided by FirstRanker.com ---
(e)
Partnership between the public and private sectors to achieve higher
growth rates and greater development.
--- Content provided by FirstRanker.com ---
In order to achieve the slated objectives of UNCTAD IX, the Conference will
strengthen its cooperation with WTO and other multilateral institutions to ensure
--- Content provided by FirstRanker.com ---
that the developing countries participate in the global economy on a moreequitable basis with regard to trade, investment, technology, services and
development. It was also agreed that UNCTAD should identify and analyze the
--- Content provided by FirstRanker.com ---
implications for development of issues relevant to a possible multilateral
framework on investment.
--- Content provided by FirstRanker.com ---
The major problem with the UNCTAD has been trying to tackle too manyproblems at the same time. Partly it is due to the widely divergent interests of
the developing country members of the UNCTAD. As a result due to the lack of
--- Content provided by FirstRanker.com ---
any specific focus, it has not been able to achieve any tangible results.
Experience shows that whenever UNCTAD discussed specific issues, it has
--- Content provided by FirstRanker.com ---
been able to achieve significant success.UNCTAD-X
The tenth session of UNCTAD was held in 2000 at Bangkok, Thailand. This
--- Content provided by FirstRanker.com ---
conference was held against global recessionary conditions as well as fears on
the part of many developing countries as to the adverse impact of globalization.
--- Content provided by FirstRanker.com ---
The Bangkok Conference emphasized the need for increased policy coherence atthe national and international levels. There should be complementarily between
macroeconomic and Sectoral policies at the national level and between policies
--- Content provided by FirstRanker.com ---
at the national and international levels. There is also a need for more effective
cooperation and coordination among multilateral institutions.
Many countries have difficulty in coping with the increased competition and
--- Content provided by FirstRanker.com ---
lack the capacity to take advantage of the opportunities brought about by
globalization. This requires a decisive effort in favour of those at the risk of
--- Content provided by FirstRanker.com ---
marginalization.UNCTAD endorsed its commitment to a multilateral trading system that is fair,
equitable and rules-based operates in a non-discriminatory and transparent
--- Content provided by FirstRanker.com ---
manner and provides benefits to all countries, specially developing countries.
This will involve, among other things, improving market access for goods and
--- Content provided by FirstRanker.com ---
services of particular interest to developing countries, resolving issues relatingto the implementation of World Trade Organization (WTO) agreements, fully
implementing special and differential treatment, facilitating accession to the
--- Content provided by FirstRanker.com ---
WTO and providing technical assistance. A new round of multilateral trade
negotiations should take account of the development dimension.
--- Content provided by FirstRanker.com ---
Specially, the Bangkok conference prepared a detailed Plan of Action whichincluded inter alia, the following:
- Reducing tariff and non-tariff barriers in export sectors of interest to
--- Content provided by FirstRanker.com ---
developing countries, particularly in developed country markets;
- Maintaining and further improving the level of tariff-free or reduced
--- Content provided by FirstRanker.com ---
tariff access to markets through national GSP schemes for allbeneficiaries.
- Maximizing market access benefits for the least developed countries,
--- Content provided by FirstRanker.com ---
for example, developed countries granting duty-free and quota-freetreatment for essentially all products originating in these countries.
- Impact of anti-dumping and countervailing duties actions:
UNCTAD should help developing countries in identifying:
--- Content provided by FirstRanker.com ---
- The priority sectors where early trade liberalization should take
place;
--- Content provided by FirstRanker.com ---
- The main trade barriers that developing countries face in sectorswhich limit developing country ability to export their services;
- The preconditions, at the domestic level, which are necessary for
--- Content provided by FirstRanker.com ---
developing countries to benefit from trade liberalization in theservice sector in general.
UNCTAD-XI
--- Content provided by FirstRanker.com ---
Held at Sao Paulo (Brazil) in 2004, it agreed on the following:(a) There was need to focus on the ability of international trade to
contribute to poverty alleviation, and instability in world
--- Content provided by FirstRanker.com ---
commodity prices.(b) All countries at the international level should facilitate internal
adjustments and remove external constraints to put the
--- Content provided by FirstRanker.com ---
developing world on a firm and sustainable path to development.(c) Policy instruments and measures were adopted to eradicate
poverty and hunger.
--- Content provided by FirstRanker.com ---
(d) To generate and better utilize additional international resources,
market access and technical assistance for the LDCs be
established, so as to form a solid base for their development.
--- Content provided by FirstRanker.com ---
(e) Attention be devoted to improve international capital flows for
development as well as deal with the volatility of international
capital markets.
--- Content provided by FirstRanker.com ---
Achievements of UNCTAD
--- Content provided by FirstRanker.com ---
Despite the disagreements over the years, UNCTAD has played a keyrole various sphere. The more important of these are as follows:
1.
--- Content provided by FirstRanker.com ---
Trade in Primary Commodities:- The UNCTAD has been active in the
International Commodity Agreement since its inception, LDC`s (Last
Developed Countries) wanted to expand their market for their traditional
exports of primary commodities. Developed countries placed restrictions
--- Content provided by FirstRanker.com ---
of the exports of the latter in such form as licensing, quotas, tariffs etc.and provided subsidies to domestic producers. Such trade restrictions
tend to be higher for processed products than for unprocessed ones.
Besides, exports form LDC`s have been subject to wide fluctuations.
Thus, there has been a continual deterioration in the terms of trade of
--- Content provided by FirstRanker.com ---
primary products of the LDC`s in relation to the export of manufacturedproducts from the developed countries. Since UNCTAD-II, the LDC`s
have been insisting on International Commodity Agreements to stabilize
the prices and markets for their exports of primary products. At
UNCTAD IV in 1976, it was proposed to have an Integrated Program for
--- Content provided by FirstRanker.com ---
Commodities (IPC) and to create common fund for buffer stockfinancing. This fund was meant to provide a considerable benefit to the
exporters and importers of developing countries. Exporters of primary
products would be able to realize higher prices for primary products like
rubber, cocoa, tin etc. Similarly, exporters of such primary products also
--- Content provided by FirstRanker.com ---
would not be subjected to the uncertainties of price fluctuations whichsometimes are the results of speculative activity.
2.
--- Content provided by FirstRanker.com ---
Trade in Manufactured Goods: LDC`s have strongly urged thedeveloped countries to give them tariff preferences on their
manufactured and semi-manufactured goods. At UNCTAD-I, the G-77
urged the develop countries to grant generalized system of preferences
(GSP) to the exports of such goods to the developed countries. It was at
--- Content provided by FirstRanker.com ---
UNCTAD-II that all members unanimously agreed for the earlyestablishment of a mutually acceptable system of generalized, non-
reciprocal and non-discriminatory preferences. Under GSP, most
manufactured and semi-manufactured goods from LDC`s to developed
countries enjoy tariff reduction or exemptions from custom duties. A
--- Content provided by FirstRanker.com ---
majority of developed countries grant duty free treatment for all or mostproducts eligible for GSP. But there are certain limitations to the scheme
of GSP :-
(a)
--- Content provided by FirstRanker.com ---
Despite efforts made to expand the coverage of GSP, there areitems like textiles, clothing, steel, footwear etc., which are
excluded by a number of developed countries.
--- Content provided by FirstRanker.com ---
(b)Many developed countries have devolved their own schemes
which subject the preferences to variety of restrictions.
--- Content provided by FirstRanker.com ---
(c)
There is no long term guarantee in the case of GSP concessions
--- Content provided by FirstRanker.com ---
which can be altered or withdrawn at short notice.(d)
Among the LDC`s, the benefit of GSP have been consistently
--- Content provided by FirstRanker.com ---
concentrated among a few more advanced developing countries.
Thus, the scope for the extension of GSP is quite limited, as producers in the
--- Content provided by FirstRanker.com ---
LDC`s have to face a tough competitive position in the world market.3.
Development Finance: UNCTAD is also endeavoring to reduce the debt
--- Content provided by FirstRanker.com ---
burden of the developing countries. These countries have taken large
amount of loans from bilateral and multilateral sources. As a result, the
--- Content provided by FirstRanker.com ---
servicing of the accumulated debts, i.e. the interest payments andrepayments, now account for a very substantial proportion from exports.
In fact, for some of the developing countries the outgo of foreign
--- Content provided by FirstRanker.com ---
exchange on account of debt servicing is more than the current inflowsof loans and credits. UNCTAD is trying to persuade the developed
countries, to write off a part of the accumulated debts. Some of the
--- Content provided by FirstRanker.com ---
developed countries, mostly Scandinavian group, have accepted the
proposal.
--- Content provided by FirstRanker.com ---
4.Technology Transfer: In UNCTAD, measures were adopted to
strengthen technology capability of LDC`s. It was pointed out that better
--- Content provided by FirstRanker.com ---
research facilities, training programmes and establishment of local and
regional centers for technology transfer would serve the purpose. Thus,
--- Content provided by FirstRanker.com ---
the UNCTAD VI held at Belgrade in June 1983 emphasized the need fortransfer of technology to LDC`s in order to promote their speedy and self
reliant development. UNCTAD VI passed a resolution relating to the
--- Content provided by FirstRanker.com ---
transfer of technology to LDC`s on the lines of the policy paper
approved at UNCTAD VI. The UNCTAD has simply laid down the
--- Content provided by FirstRanker.com ---
broad principles for transfer of publicity funded technologies at theintergovernmental level. It may facilitate the process of technology
transfer by freer access to sources of information, cutting down barriers
--- Content provided by FirstRanker.com ---
to free flow of technology etc.
5.
--- Content provided by FirstRanker.com ---
Economic Co-operation: UNCTAD-II held at Delhi in 1968emphasized for the first time the need for promoting international co-
operation and self-reliance among the LDCs. UNCTAD VI again
--- Content provided by FirstRanker.com ---
emphasized the need for co-operative efforts among the LDCs through
widening the scope of preferential trading arrangements, harmonizing
--- Content provided by FirstRanker.com ---
industrial development programmes through infrastructural facilitiesparticularly in respect of shipping services and simple payment
mechanism under common clearing system. GSTP is major initiative of
--- Content provided by FirstRanker.com ---
developing countries to expand mutual trade through grant of tariff and
non-tariff concessions and other measures such as long term contracts
under UNCTAD.
--- Content provided by FirstRanker.com ---
Problems of UNCTAD
The following are the problems of UNCTAD:
--- Content provided by FirstRanker.com ---
1.UNCTAD has had problems from its inception, which have kept the
organization from being fully effective in achieving its objectives. It has
been dominated by two organisations: The U.N. type and G-77. The
--- Content provided by FirstRanker.com ---
interest of each of the major political-economic classifications create somuch friction that the rule-by-consensus method of negotiating issues
results in few concrete accomplishments.
2.
--- Content provided by FirstRanker.com ---
UNCTAD has failed to adopt or implement a trade policy for
development.
3.
--- Content provided by FirstRanker.com ---
UNCTAD seems to be an international organization which, rather than to
do a proper job with short-meetings and clear focus on its objectives and
international realities, appears to be among those institutions which huff
and puff for weeks while revealing their own importance.
--- Content provided by FirstRanker.com ---
INTERNATIONAL COMMODITY AGREEMENTS (ICA)
International commodity agreements are inter-governmental arrangements
--- Content provided by FirstRanker.com ---
concerning the production and trade of certain primary products. Manydeveloping countries which have embarked upon ambitious development
programmes are in need of large foreign exchange resources to finance some of
--- Content provided by FirstRanker.com ---
their development requirements like capital goods imports. But they have been
facing the important problem of wide-fluctuations in the export prices of the
--- Content provided by FirstRanker.com ---
primary goods i.e. agricultural products and minerals, which form a major partof their total exports. Apart form making the export earnings unstable, it has also
been causing a deterioration in their terms of trade. Hence, there has been a
--- Content provided by FirstRanker.com ---
growing demand for adopting stabilization measures to protect especially the
interests of developing countries. International commodity agreements, it is
--- Content provided by FirstRanker.com ---
believed, can help stabilize prices of the respective commodities.Objectives of ICA
The main objectives of the international commodity agreements are:-
--- Content provided by FirstRanker.com ---
1. Price Stabilization: Price stabilization is a very important purpose forwhich commodity agreements have been entered into.
2. The Promotion of Health and Morals: The outstanding example of
--- Content provided by FirstRanker.com ---
international agreements for the purpose of promoting health and morals
is the international regulation of trade in opium and narcotics.
3. Security Objectives: Inter governmental commodity agreements may
--- Content provided by FirstRanker.com ---
also be useful as a preventive of war by preventing scramble for scarce
strategic materials for national stock-piling or other security purposes.
4. The Conservation of Resources: The conservation of natural resources
--- Content provided by FirstRanker.com ---
is a direct or indirect objective of nearly all international raw material
schemes.
5. The management of surplus: Commodity agreements are sometimes
--- Content provided by FirstRanker.com ---
entered into to manage the surplus during times of bumper crops, there
may arise a problem of surplus. Such should be properly handled to
avoid serious adverse effects on price and also to hold stock for the lean
period.
--- Content provided by FirstRanker.com ---
Forms of Commodity Agreements
Commodity Agreements may take any of the four forms, namely, quotas, buffer
--- Content provided by FirstRanker.com ---
stock, bilateral contract, and multilateral contract.I.
Quota Agreements: International quota agreements seek to prevent fall
--- Content provided by FirstRanker.com ---
in commodity price by regulating their supply under the quota
agreement. Export quota are determined and allocated to participating
--- Content provided by FirstRanker.com ---
countries according to some mutually agreeable formula and theyundertake to restrict the export or production by a certain percentage of
the basic quota as decided by the central committee or council. For
--- Content provided by FirstRanker.com ---
instance, the coffee agreement among the major producers of Latin
America and Africa limits the amount that can be exported by each
--- Content provided by FirstRanker.com ---
country.Quota agreements have already been tried in case of coffee and
--- Content provided by FirstRanker.com ---
sugar, and commodities like tea and bananas have been suggested asprospective candidates for new agreements.
II.
--- Content provided by FirstRanker.com ---
Buffer Stock Agreements: International Buffer Stock Agreements seek
to stabilize the commodity prices by maintaining the demand-supply
--- Content provided by FirstRanker.com ---
balance.Buffer stock agreements stabilize the price by increasing the market
supply by selling the commodity when the price tends to rise and by
--- Content provided by FirstRanker.com ---
absorbing the excess supply to prevent a fall in the price. The buffer
stock plan, thus, requires an international agency to set a range of prices
--- Content provided by FirstRanker.com ---
and to buy the commodity at the minimum and sell at the maximum. Thebuffer pool method has already been tried in case of Tin, and Sugar, and
commodities like Rubber, Tea and Copper have been suggested as
--- Content provided by FirstRanker.com ---
prospective candidates for new agreements. The buffer stock
arrangement, however, has certain limitations. It can be effected only in
--- Content provided by FirstRanker.com ---
case of those products, which can be stored at relatively low cost withoutthe danger of deterioration. Further, large financial resources and stock
of the commodity are required to launch the programme successfully.
--- Content provided by FirstRanker.com ---
III. Bilateral/Multilateral Contracts: Bilateral contract to purchase and sell
certain quantities of a commodity at agreed prices may be entered into
--- Content provided by FirstRanker.com ---
between the major importer and exporter of the commodity. In such anagreement, an upper price and a lower price are specified. If the market
price throughout the period of the agreement remains within these
--- Content provided by FirstRanker.com ---
specified limits, the agreement becomes operative. But, if the market
price rises above the upper limit specified, the exporting country is
--- Content provided by FirstRanker.com ---
obliged to sell to the importing country a certain specified quantity of thecommodity at the upper prices fixed by the agreement. On the other
hand, if the market price falls below the lower limit specified, the
--- Content provided by FirstRanker.com ---
importer is obliged to purchase the contracted quantity at the specifiedlower price.
Such international sale and purchase contracts may also be entered into
--- Content provided by FirstRanker.com ---
by two or more exporters and importers. The bilateral/multilateral
agreements are usually concluded between the major suppliers and major
--- Content provided by FirstRanker.com ---
importers of the commodities. The best example of this type ofagreement are the International Wheat Agreement.
The contract has disadvantage of creating a two price system. It requires
--- Content provided by FirstRanker.com ---
domestic controls of some sort and buffer stock to implement it. And it is quite
apt to put the participating governments into the commodities business. In an
--- Content provided by FirstRanker.com ---
extreme case, it may become nothing but a payment by the government of onecountry to that of another without even touching the producer or consumer.
The experience of the post-war market stabilization schemes indicates that a
--- Content provided by FirstRanker.com ---
combination of different control techniques is likely to be more effective than
reliance on a single technique alone.
--- Content provided by FirstRanker.com ---
3.4INTERNATIONAL MONETARY FUND (IMF)
The International Monetary Fund, A Global Institution, is frequently in the
--- Content provided by FirstRanker.com ---
news, but its role and functions are often misunderstood.
The Origins of the IMF
--- Content provided by FirstRanker.com ---
The IMF was conceived in July 1944 at an international conference held atBretton Woods, New Hampshire, U.S.A. Delegates from 44 governments agreed
on a framework for economic cooperation partly designed to avoid a repetition
--- Content provided by FirstRanker.com ---
of the disastrous economic policies that had contributed to the Great Depression
of the 1930s.
--- Content provided by FirstRanker.com ---
During that decade, as economic activity in the major industrial countriesweakened, countries attempted to defend their economies by increasing
restrictions on imports; but this just worsened the downward spiral in world
--- Content provided by FirstRanker.com ---
trade, output, and employment. To conserve dwindling reserves of gold andforeign exchange, some countries curtailed their citizens' freedom to buy abroad,
some devalued their currencies, and some introduced complicated restrictions on
--- Content provided by FirstRanker.com ---
their citizens' freedom to hold foreign exchange. These fixes, however, also
proved self-defeating, and no country was able to maintain its competitive edge
--- Content provided by FirstRanker.com ---
for long. Such "beggar-thy-neighbor" policies devastated the internationaleconomy; world trade declined sharply, as did employment and living standards
in many countries.
--- Content provided by FirstRanker.com ---
As World War II came to a close, the leading allied countries considered various
plans to restore international monetary. The country representatives drew up the
--- Content provided by FirstRanker.com ---
charter (or Articles of Agreement) of an international institution to oversee theinternational monetary system and to promote both the elimination of exchange
restrictions relating to trade in goods and services, and the stability of exchange
--- Content provided by FirstRanker.com ---
rates.
The IMF came into existence in December 1945, when the first 29 countries
--- Content provided by FirstRanker.com ---
signed its Articles of Agreement.The statutory purposes of the IMF today are the same as when they were
formulated in 1944. Since then, the world has experienced unprecedented
--- Content provided by FirstRanker.com ---
growth in real incomes. And although the benefits of growth have not flowed
equally to all--either within or among nations--most countries have seen
--- Content provided by FirstRanker.com ---
increases in prosperity that contrast starkly with the interwar period, inparticular. Part of the explanation lies in improvements in the conduct of
economic policy, including policies that have encouraged the growth of
--- Content provided by FirstRanker.com ---
international trade and helped smooth the economic cycle of boom and bust. The
IMF is proud to have contributed to these developments.
--- Content provided by FirstRanker.com ---
In the decades since World War II, apart from rising prosperity, the worldeconomy and monetary system have undergone other major changes-changes
that have increased the importance and relevance of the purposes served by the
--- Content provided by FirstRanker.com ---
IMF, but that have also required the IMF to adapt and reform. Rapid advances in
technology and communications have contributed to the increasing international
integration of markets and to closer linkages among national economies. As a
--- Content provided by FirstRanker.com ---
result, financial crises, when they erupt, now tend to spread more rapidly among
countries.
--- Content provided by FirstRanker.com ---
In such an increasingly integrated and interdependent world, any country'sprosperity depends more than ever both on the economic performance of other
countries and on the existence of an open and stable global economic
--- Content provided by FirstRanker.com ---
environment. Equally, economic and financial policies that individual countries
follow affect how well or how poorly the world trade and payments system
--- Content provided by FirstRanker.com ---
operates. Globalization thus calls for greater international cooperation, which inturn has increased the responsibilities of international institutions that organize
such cooperation--including the IMF.
--- Content provided by FirstRanker.com ---
The IMF's purposes have also become more important simply because of the
expansion of its membership. The number of IMF member countries has more
--- Content provided by FirstRanker.com ---
than quadrupled from the 44 states involved in its establishment, reflecting inparticular the attainment of political independence by many developing
countries and more recently the collapse of the Soviet bloc.
--- Content provided by FirstRanker.com ---
The expansion of the IMF`s membership, together with the changes in the world
economy, has required the IMF to adapt in a variety of ways to continue serving
--- Content provided by FirstRanker.com ---
its purposes effectively.Countries that joined the IMF between 1945 and 1971 agreed to keep their
exchange rates pegged at rates that could be adjusted, but only to correct a
--- Content provided by FirstRanker.com ---
"fundamental disequilibrium" in the balance of payments and with the IMF's
concurrence. This so-called Bretton Woods system of exchange rates prevailed
--- Content provided by FirstRanker.com ---
until 1971 when the U.S. government suspended the convertibility of the U.S.dollar (and dollar reserves held by other governments) into gold.
At the same time as the IMF was created, the International Bank for
--- Content provided by FirstRanker.com ---
Reconstruction and Development (IBRD), more commonly known as the World
Bank, was set up to promote long-term economic development, including
through the financing of infrastructure projects, such as road-building and
--- Content provided by FirstRanker.com ---
improving water supply.
The IMF and the World Bank Group--which includes the International Finance
--- Content provided by FirstRanker.com ---
Corporation (IFC) and the International Development Association (IDA)--complement each other's work. While the IMF's focus is chiefly on
macroeconomic performance, and on macroeconomic and financial sector
--- Content provided by FirstRanker.com ---
policies, the World Bank is concerned mainly with longer-term development
and poverty reduction issues. Its activities include lending to developing
--- Content provided by FirstRanker.com ---
countries and countries in transition to finance infrastructure projects, the reformof particular sectors of the economy, and broader structural reforms. The IMF,
in contrast, provides financing not for particular sectors or projects but for
--- Content provided by FirstRanker.com ---
general support of a country's balance of payments and international reserves
while the country takes policy action to address its difficulties.
--- Content provided by FirstRanker.com ---
When the IMF and World Bank were established, an organization to promoteworld trade liberalization was also contemplated, but it was not until 1995 that
the World Trade Organization was set up. In the intervening years, trade issues
--- Content provided by FirstRanker.com ---
were tackled through the General Agreement on Tariffs and Trade (GATT).
The Purposes of IMF
--- Content provided by FirstRanker.com ---
The purposes of the International Monetary Fund are:i.
To promote international monetary cooperation through a
--- Content provided by FirstRanker.com ---
permanent institution which provides the machinery forconsultation and collaboration on international monetary
problems. ii. To facilitate the expansion and balanced growth of
international trade, and to contribute thereby to the promotion
and maintenance of high levels of employment and real income
--- Content provided by FirstRanker.com ---
and to the development of the productive resources of allmembers as primary objectives of economic policy.
ii.
--- Content provided by FirstRanker.com ---
To promote exchange stability, to maintain orderly exchangearrangements among members, and to avoid competitive
exchange depreciation.
iii.
--- Content provided by FirstRanker.com ---
To assist in the establishment of a multilateral system ofpayments in respect of current transactions between members and
in the elimination of foreign exchange restrictions which hamper
the growth of world trade.
--- Content provided by FirstRanker.com ---
iv.To give confidence to members by making the general resources
of the Fund temporarily available to them under adequate
safeguards, thus providing them with opportunity to correct
--- Content provided by FirstRanker.com ---
maladjustment in their balance of payments without resorting tomeasures destructive of national or international prosperity.
v.
--- Content provided by FirstRanker.com ---
In accordance with the above, to shorten the duration and lessenthe degree of disequilibrium in the international balances of
payments of members.
Decisions making at the IMF
--- Content provided by FirstRanker.com ---
The IMF is accountable to its member countries, and this accountability is
essential to its effectiveness. The day-today work of the IMF is carried out by an
--- Content provided by FirstRanker.com ---
Executive Board, representing the IMF's 184 members, and an internationallyrecruited staff under the leadership of a Managing Director and three Deputy
Managing Directors--each member of this management team being drawn from
--- Content provided by FirstRanker.com ---
a different region of the world. The powers of the Executive Board to conduct
the business of the IMF are delegated to it by the Board of Governors, which is
--- Content provided by FirstRanker.com ---
where ultimate oversight rests.The Board of Governors, on which all member countries are represented, is the
highest authority governing the IMF. It usually meets once a year, at the Annual
--- Content provided by FirstRanker.com ---
Meetings of the IMF and the World Bank. Each member country appoints a
Governor--usually the country's minister of finance or the governor of its
--- Content provided by FirstRanker.com ---
central bank--and an Alternate Governor. The Board of Governors decides onmajor policy issues but has delegated day-to-day decision-making to the
Executive Board.
--- Content provided by FirstRanker.com ---
Key policy issues relating to the international monetary system are considered
twice yearly in a committee of Governors called the International Monetary
--- Content provided by FirstRanker.com ---
and Financial Committee, or IMFC (until September 1999 known as theInterim Committee). A joint committee of the Boards of Governors of the IMF
and World Bank called the Development Committee advises and reports to the
--- Content provided by FirstRanker.com ---
Governors on development policy and other matters of concern to developingcountries.
The Executive Board consists of 24 Executive Directors, with the Managing
--- Content provided by FirstRanker.com ---
Director as chairman. The Executive Board usually meets three-times a week, in
full-day sessions and more often if needed, at the organization's headquarters in
--- Content provided by FirstRanker.com ---
Washington, D.C. The IMF's five largest shareholders --the United States,Japan, Germany, France, and the United Kingdom--along with China, Russia,
and Saudi Arabia, have their own seats on the Board. The other 16 Executive
--- Content provided by FirstRanker.com ---
Directors are elected for two-year terms by groups of countries, known as
constituencies.
--- Content provided by FirstRanker.com ---
Unlike some international organizations that operate under a one-country-one-vote principle (such as the United Nations General Assembly), the IMF has a
weighted voting system: the larger a country's quota in the IMF--determined
--- Content provided by FirstRanker.com ---
broadly by its economic size--the more votes it. But the Board rarely makes
decisions based on formal voting; rather, most decisions are based on consensus
--- Content provided by FirstRanker.com ---
among its members and are supported unanimously.The Executive Board selects the Managing Director, who besides serving as
the chairman of the Board, is the chief of the IMF staff and conducts the
--- Content provided by FirstRanker.com ---
business of the IMF under the direction of the Executive Board. Appointed for a
renewable five-year term, the Managing Director is assisted by a First Deputy
--- Content provided by FirstRanker.com ---
Managing Director and two other Deputy Managing Directors.IMF employees are international civil servants whose responsibility is to the
IMF, not to national authorities. The organization has about 2,800 employees
--- Content provided by FirstRanker.com ---
recruited from 141 countries. About two-thirds of its professional staff are
economists. Directors, who report to the Managing Director, head the IMF`s 26
--- Content provided by FirstRanker.com ---
departments and offices. Most staff works in Washington, although about 90resident representatives are posted in member countries to help advice on
economic policy. The IMF maintains offices in Paris and Tokyo for liaison with
--- Content provided by FirstRanker.com ---
other international and regional institutions, and with organizations of civilsociety; it also has offices in New York and Geneva, mainly for liaison with
other institutions in the UN system.
--- Content provided by FirstRanker.com ---
Funding of IMF
The IMF's resources come mainly from the quota (or capital) subscriptions that
--- Content provided by FirstRanker.com ---
countries pay when they join the IMF, or following periodic reviews in whichquotas are increased. Countries pay 25 percent of their quota subscriptions in
Special Drawing Rights or major currencies, such as U.S. dollars or Japanese
--- Content provided by FirstRanker.com ---
yen; the IMF can call on the remainder, payable in the member's own currency,
to be made available for lending as needed. Quotas determine not only a
--- Content provided by FirstRanker.com ---
country's subscription payments, but also the amount of financing that it canreceive from the IMF, and its share in SDR allocations. Quotas also are the main
determinant of countries' voting power in the IMF.
--- Content provided by FirstRanker.com ---
Quotas are intended broadly to reflect members' relative size in the world
economy: the larger a country's economy in terms of output, and the larger and
--- Content provided by FirstRanker.com ---
more variable its trade, the higher its quota tends to be. The United States ofAmerica, the world's largest economy, contributes most to the IMF, 17.5 percent
of total quotas; Palau, the world's smallest, contributes 0.001 percent. The most
--- Content provided by FirstRanker.com ---
recent (eleventh) quota review came into effect in January 1999, raising IMF
quotas (for the first time since 1990) by about 45 percent to SDR 212 billion
--- Content provided by FirstRanker.com ---
(about $300 billion).If necessary, the IMF may borrow to supplement the resources available from its
quotas. The IMF has two sets of standing arrangements to borrow if needed to
--- Content provided by FirstRanker.com ---
cope with any threat to the international monetary system:
the General Arrangements to Borrow (GAB), set up in 1962, which has
--- Content provided by FirstRanker.com ---
11 participants (the governments or central banks of the Group of Tenindustrialized countries and Switzerland), and
the New Arrangements to Borrow (NAB), introduced in 1997, with 25
--- Content provided by FirstRanker.com ---
participating countries and institutions. Under the two arrangements
combined, the IMF has up to SDR 34 billion (about $50 billion)
--- Content provided by FirstRanker.com ---
available to borrow.
--- Content provided by FirstRanker.com ---
Concept of SDR
The SDR, or special drawing right, is an international reserve asset introduced
--- Content provided by FirstRanker.com ---
by the IMF in 1969 (under the First Amendment to its Articles of Agreement)
out of concern among IMF members that the current stock, and prospective
--- Content provided by FirstRanker.com ---
growth, of international reserves might not be sufficient to support the expansionof world trade. The main reserve assets were gold and U.S. dollars, and
members did not want global reserves to depend on gold production, with its
--- Content provided by FirstRanker.com ---
inherent uncertainties, and continuing U.S. balance of payments deficits, which
would be needed to provide continuing growth in U.S. dollar reserves. The SDR
--- Content provided by FirstRanker.com ---
was introduced as a supplementary reserve asset, which the IMF could"allocate" periodically to members when the need arose, and cancels, as
necessary.
--- Content provided by FirstRanker.com ---
SDRs--sometimes known as "paper gold" although they have no physicalform--have been allocated to member countries (as bookkeeping entries) as a
percentage of their quotas. So far, the IMF has allocated SDR 21.4 billion (about
--- Content provided by FirstRanker.com ---
$32 billion) to member countries. The last allocation took place in 1981, when
SDR 4.1 billion was allocated to the 141 countries that were then members of
--- Content provided by FirstRanker.com ---
the IMF. Since 1981, the membership has not seen a need for another generalallocation of SDRs, partly because of the growth of international capital
markets. In September 1997, however, in light of the IMF's expanded
--- Content provided by FirstRanker.com ---
membership--which included countries that had not received an allocation--the
Board of Governors proposed a Fourth Amendment to the Articles of
--- Content provided by FirstRanker.com ---
Agreement. When approved by the required majority of member governments,this will authorize a special one-time "equity" allocation of SDR 21.4 billion, to
be distributed so as to raise all members' ratios of cumulative SDR allocations to
--- Content provided by FirstRanker.com ---
quotas to a common benchmark.
IMF member countries may use SDRs in transactions among themselves, with
--- Content provided by FirstRanker.com ---
16 "institutional" holders of SDRs, and with the IMF. The SDR is also the IMF'sunit of account. A number of other international and regional organizations and
international conventions use it as a unit of account, or as a basis for a unit of
--- Content provided by FirstRanker.com ---
account.
The SDR's value is set daily using a basket of four major currencies: the euro,
--- Content provided by FirstRanker.com ---
Japanese yen, pound sterling, and U.S. dollar. On July 1, 2004, SDR 1 =US$1.48. The composition of the basket is reviewed every five years to ensure
that it is representative of the currencies used in international transactions, and
--- Content provided by FirstRanker.com ---
that the weights assigned to the currencies reflect their relative importance in the
world's trading and financial systems.
--- Content provided by FirstRanker.com ---
The IMF helps its member countries by:reviewing and monitoring national and global economic and financial
developments and advising members on their economic policies;
--- Content provided by FirstRanker.com ---
lending them hard currencies to support adjustment and reform policiesdesigned to correct balance of payments problems and promote
sustainable growth; and
--- Content provided by FirstRanker.com ---
offering a wide range of technical assistance, as well as training for
government and central bank officials, in its areas of expertise.
--- Content provided by FirstRanker.com ---
Advice on Policies and Global OversightThe IMF's Articles of Agreement call for it to oversee the international monetary
system, including by exercising firm "surveillance"--that is, oversight--over its
--- Content provided by FirstRanker.com ---
member countries' exchange rate policies. Under the Articles, each member
country undertakes to collaborate with the IMF in its efforts to ensure orderly
--- Content provided by FirstRanker.com ---
exchange arrangements and to promote a stable system of exchange rates.More specifically, member countries agree to direct policies toward the goals of
orderly economic growth with reasonable price stability, together with orderly
--- Content provided by FirstRanker.com ---
underlying economic and financial conditions, and to avoid manipulating
exchange rates for unfair competitive advantage. In addition, each country
--- Content provided by FirstRanker.com ---
undertakes to provide the IMF with the information necessary for its effectivesurveillance. The membership has agreed that the IMF's surveillance of each
member's exchange rate policies has to be carried out within the framework of a
--- Content provided by FirstRanker.com ---
comprehensive analysis of the general economic situation and economic policy
strategy of the member.
--- Content provided by FirstRanker.com ---
The regular monitoring of economies, and associated provision of policy advice,that IMF surveillance involves can help signal dangers ahead and enable
members to act in a timely way to avoid trouble.
--- Content provided by FirstRanker.com ---
The IMF conducts its oversight in three ways:
i) Country surveillance, which takes the form of regular (usually yearly)
--- Content provided by FirstRanker.com ---
comprehensive consultations with individual member countries about theireconomic policies, with interim discussions as needed. The consultations are
referred to as "Article IV consultations" as they are mandated by Article IV of
--- Content provided by FirstRanker.com ---
the IMF's charter. (They are also referred to as "bilateral" consultations, but thisis strictly speaking a misnomer: when the IMF consults with a member country,
it represents the entire membership, so that the consultations are really always
--- Content provided by FirstRanker.com ---
multilateral). The IMF supplements its usually annual country consultations
with additional staff visits to member countries when needed. The Executive
--- Content provided by FirstRanker.com ---
Board also holds frequent, informal meetings to review economic and financialdevelopments in selected member countries and regions.
ii) Global surveillance, which entails reviews by the IMF's Executive Board of
--- Content provided by FirstRanker.com ---
global economic trends and developments. The main reviews of this kind are
based on World Economic Outlook and Global Financial Stability reports
--- Content provided by FirstRanker.com ---
prepared by IMF staff, normally twice a year, before the semiannual meetings ofthe International Monetary and Financial Committee. The reports are published
in full prior to the IMFC meetings, together with the Chairman's summing up of
--- Content provided by FirstRanker.com ---
the Executive Board's discussion. The Executive Board also holds more
frequent, informal discussions on world economic and market developments.
--- Content provided by FirstRanker.com ---
iii) Regional surveillance, under which the IMF examines policies pursuedunder regional arrangements. This includes, for example, Board discussions of
developments in the European Union, the euro area, the West African Economic
--- Content provided by FirstRanker.com ---
and Monetary Union, the Central African Economic and Monetary Community,
and the Eastern Caribbean Currency Union.
--- Content provided by FirstRanker.com ---
IMF management and staff also participate in surveillance discussions of suchgroups of countries as the G-7 (the Group of Seven major industrial countries)
and APEC (the Asia-Pacific Economic Cooperation forum).
--- Content provided by FirstRanker.com ---
Instruments of IMF lending and their evolution
The IMF provides loans under a variety of policies or "facilities" that have
--- Content provided by FirstRanker.com ---
evolved over the years to meet the needs of the membership. The duration,repayment terms, and lending conditions attached to these facilities vary,
--- Content provided by FirstRanker.com ---
reflecting the types of balance of payments problem and circumstances theyaddress.
--- Content provided by FirstRanker.com ---
Most of the IMF's financing is provided through three different types of lending
--- Content provided by FirstRanker.com ---
policies:Stand-By Arrangements form the core of the IMF's lending policies. First used
in 1952, they are designed to deal mainly with short-term balance of payments
--- Content provided by FirstRanker.com ---
problems.
Medium-term extended arrangements under the Extended Fund Facility are
--- Content provided by FirstRanker.com ---
intended for countries with balance of payments difficulties related to structuralproblems, which may take longer to correct than macroeconomic weaknesses.
Structural policies associated with extended arrangements include reforms
--- Content provided by FirstRanker.com ---
designed to improve the way economy function, such as tax and financial sector
reforms, privatization of public enterprises, and steps to enhance the flexibility
--- Content provided by FirstRanker.com ---
of labor markets. The IMF has been providing concessional lending to help itspoorest member countries achieve external viability, sustainable economic
growth, and improved living standards since the late 1970s. The current
--- Content provided by FirstRanker.com ---
concessional facility, the Poverty Reduction and Growth Facility (PRGF),
replaced the Enhanced Structural Adjustment Facility (ESAF) in November
1999, with the aim of making poverty reduction and economic growth the
--- Content provided by FirstRanker.com ---
central objectives of policy programs in the countries concerned.
In the late 1990s, the IMF introduced facilities designed to help countries cope
--- Content provided by FirstRanker.com ---
with sudden losses of market confidence, and to prevent "contagion"--thespread of financial crises to countries with sound economic policies. (See pages
30-33 for highlights of the IMF's evolving facilities.) The IMF also provides
--- Content provided by FirstRanker.com ---
loans to help countries cope with balance of payments problems caused by
natural disasters, the aftermath of military conflicts, and temporary shortfalls in
--- Content provided by FirstRanker.com ---
export earnings (or temporary increases in cereal import costs) beyond theircontrol.
Just as new facilities have been introduced to meet new challenges, redundant
--- Content provided by FirstRanker.com ---
facilities have over time been terminated. Indeed, the Executive Board initiated
in early 2000 a review of facilities. The review led to the elimination of four
--- Content provided by FirstRanker.com ---
obsolete facilities. The Board's consideration of modifications to othernonconcessional facilities led to agreement to:
adapt the terms of Stand-By Arrangements and Extended Fund Facility
--- Content provided by FirstRanker.com ---
loans to encourage countries to avoid reliance on IMF resources for
unduly long periods or in unduly large amounts;
--- Content provided by FirstRanker.com ---
reaffirm the Extended Fund Facility as one confined to cases wherelonger-term financing is clearly required; and
enhance monitoring of IMF-supported programs after their expiration,
--- Content provided by FirstRanker.com ---
especially when a member's credit outstanding exceeds a certain
threshold.
--- Content provided by FirstRanker.com ---
Selected IMF Lending Facilitiesi) Stand-By Arrangements?form the core of the IMF's lending policies. A
Stand-By Arrangement provides assurance to a member country that it can draw
--- Content provided by FirstRanker.com ---
up to a specified amount, usually over 12-18 months, to deal with a short-term
balance of payments problem.
ii) Extended Fund Facility?IMF support for members under the Extended Fund
--- Content provided by FirstRanker.com ---
Facility provides assurance that a member country can draw up to a specified
amount, usually over three to four years, to help it tackle structural economic
--- Content provided by FirstRanker.com ---
problems that are causing serious weaknesses in its balance of payments.iii) Poverty Reduction and Growth Facility?(which replaced the Enhanced
Structural Adjustment Facility in November 1999). A low-interest facility to
--- Content provided by FirstRanker.com ---
help the poorest member countries facing protracted balance of payments
problems (see page 46, "A New Approach to Reducing Poverty"). The cost to
--- Content provided by FirstRanker.com ---
borrowers is subsidized with resources raised through past sales of IMF-ownedgold, together with loans and grants provided to the IMF for the purpose by its
members.
--- Content provided by FirstRanker.com ---
iv) Supplemental Reserve Facility?Provides additional short-term financing to
member countries experiencing exceptional balance of payments difficulty
--- Content provided by FirstRanker.com ---
because of a sudden and disruptive loss of market confidence reflected in capitaloutflows. The interest rate on SRF loans includes a surcharge over the IMF's
usual lending rate.
--- Content provided by FirstRanker.com ---
v) Emergency Assistance?Introduced in 1962 to help members cope with
balance of payments problems arising from sudden and unforeseeable natural
--- Content provided by FirstRanker.com ---
disasters, this form of assistance was extended in 1995 to cover certainsituations in which members have emerged from military conflicts that have
disrupted institutional and administrative capacity.
--- Content provided by FirstRanker.com ---
At present, IMF borrowers are all either developing countries, countries in
transition from central planning to market-based systems, or emerging market
--- Content provided by FirstRanker.com ---
countries recovering from financial crises. Many of these countries have onlylimited access to international capital markets, partly because of their economic
difficulties. Since the late 1970s, all industrial countries have been able to meet
--- Content provided by FirstRanker.com ---
their financing needs from capital markets, but in the first two decades of the
IMF's existence over half of the IMF's financing went to these countries.
Technical Assistance and Training
--- Content provided by FirstRanker.com ---
The IMF is probably best known for its policy advice and its policy-based
lending to countries in times of economic crisis. But the IMF also shares its
--- Content provided by FirstRanker.com ---
expertise with member countries on a regular basis by providing technicalassistance and training in a wide range of areas, such as central banking,
monetary and exchange rate policy, tax policy and administration, and official
--- Content provided by FirstRanker.com ---
statistics. The objective is to help strengthen the design and implementation of
members' economic policies, including by strengthening skills in the institutions
--- Content provided by FirstRanker.com ---
responsible, such as finance ministries and central banks. Technical assistancecomplements the IMF's policy advice and financial assistance to member
countries and accounts for some 20 percent of the IMF's administrative costs.
--- Content provided by FirstRanker.com ---
The IMF began providing technical assistance in the mid-1960s when many
newly independent countries sought help in setting up their central banks and
--- Content provided by FirstRanker.com ---
finance ministries. Another surge in technical assistance occurred in the early1990s, when countries in central and eastern Europe and the former Soviet
Union began their shift from centrally planned to market-based economic
--- Content provided by FirstRanker.com ---
systems. More recently, the IMF has stepped up its provision of technical
assistance as part of the effort to strengthen the architecture of the international
--- Content provided by FirstRanker.com ---
financial system.Specifically, it has been helping countries bolster their financial systems,
improve the collection and dissemination of economic and financial data,
--- Content provided by FirstRanker.com ---
strengthen their tax and legal systems, and improve banking regulation and
supervision. It has also given considerable operational advice to countries that
--- Content provided by FirstRanker.com ---
have had to reestablish government institutions following severe civil unrest orwar.
The IMF provides technical assistance and training mainly in four areas:
--- Content provided by FirstRanker.com ---
strengthening monetary and financial sectors through advice on banking
system regulation, supervision, and restructuring, foreign exchange
management and operations, clearing and settlement systems for
--- Content provided by FirstRanker.com ---
payments, and the structure and development of central banks;supporting strong fiscal policies and management through advice on tax
and customs policies and administration, budget formulation,
--- Content provided by FirstRanker.com ---
expenditure management, design of social safety nets, and themanagement of internal and external debt;
compiling, managing, and disseminating statistical data and improving
--- Content provided by FirstRanker.com ---
data quality; anddrafting and reviewing economic and financial legislation.
--- Content provided by FirstRanker.com ---
The IMF offers training courses for government and central bank officials ofmember countries at its headquarters in Washington and at regional training
centers in Bras?lia, Singapore, Tunis, and Vienna. In the field, it provides
--- Content provided by FirstRanker.com ---
technical assistance through visits by IMF staff, supplemented by hired
consultants and experts. Supplementary financing for IMF technical assistance
--- Content provided by FirstRanker.com ---
and training is provided by the national governments of such countries as Japanand Switzerland, and international agencies such as the European Union, the
Organization for Economic Cooperation and Development, the United Nations
--- Content provided by FirstRanker.com ---
Development Program, and the World Bank.
3.5
--- Content provided by FirstRanker.com ---
WORLD BANKIntroduction
A need arises to finance various projects in various countries to promote the
--- Content provided by FirstRanker.com ---
development of economically backward regions. The United States and other
countries have established a variety of development banks whose lending is
--- Content provided by FirstRanker.com ---
directed to investments that would not otherwise be funded by private capital.The investments include dams, roads, communication systems, and other
infrastructural projects whose economic benefits cannot be computed and/or
--- Content provided by FirstRanker.com ---
captured by private investors, as well as projects, such as steel mills or chemical
plants, whose value lies not only in the economic terms but also, significantly in
--- Content provided by FirstRanker.com ---
the political and social advantages to the nation. The loans generally aremedium-term to long-term and carry concessional rates.
Even though most lending is done directly to a government, this type of
--- Content provided by FirstRanker.com ---
financing has two implications for the private sector. First, the projects requiregoods and services which corporations can produce. Secondly, by establishing
an infrastructure, new investment opportunities become available for
--- Content provided by FirstRanker.com ---
multinational corporations.
The World Bank or the International Bank for Reconstruction and Development
--- Content provided by FirstRanker.com ---
(IBRD) was established in 1945 under the Bretton Woods Agreement of 1944.An International Monetary and Financial Conference was held at Bretton
Woods, New Hampshire during July 1-22, 1944. The main purpose of the
--- Content provided by FirstRanker.com ---
conference was finalisation of the Articles of Association of IMF and
establishment of an institution for the reconstruction of the war shattered world
--- Content provided by FirstRanker.com ---
economies. Thus, the conference has given birth to World Bank or InternationalBank for Reconstruction and Development (IBRD). World Bank was established
to provide long-term assistance for the reconstruction and development of the
--- Content provided by FirstRanker.com ---
economies of the member countries while IMF was established to provide short-
term assistance to correct the balance of payment disequilibrium.
--- Content provided by FirstRanker.com ---
The World Bank is an inter-governmental institution, corporate, in form, thecapital stock of which is entirely owned by its members-governments. Initially,
only nations that were members of the IMF could be members of the World
--- Content provided by FirstRanker.com ---
Bank. This restriction on membership was subsequently relaxed. The World
Bank makes loans at nearly conventional terms for projects of high economic
--- Content provided by FirstRanker.com ---
priority. To qualify for financing, a project must have costs and revenues thatcan be estimated with reasonable accuracy. A government guarantee is a
necessity for World Bank funding. The Bank`s main emphasis has been on large
--- Content provided by FirstRanker.com ---
infrastructure projects such as roads, dams, power plants, education and
agriculture. However, in recent years the Bank has laid greater emphasis on
--- Content provided by FirstRanker.com ---
quick loans to help borrower countries to alleviate their balance of paymentsproblems. These loans are tied to the willingness of the debtor nations to adopt
economic policies that will spur growth, free trade, more open investment, and a
--- Content provided by FirstRanker.com ---
more vigorous private sector. Besides its members subscriptions, the WorldBank raises funds by issuing bonds to private sources.
Functions of the World Bank
--- Content provided by FirstRanker.com ---
The principal functions of the IBRD are set forth in Article I of the agreement
and are as follows :
--- Content provided by FirstRanker.com ---
1.To assist in the reconstruction and development of the territories of its
members by facilitating the investment of capital for productive
purposes.
--- Content provided by FirstRanker.com ---
2.
To promote private foreign investment by means of guarantee of
participation in loans and other investments made by private investors
--- Content provided by FirstRanker.com ---
and, when private capital is not available on reasonable terms, to makeloans for productive purposes out of its own resources or from funds
borrowed by it.
3.
--- Content provided by FirstRanker.com ---
To promote the long term balanced growth of international trade and the
maintenance of equilibrium in balance of payments by encouraging
international investment for the development of the productive resources
of members.
--- Content provided by FirstRanker.com ---
4.
To arrange loans made or guaranteed by it in relation to international
loans through other channels so that more useful and urgent projects,
--- Content provided by FirstRanker.com ---
large and small a like, will be dealt first. It appears that the World Bankwas created to promote and not to replace private foreign investment. In
this respect the Bank considers its role to be a marginal one, to
supplement and assist private foreign investment in the member
countries.
--- Content provided by FirstRanker.com ---
Membership of the World Bank
All the members of the IMF are also the members of the World Bank. Any
--- Content provided by FirstRanker.com ---
country can join as a member of the IBRD by signing in the Charter of the Bankas its subscriber. It had 184 members in 2003. Bank has the authority to suspend
any member, if the country concerned fails to discharge its responsibilities to the
--- Content provided by FirstRanker.com ---
IBRD. Similarly, every member is free to resign from the membership but it has
to pay back all loans with interest on due dates. The member is also required to
pay its share of the loss on demand if the Bank incurs a financial loss in the year
--- Content provided by FirstRanker.com ---
in which a member resigns.
Capital Structure of the World Bank
--- Content provided by FirstRanker.com ---
The World Bank or IBRD started with an authorised capital of US $ 10 billiondivided into 1,00,000 shares of US $ 1,00,000 each. The subscribed capital at
that at time was US $9.4 billion. The authorised capital was increased to
--- Content provided by FirstRanker.com ---
7,16,500 shares of the par value of SDR 1,00,000 each in 1985. In July 1992, the
total authorised capital of the bank was $14.1 billion with a capital increase of
--- Content provided by FirstRanker.com ---
$9.3 billion. This increase of 77,159 shares was subscribed by the republics ofthe former Soviet Union. The bank has raised capital worth $23 billion in 2002.
The member countries contribute their share capital to the Bank as follows:
--- Content provided by FirstRanker.com ---
(1) 2% of the share in the form of gold and US dollars. The World Bank
utilizes this amount freely for granting loans.
--- Content provided by FirstRanker.com ---
(2) 18% of the share capital in the form of own currency. This amount isalso used by Bank for granting loans.
(3) 80% of the share capital is payable at the request of the Bank. This
--- Content provided by FirstRanker.com ---
amount is also used by Bank for granting loans. But it can use this
amount in discharging its responsibilities.
--- Content provided by FirstRanker.com ---
Organisation Structure of the World BankThe World Bank like IMF is also managed by a three-tier structure including
Board of Governors, Executive Directors and President.
--- Content provided by FirstRanker.com ---
(1) Board of Governors: The Board of Governors has full authority and control
over the Bank`s activities. Normally, each country appoints its Finance Minister
--- Content provided by FirstRanker.com ---
as a Governor and the Governor of its Central Bank as Alternate Governor onthe Board of Governors for a period of 5 years. The strength of the voting rights
to the Governors depends upon the subscribed capital by the member country. In
--- Content provided by FirstRanker.com ---
the absence of Governor, the Alternate Governor can exercise the voting right.Normally the Board of Governors meets annually.
(2) Executive Directors: The bank has 24 Executive Directors. They supervise
--- Content provided by FirstRanker.com ---
the entire operations of the Bank. Out of these 24 Directors, are appointed by
USA, UK, Germany, Finance and Japan. The remaining 19 Directors are elected
--- Content provided by FirstRanker.com ---
by the remaining member countries. The Executive Directors normally meetregularly once in a month. The 24 Directors elect the President of the Bank who
presides over the meetings of the Board of Executive Directors.
--- Content provided by FirstRanker.com ---
The Scope of Decisions of the Executive Directors Include:
(a) Policy making within the framework of the Articles of Agreement.
--- Content provided by FirstRanker.com ---
(b) Loans and credit proposals.Function of Board of Executive Directors
(a) To Present audited annual reports.
--- Content provided by FirstRanker.com ---
(b) To prepare administrative budget.(c) To prepare and present to Board of Governors annual reports on the
operation and policies of the Bank.
--- Content provided by FirstRanker.com ---
(3) President: Normally the president does not have any voting right except incase of exercising equal rights. He is assisted by senior Vice-Presidents and
Directors of various departments and regions.
--- Content provided by FirstRanker.com ---
Funding Strategy of the World Bank
There are the four basic objectives of the World Bank`s funding strategy:
--- Content provided by FirstRanker.com ---
(1) To make sure availability of funds in the market.(2) To provide the funds at the lowest possible cost to the borrowers
through appropriate currency mix of its borrowing and opting to
borrow when interest rates are expected to rise.
--- Content provided by FirstRanker.com ---
(3) To control volatility in net income and overall loan changes.
(4) To provide an appropriate degree of maturity transformation between
its lending and the borrowing. Maturity transformation depicts the
--- Content provided by FirstRanker.com ---
Bank`s capacity to lend for longer period than it borrows.Bank's Borrowings
Bank`s main function is to lend the money to the needy member. For lending
--- Content provided by FirstRanker.com ---
activities, it needs money and therefore it has to borrow.
Sources: The bank borrows from the following sources:
--- Content provided by FirstRanker.com ---
(1) The Bank borrows from international market both for long-term andshort-term periods.
(2) The Bank also borrows under currency swap agreements (CSA).
--- Content provided by FirstRanker.com ---
(3) The Bank also borrows under the Discount-Note Programme by twomethods. First, it places bonds and notes directly wih its member
countries. Second, it offer issues to investors and in public markets.
--- Content provided by FirstRanker.com ---
Two new borrowings instruments were evolved by the Bank. The first one isCentral Bank Facility and US Dollar Dominated Facility. The second instrument
is Floating Rate Notes. The World Bank borrows from the commercial banks
--- Content provided by FirstRanker.com ---
and other financial institutions with the help of this instrument.
(a) Bank's Lending Activities
--- Content provided by FirstRanker.com ---
The Bank grants loans to members in any one or more of the following ways:(1) by participating or granting indirect loans out of its own funds;
(2) by granting loans out of funds raised in the market of a member or
--- Content provided by FirstRanker.com ---
otherwise borrowed by the Bank; and
(3) by guaranteeing in whole or part, loans made by private investors
--- Content provided by FirstRanker.com ---
through the investment channels.The total outstanding amount of the total direct and indirect loans made or
guaranteed by the Bank is not to exceed 100 per cent of its total unimpaired
--- Content provided by FirstRanker.com ---
subscribed capital, resources and surpluses. Bank imposes following conditions
in granting loans:
(1) The bank is satisfied that the borrower is unable to borrow under
--- Content provided by FirstRanker.com ---
reasonable conditions in the prevailing market conditions.
(2) The project for which loan is required should be recommended by
--- Content provided by FirstRanker.com ---
the competent authority in the form of a written report after carefulexamination of the project.
(3) The loan is required for productive purpose.
(4) The borrower or guarantor has reasonable prospects of repaying
--- Content provided by FirstRanker.com ---
loans and interest on loans.
(5) If the project is located on the territory of the member but itself is not
--- Content provided by FirstRanker.com ---
a borrower, then the member or its central bank has to guarantee therepayment of loan, interest on loans and other charges on loan.
In 1991, the Executive Board of the Bank modified the repayment terms which
--- Content provided by FirstRanker.com ---
include extension of repayment period from 3 to 5 years for middle income
countries and review of repayment terms for middle income countries within 3
--- Content provided by FirstRanker.com ---
years. The cumulative lending of the Bank is of $ 383 billion and in the fiscalyear 2003, it has lended $ 11.2 billion for 99 new operations in 37 countries.
Facilities to Member Countries
--- Content provided by FirstRanker.com ---
The Bank provides the following facilities to member countries:
(1) Structural Adjustment Facility (SAF): In order to reduce their balance of
--- Content provided by FirstRanker.com ---
payment deficit and maintaining or regaining the economic growth of membercountries, the World Bank has introduced SAF in 1985. These funds are used to
finance the general imports with a few agreed exceptions such as luxury and
--- Content provided by FirstRanker.com ---
military imports. These funds are released in two parts and in a series of upto
five SAFs to a borrowing country. Generally, the bank imposes stiff conditions
--- Content provided by FirstRanker.com ---
for these. These are provided to support to programmes running from 5 to 7years.
(2) Enhanced Structural Adjustment Facility (ESAF): In order to increase
--- Content provided by FirstRanker.com ---
the availability of concessional resources to the low income member countries,
ESAF was established in December 1987. It provides new concessional
resources of SDR 6 billion which will be financed by special loans and
--- Content provided by FirstRanker.com ---
contributions from developed and OPEC countries. The purposes for advancing
the amount is same, i.e., to reduce balance of payment deficits of borrowing
--- Content provided by FirstRanker.com ---
member countries and encourage growth. The interest rate charged by the Bankis 0.5 per cent to be repaid in ten semi-annual installments beginning after 5?
years of disbursements.
--- Content provided by FirstRanker.com ---
(3) Special Action Programme (SAP): The Special Action Programme (SAP)
has been started in 1983 to strengthen the IBRD`s ability to assist member
--- Content provided by FirstRanker.com ---
countries in adjusting to the current economic environment. It has four majorelements:
(i)
--- Content provided by FirstRanker.com ---
Provide lending for structural adjustment, policy changes, export-
oriented production, full utilisation of existing capacity and
maintenance of critical infrastructure.
--- Content provided by FirstRanker.com ---
(ii)Provide advisory services regarding policies.
(iii)
--- Content provided by FirstRanker.com ---
Enlisting familiar efforts by other donors for fast disbursing
assistance.
Other Activities of the World Bank
--- Content provided by FirstRanker.com ---
In addition to lending activities, the Bank also undertakes the following
activities:
--- Content provided by FirstRanker.com ---
(1) Training: In 1956, the Bank set up a staff college to provide training tosenior officials of the member countries. This college is known as Economic
Development Institute (EDI). The Institute helps the officials in improving the
--- Content provided by FirstRanker.com ---
management of their economies and to increase the efficiency of their
investment programmes. The EDI also organises seminars in Washington and in
--- Content provided by FirstRanker.com ---
different regions of the World in Cooperation with regional institutes.(2) Technical Assistance: The World Bank also provides technical assistance to
its member countries. This assistance include:
--- Content provided by FirstRanker.com ---
(i)Engineering ? related: It includes feasibility studies,
engineering design and construction supervision;
--- Content provided by FirstRanker.com ---
(ii)Institution-related: It includes diagnostic policy and
institutional studies, management
--- Content provided by FirstRanker.com ---
The primary way of providing technical assistance is through loans made forsupervision, implementation and engineering services, energy, power,
transportation, water supply, etc. In 1975, the Bank created Project Preparation
--- Content provided by FirstRanker.com ---
Facility (PPF) for meeting gaps in project preparation and for institution
building. The Bank also acts as executing agency for project financed by the
--- Content provided by FirstRanker.com ---
United Nations Development Programme (UNDP).(3) Inter-Organisational Co-operation: The World Bank is also engaged in
inter-organisational cooperation. It is based on formal agreement between it and
--- Content provided by FirstRanker.com ---
international organisations, such as, the cooperative programmes between it and
FAO, the UNESCO, the WHO, the GATT, the UNCTAD, the UNEP (United
--- Content provided by FirstRanker.com ---
Nation Environment Programmes), The UNDP, The UNIDO (United NationsIndustrial Development Organisation) the ILO, the African Development Bank,
the Asian Development Fund, the International Fund for Agriculture
--- Content provided by FirstRanker.com ---
Development (IFAD), etc.
(4) Economic and Social Research: In 1983, the Bank established a Research
--- Content provided by FirstRanker.com ---
Policy Council (RPC). It provides leadership in the guidance, co-ordination andevaluation of all bank research. The Bank`s own research staff undertakes
research activities and also in collaboration with outside researchers.
--- Content provided by FirstRanker.com ---
(5) Operations Evaluation: The Bank has set up the Operations Evaluation
Department (OED) to help borrowers in the post-evaluation of Bank assisted
--- Content provided by FirstRanker.com ---
projects. Members of borrowers` staff visit this Department for seeking help inthe preparation of project completion report.
(6) Settlement of Investment Disputes: The Bank has set up the International
--- Content provided by FirstRanker.com ---
Centre of Settlement of Investment Disputes (ICSID) between states and
nationals of other states. The Bank has successfully mediated in solving many
international investment disputes such as the River Water Dispute between India
--- Content provided by FirstRanker.com ---
and Pakistan, and the Suez Canal dispute between Egypt and the U.K.
Criticism of the World Bank
--- Content provided by FirstRanker.com ---
The modus operandi of the Bank has been criticised on various counts bydifferent quarters as follows:
1. It is alleged that bank charges a very high rate of interest on loans. For
--- Content provided by FirstRanker.com ---
example, some of the loans which India has received in recent years bear
an interest of 5.75 per cent including the commission at 1% which is put
in the Bank`s special reserve.
--- Content provided by FirstRanker.com ---
2. The Bank`s insistence, prior to the actual grant of loan, on the countryhaving the capacity to transfer or repay, is open to criticism. The Bank
should not apply orthodox standards to judge the transfer capacity of any
borrowing country. Transfer capacity follows rather than precede the
--- Content provided by FirstRanker.com ---
loan.3. The financial help given by the Bank does not amount to more than a
drop in the big ocean of financial requirements so essential for various
--- Content provided by FirstRanker.com ---
development projects.India and the World Bank
India is the founder member of the Bank and held a permanent seat for number
--- Content provided by FirstRanker.com ---
of years on its Board of Executive Directors. India is one of the largest receiver
of assistance since 1949. Upto June 2002, cumulative lendings of the World
--- Content provided by FirstRanker.com ---
Bank to India amounted to $ 26.69 billion in 187 loans. The total amountborrowed by India from the World Bank and the IDA till June 2002 amounted to
$ 58.54 billion in 434 loans. This amounted to 11.6 per cent of the total loans
--- Content provided by FirstRanker.com ---
and credits approved by the World Bank groups. During 2001-02, India received
$ 893 million from the World Bank accounting for 11.22 per cent of its total
--- Content provided by FirstRanker.com ---
loans.India is helped by the World Bank in its planned economic development through
granting loans, conducting field surveys, sending study terms and missions and
--- Content provided by FirstRanker.com ---
through rendering expert advice. The Bank also provides training to Indianpersonnel at EDI. There is also a Chief of Missions of the Bank at New Delhi.
He is representing the Bank for its aided projects in India for monitoring and
--- Content provided by FirstRanker.com ---
consultations. The Bank has been helping India in various objects like
development of ports, oil exploration including the Bombay high and gas power
--- Content provided by FirstRanker.com ---
projects, aircrafts, coal, iron, aluminum, fertilizers, railway modernisation andtechnical assistance etc. It also helped India to solve its river water dispute with
Pakistan. The benefits desired by India from the World bank are:
--- Content provided by FirstRanker.com ---
(i)
India has received a lot of assistance from the World Bank for its
development projects.
--- Content provided by FirstRanker.com ---
(ii)
Aid India Club was founded in 1950 by the efforts of the World
Bank with a view to help India. This club is now called India
--- Content provided by FirstRanker.com ---
Development Forum. This Forum had decided to give loansamounting to $ 600 crore to India for implementing its structural
adjustment.
(iii)
--- Content provided by FirstRanker.com ---
The bank`s role in solving the Indus water dispute between India
and Pakistan has been invaluable.
(iv)
--- Content provided by FirstRanker.com ---
General loans have also been granted by the World Bank to India,
to be utilised as per its own discretion.
(v)
--- Content provided by FirstRanker.com ---
As a member of the World Bank, India has become the members
of International Finance Corporation, International Development
Association and Multilateral Investment Guarantee Agency also.
--- Content provided by FirstRanker.com ---
(vi)India has received technical assistance from time to time from the
World Bank for its various projects. The Expert Team of the
Bank has visited India and given valuable suggestions also.
--- Content provided by FirstRanker.com ---
(vii) The massive population of India has always created problems in
the economic development of the country. World Bank has been
helping India in the population control programmes and urban
--- Content provided by FirstRanker.com ---
development. For this purpose loans amounting to $ 495 crorehave also been given to India.
(viii) World Bank has been giving financial assistance to NGOs
--- Content provided by FirstRanker.com ---
operating in India e.g. Leprosy Elimination, Education Projects,Child development service projects etc.
On the other hand, critics argue that the World Bank have endangered the
economic freedom of India. The basic points of criticism are as follows:
--- Content provided by FirstRanker.com ---
(i)
The World Bank has laid a great deal of emphasis on measures of
economic liberalisation and more free play of market forces.
--- Content provided by FirstRanker.com ---
(ii)
A lot of stress has been laid on going very slow on the setting up
of public sector enterprises including financial intermediaries and
--- Content provided by FirstRanker.com ---
encouraging private sector.(iii)
India`s dependence on World Bank has been increasing which is
--- Content provided by FirstRanker.com ---
adversely affecting its economic freedom.(iv)
The attitude of World Bank reflects the preference for free
--- Content provided by FirstRanker.com ---
enterprise and a market oriented economy. It showsdissatisfaction with the general performance of economies which
are based on planning and regulation. At different occasions the
Bank has tried to undermine the Significance of our Planning
Commission.
--- Content provided by FirstRanker.com ---
(v)
The devaluation of Indian rupee in 1966 and 1991 was done at
the insistence of the World Bank only.
--- Content provided by FirstRanker.com ---
India`s main problem till now has been the government`s incapacity to act
rightly, firmly and effectively in time, on account of being more emotional to set
--- Content provided by FirstRanker.com ---
ideologies and compromising attitude to safeguard the political party`s interestmore than the national interest.
Affiliates to the World Bank
--- Content provided by FirstRanker.com ---
The Bank has four affiliates. These are:
International Development Association (IDA)
--- Content provided by FirstRanker.com ---
The IDA was set up in 1960 as a subsidiary of the World Bank to provide softloans to the member countries. Thus, the object of the IDA is to provide loans
to member countries on liberal terms with regard to the rate of interest and the
--- Content provided by FirstRanker.com ---
period of repayment. Another attraction of the IDA loans is that they can be
repaid in the currency of the member country.
--- Content provided by FirstRanker.com ---
In approving an IDA credit, three criteria are observed:1.
Poverty Test : IDA`s assistance is limited to the poorest of those
--- Content provided by FirstRanker.com ---
countries classified as Part II countries, and which continue to face suchsevere handicaps as excessive dependence on volatile primary products
markets, heavy debt servicing burden, and often, rates of population
--- Content provided by FirstRanker.com ---
growth eat outweigh the gains of production.
2.
--- Content provided by FirstRanker.com ---
Performance Test: Within the range of difficulties of establishingobjective standards of performance, the following factors serve as the
yardstick for an adequate performance test: satisfactory overall economic
--- Content provided by FirstRanker.com ---
policies and past success in project execution.
3.
--- Content provided by FirstRanker.com ---
Project Test: The purpose of the IDA is soft loans, not soft projects.IDA projects are appraised according to the same standard as that
applied to the Bank projects ? the test essentially requires that proposed
--- Content provided by FirstRanker.com ---
projects promise to yield financial and economic returns adequate to
justify the use of scarce capital.
--- Content provided by FirstRanker.com ---
The Objective of IDA are:1.
To provide development finance on easy terms to less developed
--- Content provided by FirstRanker.com ---
member countries; and
2.
--- Content provided by FirstRanker.com ---
To promote economic development, increase productivity and thus raisestandards of living in the underdeveloped areas.
--- Content provided by FirstRanker.com ---
Since the IDA charges nominal rates of interest on its loans, it has also
been nicknamed the soft-loan windows.
--- Content provided by FirstRanker.com ---
Membership: All the members of the World Bank are the members of the IDA.It had 164 members in June, 2003. There are two types of members. In IDA-
Part I members are the developed countries which are 24 in number and
--- Content provided by FirstRanker.com ---
therefore are called as G-24 countries. Part II members are the developing
countries.
Organisation: The organisation of IDA is same as that of the World Bank.
--- Content provided by FirstRanker.com ---
Generally, the staff of the World Bank operates this association with few
separate sections.
--- Content provided by FirstRanker.com ---
Loans: IDA loans are known as IDA credits. Only a member country canborrow from IDA with a restriction that a member country is eligible to borrow
from IDA only if its per capita income is less than US $ 695 at 1990 price index.
--- Content provided by FirstRanker.com ---
Those projects get assistance from IDA which are not financed by the World
Bank. IDA observes the poverty criterion, performance criterion and project
--- Content provided by FirstRanker.com ---
criterion while approving the projects.Terms of Loans: Conditions for IDA loans are:
(1) Repayment period is 35-40 years.
--- Content provided by FirstRanker.com ---
(2) Grace period is 10 years.
(3) Interest rate varies between zero to 0.5% which is waived now.
--- Content provided by FirstRanker.com ---
(4) Administrative fee is 0.75% on the loan amount disbursed.Gross disbursement by IDA during the year 2002-03 were $8.1 billion. India
received $686.6 million interest free loan during the year 2002-03. The
--- Content provided by FirstRanker.com ---
cumulative commitments of IDA were of $ 142 billion and commitments of $7.3
billion for 141 new operations in 55 countries were made in fiscal year 2003.
--- Content provided by FirstRanker.com ---
International Finance Corporation (IFC)The International Finance Corporation (IFC) is the private sector arm of the
World Bank family which was established in July 1956. It is the major
--- Content provided by FirstRanker.com ---
multilateral agency promoting productive private investment in developing
private investment in developing countries. It helps finance private sector
--- Content provided by FirstRanker.com ---
projects to mobilise finance for them in the international financial markets, andprovides advice and technical assistance to businesses and governments.
Membership
--- Content provided by FirstRanker.com ---
The Articles of Agreement of the IFC are similar to that of the World Bank. Acountry has to be a member of the World Bank in order to join the IFC. In June
2003, it had 175 members.
--- Content provided by FirstRanker.com ---
Objectives
The objectives for which the IFC was set up have been laid down in Article 1 of
--- Content provided by FirstRanker.com ---
its Articles of Agreement as under:The purpose of the Corporation is to further economic development by
encouraging the growth of productive private enterprise in member countries,
--- Content provided by FirstRanker.com ---
particularly in the less developed areas, thus supplementing the activities of the
International Bank for Reconstruction and Development. In carrying out this
--- Content provided by FirstRanker.com ---
purpose, the Corporation shall:(i) in association with private investors, assist in financing the establishment,
improvement and expansion of productive private enterprise which would
--- Content provided by FirstRanker.com ---
contribute to the development of its member countries by making investments,
without guarantee of repayment by the member Government concerned, in cases
--- Content provided by FirstRanker.com ---
where sufficient private investment is not available on reasonable terms;(ii) seek to bring together investment opportunities, domestic and foreign private
capital, and experienced management; and
--- Content provided by FirstRanker.com ---
(iii) seek to stimulate, and to help create conditions conducive to the flow of
private capital, domestic and foreign, into productive investment in member
--- Content provided by FirstRanker.com ---
countries.IFC is the largest multinational source of loan and equity financing for private
sector projects in the developing world. It offers a full array of financial
--- Content provided by FirstRanker.com ---
products and services to companies in its developing member countries:
?
--- Content provided by FirstRanker.com ---
long-term loan in major currencies, at fixed or variable rates.?
equity investment.
--- Content provided by FirstRanker.com ---
?quasi-equity instruments (subordinated loans, preferred stock,
income rates).
--- Content provided by FirstRanker.com ---
?guarantees and standby financing.
?
--- Content provided by FirstRanker.com ---
risk management (intermediation of currency and interest rate
swaps, provision of hedging facilities).
IFC has approved $3.9 billion in financing 204 project in various sectors in 64
--- Content provided by FirstRanker.com ---
developing countries in the fiscal year 2003. IFC invested in 11 projects
involving an amount of $48.1 million in India. It is composed to $25.4 million in
--- Content provided by FirstRanker.com ---
the form of loan and $ 22.7 million in the form of equity.In recent years, greater emphasis has been placed by the corporation on helping
to develop resources and to increase the availability of foodstuffs.
--- Content provided by FirstRanker.com ---
The special feature of the IFC is that, unlike commercial financial institutions, it
judges potential ventures in terms of both their financial viability and their
--- Content provided by FirstRanker.com ---
contribution to the economic development of the country concerned. At thesame time, unlike other official development institutions, it participates directly
with the private sector in both the developed and developing worlds. Unlike
--- Content provided by FirstRanker.com ---
both types of institutions, it provides both equity and fixed rate financing.
The Multinational Investment Guarantee Agency (MIGA)
--- Content provided by FirstRanker.com ---
The Multinational Investment Guarantee Agency was established in April 1988as a new affiliate of the World Bank. It is a joint venture of the World Bank and
IFC. It was created to assist the World Bank and the IFC in the areas where the
--- Content provided by FirstRanker.com ---
Bank and the IFC do not reach. The authorised capital of MIGA is $ 1.08
billion.
--- Content provided by FirstRanker.com ---
Objectives: The MIGA has the following objectives:(1) To encourage the flow of direct foreign investment into developing
member countries.
--- Content provided by FirstRanker.com ---
(2) To provide insurance cover against political risks to investors.
(3) The guarantee programme of MIGA protects investors against non-
commercial risks like danger involved in currency transfer, war and
--- Content provided by FirstRanker.com ---
civil disturbances, breach of contract by governments, etc.
(4) To provide promotional and advisory services.
--- Content provided by FirstRanker.com ---
(5) To insure only new investments, expansion of existing investment,privatization and financial restructuring.
(6) To establish credibility among investors.
--- Content provided by FirstRanker.com ---
Membership: Any country can become its full-fledged member by ratifying the
convention and pay its capital subscription. By June 30, 2003, 162 countries had
--- Content provided by FirstRanker.com ---
signed the MIGA convention. Of these, 136 countries had become its full-fledged members.
Activities: The MIGA provides promotional and advisory services to its
--- Content provided by FirstRanker.com ---
developing member countries, such as organisation of investment promotion
conferences, executive development programmes, foreign investment policy,
--- Content provided by FirstRanker.com ---
round table conferences, etc. It also operates the Foreign Investment AdvisoryService in policy, institutional and legal matters relating to direct foreign
investment.
--- Content provided by FirstRanker.com ---
Progress: 226 contracts of guarantee for investments in 52 developing countries
have been signed by MIGA. Its outstanding contingent liability was $2.8 billion
--- Content provided by FirstRanker.com ---
in 2000. The amount of insured projects of foreign investment was $8.4 billion.It issued 68 investment guarantee contracts with $862 million. It assisted private
firms of 17 countries in making investment in 27 countries. Its cumulative
--- Content provided by FirstRanker.com ---
guarantee till fiscal year 2003 was of $12.4 billion and alone is fiscal year 2003,
it issued guarantee worth of $1.4 billion.
--- Content provided by FirstRanker.com ---
India became the 113th member country of MIGA in April 13,1992.The International Centre for Settlement of Investment Disputes (ICSID)
The international Centre for Settlement of Investment Disputes was established
--- Content provided by FirstRanker.com ---
in 1966. It has 139 members till date. It helps in encouraging foreign investmentby providing international facilities for conciliation and arbitration of investment
disputes. Therefore, it is helping in fostering an atmosphere of mutual
--- Content provided by FirstRanker.com ---
confidence between states and foreign investors. ICSID also conducts research
and publishing activities in the areas of arbitration law and foreign investment
--- Content provided by FirstRanker.com ---
law. It has registered 129 cases in total and in the fiscal year 2003, it hadregistered 26 cases.
4.0
--- Content provided by FirstRanker.com ---
Summary
Economic environment is one of the most important factors that influences the
--- Content provided by FirstRanker.com ---
business environment. In the present times, there is a high degree ofinterdependence among nations. Liberalization of economy, worldwide, is
creating several opportunities and the nations are becoming more open in their
--- Content provided by FirstRanker.com ---
policies. Last few decades has witnessed a high growth in the international trade.
However, the growth is skewed in favour of developed economies, in the
--- Content provided by FirstRanker.com ---
services sectors and limited to the nations that have developed exclusivecompetitive advantages.
The General Agreement on Tariffs and Trade (GATT) was a multilateral treaty
--- Content provided by FirstRanker.com ---
that laid down agreed rules for conducting international trade. It came into force
in January 1948. Its basic aim was to liberalize trade and for 47 years it had been
--- Content provided by FirstRanker.com ---
concerned with negotiating the reduction of trade barriers and with internationaltrade relations. Overseeing the application of its rules was an important and
continuing part of its activities. GATT also provided a forum in which countries
--- Content provided by FirstRanker.com ---
could discuss and overcome their trade problems and negotiate to enlarge
international trading opportunities. The rapid and uninterrupted growth in the
--- Content provided by FirstRanker.com ---
volume of international trade till 1994 provided a good testimony for the successof the GATT.
The World Trade Organisation (WTO) came into effect on January 1, 1995 with
--- Content provided by FirstRanker.com ---
the support of 85 founder members. India was one of them. It is third pillar ofworldwide economic dimensions along with the IMF and the World Bank.
GATT is replaced by the WTO. The WTO has taken charge of monitoring and
--- Content provided by FirstRanker.com ---
administering the new global trade rules agreed in the Uruguay Round. The
world income is expected to rise by over $ 500 billion annually by the year 2005
--- Content provided by FirstRanker.com ---
A.D. through the WTO agreements and market access commitments. Theexpected annual trade growth will be a quarter higher in the same year than it
would otherwise have been.
--- Content provided by FirstRanker.com ---
The WTO is an international trade organisation, having set of rules and
principles, which were mutually designed and agreed upon to promote
--- Content provided by FirstRanker.com ---
international trade in general and also to reduce tariff barriers and to removeimport restrictions, in particular. It can be called as World Trade System. It is a
new trade organisation with global recognition and succeeded GATT on
--- Content provided by FirstRanker.com ---
renewed agreements. The WTO has a new vision with tougher and wider
enforcement power to promote international trade. Divergent views have been
--- Content provided by FirstRanker.com ---
expressed in support and against our country becoming a member of the WTO.The UNCTAD secretariat has been doing yeoman`s service to LDCs in trade,
finance and debt problems vis-a-vis developed countries. The detailed reports
--- Content provided by FirstRanker.com ---
prepared by UNCTAD before each conference have create a new climate of
thought with regard to the problems and need of LDCs. These are again
--- Content provided by FirstRanker.com ---
discussed at other international forums such as the IMF, World Bank, OECD,EEC, NAM etc. Often, positive measures follow, such as larger aid by the
World Bank and OECD, giving more trade concessions by EEC to LDCs etc. As
--- Content provided by FirstRanker.com ---
such, the UNCTAD reflects the sentiments, hopes and aspirations of LDCs in a
world still dominated by the developed countries, both politically and
--- Content provided by FirstRanker.com ---
economically.It can be noted that although wide-range measures have been proposed and
devised from time to time by the UNCTAD and Commodity Agreements, there
--- Content provided by FirstRanker.com ---
have remained certain important shortcomings in the effective implementationand follow up. Nevertheless, it can be said that the increasing awareness among
the developing countries has served the purpose of pressurizing the more
--- Content provided by FirstRanker.com ---
powerful developed countries to listen and to accommodate the interest of the
weaker developing countries to some extent, if not fully. This indeed, has been
--- Content provided by FirstRanker.com ---
the success of UNCTAD and Commodity Agreements.It may be said that the World Bank has not come upto the expectations of many
nations. Nevertheless, it has been instrumental to a very large extent in initiating
--- Content provided by FirstRanker.com ---
and accelerating the work of economic reconstruction and development in
different countries. No doubt, India bas derived immense benefit from the World
--- Content provided by FirstRanker.com ---
Bank. The bank may have failed to finance most of the development projects,but it should be remembered that it has financed quite a large number of them
which have proved a notable success. The Bank has also played a significant
--- Content provided by FirstRanker.com ---
role outside financial matters by serving as a mediator between different
countries on major economic and political issues. For instance, its help in the
--- Content provided by FirstRanker.com ---
solution of the Indus Water dispute between India and Pakistan and the SuezCanal dispute between UK and UAE has been valuable.
The ADB has been playing an important role in providing finance in the form of
--- Content provided by FirstRanker.com ---
loans and grants to its member developing countries of their development. There
have been two factors for the increase in the Bank`s lending operations. First, at
--- Content provided by FirstRanker.com ---
the time of its establishment, India had agreed not to get loans from the Bank sothat smaller developing member countries might be given larger aid. But when
China became its member and started setting assistance from the Bank. India
--- Content provided by FirstRanker.com ---
followed it. This has led to increase in the Bank`s lending operations. The
second factor has been introduction of non-project loans. These are given to
--- Content provided by FirstRanker.com ---
member countries to solve their balance of payments problems with thecondition that the concerned countries should follow the policies laid down by
the Bank. However, industrialised developing countries like China and India do
--- Content provided by FirstRanker.com ---
not receive soft` loans from the Bank with a nominal rate of interest. TheADB`s contribution to the economic development of the developing member
countries of the region has been creditable.
--- Content provided by FirstRanker.com ---
5.0 SELF ASSESSMENT QUESTIONS
1. Explain the origin, objectives and function of the World Bank.
2. What are the objectives of the International Development Association?
--- Content provided by FirstRanker.com ---
To what extent it has been successful in helping the developing
economies?
3. What is Multinational Investment Guarantee Agency? Discuss its
--- Content provided by FirstRanker.com ---
objectives and workings.
4. Discuss the objectives the Asian Development Banks. What has been its
--- Content provided by FirstRanker.com ---
contribution to the regional development of India.5. Explain the working and achievements of the Asian Development Bank.
6. What do you understand by GATT? Discuss its main objectives and
--- Content provided by FirstRanker.com ---
principles.7. Explain the main achievements and shortcomings of GATT.
8. What is WTO? Discuss its functions and objectives.
--- Content provided by FirstRanker.com ---
9. Bring out the arguments for and against India`s membership of WTO.10. Discuss the achievements and failure of WTO.
11. Write a detailed note on Doha Ministerial Conference, 2001.
12. Discuss the functions of UNCTAD. Explain its basic principles.
--- Content provided by FirstRanker.com ---
13. What are the achievements of UNCTAD? Also explain the problems ofUNCTAD.
14. Explain the objectives of International Commodity Agreements (ICA).
--- Content provided by FirstRanker.com ---
Discuss the various forms of commodity agreements.
6.0 FURTHER READINGS
--- Content provided by FirstRanker.com ---
International Economies ? D.N. Krithani.International Business ? Roges Bennett
International Business ? P. Subha Rao
WTO-Structure, Functions, Tasks and Challenges ? Alok Roy
Business Environment ? C.B. Gupta
--- Content provided by FirstRanker.com ---
International Business : Francis CherunillamUnit -III
ORGANISATIONS ENGAGED IN INTERNATIONAL BUSINESS
--- Content provided by FirstRanker.com ---
Multinational Corporations
MNCs Critics and Defenders
--- Content provided by FirstRanker.com ---
MNCs and Home Societies
MNCs and Host Societies
--- Content provided by FirstRanker.com ---
Technology TransferAfter learning this chapters nice these chapters you can
know the types and importance of MNCs
--- Content provided by FirstRanker.com ---
understand the home and host countries position with reference to MNCs
Understand the technology transfer, its ways importance and its
--- Content provided by FirstRanker.com ---
categoriesMultinational Corporation
The multinational company (MNC) is a company involved in producing and
--- Content provided by FirstRanker.com ---
marketing its outputs in several countries. The outputs may be goods, services,
or various combinations of both. To develop the capacity to produce and market
--- Content provided by FirstRanker.com ---
multination ally a firm must acquire managerial control over operating entitiesin a number of countries; in other words, it must establish subsidiary companies
in all host economies and endow each with the necessary operating assets, such
--- Content provided by FirstRanker.com ---
as factories, mines, department stores, hotels, banks, or whatever is required in
the particular company`s mines, field of activity.
--- Content provided by FirstRanker.com ---
The capacity to act simultaneously in numbers of countries of countries sets theMNC clearly apart from the domestic or unemotional company (UNC). The
UNC has all its operating assets and organizational subunits (departments,
--- Content provided by FirstRanker.com ---
divisions, subsidiaries) in its home country. It may on occasion engage in
exporting or importing by transacting with foreign firms, but its own capacity to
--- Content provided by FirstRanker.com ---
function is limited to the domestic market.Some MNCs are motivated by profits, some by raw material, and some by
markets, some by diversification, some by the stability that diversification of
--- Content provided by FirstRanker.com ---
markets and operating environments may offer. Many pursue several or all ofthese objectives. Furthermore, the objectives vary with time, with place, and
with circumstances. From the market perspective, some MNCs cater to
--- Content provided by FirstRanker.com ---
individual consumers, some to government procurement, some to the industrial
sector, and some to the military. Some MNCs operate in a competitive markting
--- Content provided by FirstRanker.com ---
atmosphere, other in oligopolistic rivalry, and some in monopolistic autonomy.Neither in structure nor in behavior are all the MNCs alike. Rather, they are very
highly differentiated and each variegated economic entities, each ranking as a
--- Content provided by FirstRanker.com ---
complex organization and each possessing characteristics of its own.
Organizations that engage in international business vary considerably in size and
--- Content provided by FirstRanker.com ---
the extent to which their business activities cross national boundaries. Onespecial type of organization engaged in global business is the multinational
corporation (MNC). An MNC is an organization that engages in production or
--- Content provided by FirstRanker.com ---
service activities through its own affiliates in several countries, maintains
control over the policies of those affiliates, and manages from a global
--- Content provided by FirstRanker.com ---
perspective. With a global perspective, top managers allocate resources andcoordinate activities to take the best possible advantage of favourable business
conditions throughout the world.
--- Content provided by FirstRanker.com ---
Some other expressions are also coined to name enterprises engaged in global
business.
--- Content provided by FirstRanker.com ---
WHAT `S IN A NAME?There is a debate about what to call a company, whose business ranges across
national borders, tying together home and host countries through corporate
--- Content provided by FirstRanker.com ---
policies and practices. Here are some of the terms used to describe these
companies.
--- Content provided by FirstRanker.com ---
Transnational Corporation (TNC)
Because companies transcend or operate across national borders, some experts
--- Content provided by FirstRanker.com ---
prefer the term transnational corporation, or TNC. The United Nations favourthis term and has created a research centre for the study of Transnational
Corporations.
--- Content provided by FirstRanker.com ---
Multinational Corporation (MNC)
The fact that companies operate in multiple countries has led some experts to
--- Content provided by FirstRanker.com ---
adopt the term Multinational Corporation, or MNC. This term is very popular inthe business press and in textbooks. It seems to be the most generic name to
describe corporations operating around the world.
--- Content provided by FirstRanker.com ---
Multinational Enterprise (MNE)
Because some of the international giants are state-owned enterprise, rather than
--- Content provided by FirstRanker.com ---
corporations, the term multinational enterprise, or MNE, has entered thevocabulary of international trade.
Global Corporation
--- Content provided by FirstRanker.com ---
This term became very popular in the 1990s. The term seems to have first been
used to describe a small number of companies whose business was conducted in
--- Content provided by FirstRanker.com ---
dozens of-perhaps more than 100-nations. Hence, Nestle has long beendescribed as truly because the scope of its operations extends to more than 150
nations around his globe. The term is often applied to companies doing business
--- Content provided by FirstRanker.com ---
in several areas of the world (e.g., Europe, Latin America, Asia-pacific, and
North America).
--- Content provided by FirstRanker.com ---
Colossal is the right word to describe the pre-eminent position of MNCs in theworld of business. There are about 35,000 MNCs around the world today,
controlling over 170,000 foreign affiliates. It is estimated that roughly half of all
--- Content provided by FirstRanker.com ---
cross-border corporate assets are accounted for just by the top 100 MNCs.
--- Content provided by FirstRanker.com ---
ABB is a typical MNC.ABB is a federation of national companies with a globalcoordination culture. It is a Swiss company having headquarters in Zurich, but
only 100 professionals work at the headquarters. only two of the eight board
--- Content provided by FirstRanker.com ---
members are Swedes. Financial dates are reported in US dollars and English isABB`s official language.
It is argued that the MNC`s reign as the pre-eminent vehicle of international
--- Content provided by FirstRanker.com ---
trade is nearing its end. It is slowly being displaced by firms that represent a new
type of international enterprise, which is called the global corporation. The
--- Content provided by FirstRanker.com ---
MNC operates in a number of countries and adjusts its products and services toeach. The global corporation, on the other hand, operates as if the entire world
were a single entity. Global corporations essentially sell the same things in the
--- Content provided by FirstRanker.com ---
same way every where. Thus, a global corporation, such as Sony, sells a
standardized product--walkman`--throughout the world, components of which
--- Content provided by FirstRanker.com ---
may be made or designed in different countries.Although multinational companies tend to be rather large engage in a substantial
amount of cross-border transactions, an increasing number of medium and small
--- Content provided by FirstRanker.com ---
business enterprises are also involved in international business. More than 75
per cent of Indian`s total export earnings, for instance, come from small-scale
--- Content provided by FirstRanker.com ---
unitsINDIAN MNCs (LIST OF INDIAN ACQUIRERS OF FIRMS ABROAD)
Tata motors to takeover Daewoo in South Korea for $118 million
--- Content provided by FirstRanker.com ---
Ambanis to takeover flag international for $211 million
Ranbaxy to takeover RPG Aventis a France based firm
--- Content provided by FirstRanker.com ---
Wockhardt acquired CP pharmanceutical and Wallis Laboratories ?bothof Britain
Hindalco took over mount garden and Nifty--copper mines in Australia
--- Content provided by FirstRanker.com ---
Sundaram Fasteners has acquired Dana spicer Europe, the British arm ofan MNC.
Amtek Auto has acquired the GWK group in the UK
--- Content provided by FirstRanker.com ---
Kirloskar Brothers took over SPP pumps, UK
TYPES OF MNCs
Equity-based MNCs
--- Content provided by FirstRanker.com ---
Many older MNCs obtained their multinational capacities through direct foreign
investments. They either built from ground up or bought the equity of the
--- Content provided by FirstRanker.com ---
desired capital assets, such as assembly plants, pharmaceutical laboratories,department stores, banks, flour mill, or whatever operating facilities they use.
Either way, they became owners of these operating entities.
--- Content provided by FirstRanker.com ---
Equity ownership provides the basis for managerial control over the foreign-
based entities and opens the way for their affiliation or integration with one
--- Content provided by FirstRanker.com ---
another internationally by the headquarters firm. The fact that all the olderMNCs and many new ones have followed the equity ownership route has
created the impression that direct foreign investment is the only way for a firm
--- Content provided by FirstRanker.com ---
to multinationalize. This is not true. Direct foreign investments are synonymous
with MNCs are no longer synonymous with direct investments.
--- Content provided by FirstRanker.com ---
The MNCs in which the managerial control derives from equity ownership ofaffiliated enterprises in different host economies fall into four main types:
1) Resource-based companies. The main mission of these companies is to
--- Content provided by FirstRanker.com ---
produce raw materials, such as metallic ores, oil, rubber, and tropical
plantation crops (bananas, coffee, dates). Many of these are among the very
--- Content provided by FirstRanker.com ---
oldest MNCs , with roots in the colonial era.2) Public utility companies. These companies, which include military
arsenals, differ from other economic sectors in that they are either natural
--- Content provided by FirstRanker.com ---
monopolies or they serve a monopolistic (single buyer) market such as the
national airline of the host nation.
--- Content provided by FirstRanker.com ---
3) Manufacturing companies. These were the largest growth sector ofmultinational business from the 1950s to the 1970s. in many instances the
host countries were instrumental in attracting the manufacturing MNCs.
--- Content provided by FirstRanker.com ---
Foreign investment incentive programs have been the common device for
luring inbound industrial incentive. Intricate schemes of tax privilege,
protection against import competition, relaxation of foreign exchange
--- Content provided by FirstRanker.com ---
restriction, and government loan guarantees are parts of such arrangements.
4) Service industry MNCs. The largest components of this category are
--- Content provided by FirstRanker.com ---
banks, carriers, retail stores (F. W. Woolworth, sears, Takashimaya), andfirms that sell similar management services have followed the
multinationalization of industrial companies.
--- Content provided by FirstRanker.com ---
Technology-Based MNCs
A new generation of MNCs has started to emerge in which the source of
--- Content provided by FirstRanker.com ---
multinational managerial control is technology, including managementexpertise, instead of ownership of operating assets. These are known as no
equity MNCs. The hotel, mining, and construction industries have pioneered this
--- Content provided by FirstRanker.com ---
new generation of MNCs. They offer an increasingly viable alternative to the
older, equity-based model.
--- Content provided by FirstRanker.com ---
Management ContractsThe main vehicles of the no equity MNC are long-term contracts with owners of
suitable operating facilities, such as hotels or mining properties. Often the
--- Content provided by FirstRanker.com ---
contracts are either formally or informally sanctioned by the host government.
Under such a contract the owners will let the MNC take over possession and
--- Content provided by FirstRanker.com ---
management of the business and the MNC will obligate itself to share profitswith the owners by some agreed-upon formula.
The management contract model of the hotel industry has become the basis for
--- Content provided by FirstRanker.com ---
a number of variations that are rapidly gaining status not only in other service
industries but also in the manufacturing and high-technology sectors, where
--- Content provided by FirstRanker.com ---
they the potential for even greater importance.Production Sharing Arrangements
In mining, crude oil production, and other resource-based businesses, profit
--- Content provided by FirstRanker.com ---
sharing may be replaced by output sharing. These arrangements provide that the
MNC not only may produce in an extractive sector (iron ore, coal, petroleum),
--- Content provided by FirstRanker.com ---
but also must meet specific obligations for the development of indigenoussupplier industries, for training engineers and managers and for keeping pace
with developments in the industry concerned. This formula rests on an agreed
--- Content provided by FirstRanker.com ---
sharing of the output of the venture. For instance, if the contract provides of 40:60 output sharing of a mining property, the MNC will retain 40 percent of the
tonnage and turn over to the owners or, what is more typical, market on the
--- Content provided by FirstRanker.com ---
owners` behalf the remaining 60 percent.
Industrial Lease Agreements
--- Content provided by FirstRanker.com ---
These are contracts under which an owner, sometimes a government
corporation, leases a complete industrial facility, such as a factor or chemical
--- Content provided by FirstRanker.com ---
laboratory, to an MNC. The rent consists normally of a fixed annual sum plus a
scale of payments based on the output of the plant. Such lease arrangements are
--- Content provided by FirstRanker.com ---
as yet limited to manufacturing activities in which there have been rapidtechnological advances or in which complex specialized facilities are required.
--- Content provided by FirstRanker.com ---
Technology Transfer Agreements
In the high technology industries (electronics, aircraft, computers, biochemicals)
--- Content provided by FirstRanker.com ---
where the host government places the highest priority on indigenous productioncapability, the new mode is a joint venture between the MNC, whose
responsibility it is to provide the technology, and one or several indigenous
--- Content provided by FirstRanker.com ---
companies, which are responsible for financing, often with government
assistance.
--- Content provided by FirstRanker.com ---
The communist countries (U.S.S.R., Poland, Rumania, and others) havespearheaded negotiations to obtain from Western firms technologies for high
volume, low-cost products that are internationally competitive in quality. The
--- Content provided by FirstRanker.com ---
agreements completed so far cover not only the transfer of hard technology
(patent and trademark rights) but also efficient adaptation of a product to suit the
--- Content provided by FirstRanker.com ---
strategic objectives of the host enterprise, effective development of actualproduction capacity by long-term enterprise-to-enterprise cooperation after the
plant starts production, and marketing of the output outside the host country.
--- Content provided by FirstRanker.com ---
Though still modest in total business volume compared to equity-based MNCs,the industrial leases and technology transfer agreements signify the entrance of
the technology-based MNC into the manufacturing sector, which the equity-
--- Content provided by FirstRanker.com ---
based model has held as an exclusive domain in the past.
THE STRUCTURE OF MNCs
--- Content provided by FirstRanker.com ---
Regardless of which of these alternatives the contract provides, the organiza-tional effect is the same. It transfers the management of the operation to the
MNC and motivates the latter to maximize its productivity. This calls for the
--- Content provided by FirstRanker.com ---
application of the most efficient alternatives in technology and management
know-how available to the MNC.
--- Content provided by FirstRanker.com ---
Objectives to foreign ownership of major business firms have risen in manycountries. Simultaneously, the national goals and economic development plans
of host countries are placing greater priority on technology imports and
--- Content provided by FirstRanker.com ---
modernization of management practices. These trends are favoring the new no
equity model at the expense of the old ownership model for multinational
--- Content provided by FirstRanker.com ---
growth.The equity-based and technology-based models do not present an either/ or
proposition. The tow basic alternatives can be used separately or in combination
--- Content provided by FirstRanker.com ---
with each other. In either case, the final outcome is the same; a cluster of
production and marketing entities distributed multinationally but subject to
--- Content provided by FirstRanker.com ---
managerial control and coordination by the head quarters company.--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
NINE-COUNTRY COMPLEX--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Fig I Spatial Model of Multinatinal Enterprises
--- Content provided by FirstRanker.com ---
MNCs Critics and DefendersBecause of their visibility across the globe, international businesses have invited
criticisms. They have defenders too. Let us examine MNCs as they are
--- Content provided by FirstRanker.com ---
perceived by critics. These critics are activist groups that attack MNCs on
environmental and rights issues.
--- Content provided by FirstRanker.com ---
1. Challenge to Nation-state Sovereignty The developing countries wantcontrol of their economies and want to achieve their economic, political, and
social objectives. The power of the MNCs can influence each of these objectives
--- Content provided by FirstRanker.com ---
and in doing so may be obliged to give up some power and independence in
exchange for the wealth an MNC may bring.
--- Content provided by FirstRanker.com ---
2. Inequities One of the most enduring and persistent complaints about alleged
inequities by LDCs is that prices of raw materials extracted from their countries,
--- Content provided by FirstRanker.com ---
while prices of imported manufactured goods from industrialized countries are
rising. This they say creates a growing inequity. Other perceived inequities
include avoidance of taxes and giving the best management jobs to MNC home-
--- Content provided by FirstRanker.com ---
country citizens.
3. Interference with Economic Objectives interference can occur in many
--- Content provided by FirstRanker.com ---
ways. For example, an MNC may wish to locate a plant in an area of prosperitywhen the host country would prefer its location in an underdeveloped region.
MNC demands of local support can add to host-country expenditures for
--- Content provided by FirstRanker.com ---
infrastructure. Since MNCs typically do their research and development at
home, hostn countries become technologically dependent on the MNCs for
--- Content provided by FirstRanker.com ---
innovation. The MNCs have the strength to attract bank loans that otherwisemight be available for local businesses.
4. Social Disruption The introduction of different mores, habits, behaviors,
--- Content provided by FirstRanker.com ---
and ethical values, new products, management styles, distribution systems, more
money, and technology, do affect local ways of thinking and doing things.
--- Content provided by FirstRanker.com ---
5. Environmental Degradation Many nations are becoming more concernedabout the impact of MNCs on their environment. Environmental concerns are
rapidly moving higher in the chain of priorities throughout the world.
--- Content provided by FirstRanker.com ---
6. Imperialism Many of the awakening nations look on foreign managers
with fear and distrust as the embodiment of an old, not easily forgotten,
--- Content provided by FirstRanker.com ---
exploitative colonialism.7. Symbol of Frustration and Antipathy The LDCs have grievances about
their position in the world that have nothing to do with the MNC but the MNC is
--- Content provided by FirstRanker.com ---
a convenient visible target for their anger.
8. MNCs and Technology the technology brought in by MNCs is hardly
--- Content provided by FirstRanker.com ---
suitable to less developed countries. Such technology is highly capita intensivebut developing countries need a lab our intensive one. In addition, technology
brought in by MNCs is highly expensive. The MNCs charge exorbitantly in the
--- Content provided by FirstRanker.com ---
from of fee and royalty, which put a severe strain on the foreign exchange
resources of a developing country. There are also instances of technology is
dumping, which implies that MNCs use obsolete technology with the help of
--- Content provided by FirstRanker.com ---
turnkey projects shipped down from the principals of other counties. MNCs
tend to make industries in developing countries permanently dependent on
--- Content provided by FirstRanker.com ---
foreign expertise and technology.--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Loss of
--- Content provided by FirstRanker.com ---
Technologysovereignity
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Frustration and
--- Content provided by FirstRanker.com ---
antipathy
--- Content provided by FirstRanker.com ---
Inequities--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
MNCs--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
InterferenceImperialism
--- Content provided by FirstRanker.com ---
with economic
objectives
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Social
Environmental
--- Content provided by FirstRanker.com ---
disruption
--- Content provided by FirstRanker.com ---
degradation--- Content provided by FirstRanker.com ---
Fig 2. Grouse against MNCs
MNCS AND HOME SOCIETIES
--- Content provided by FirstRanker.com ---
Public attitudes toward MNCs are biased by a nation`s position as a home or
host country. Historically, home countries have perceived MNC activities as
--- Content provided by FirstRanker.com ---
desirable extensions of their domestic business systems. Conversely host
countries have viewed MNCs as agents of foreign influenced and exploitation.
--- Content provided by FirstRanker.com ---
This historic dichotomy is now shot through with conflicting perceptions of theMNCs. Different segments of society, such as labor, investors, consumers,
traders, and farmers, see their interests affected in different ways. As a result, a
--- Content provided by FirstRanker.com ---
multisided controversy about the societal merits and demerits of MNCs hasgrown in both host and home countries.
Home country conflicts
--- Content provided by FirstRanker.com ---
The most aggressive challenge to the traditionally supportive home country
policies towards MNCs has come from organized labor.
--- Content provided by FirstRanker.com ---
Labor ConflictMultinationalization has created for management new mobility and flexibility
that have greatly enhanced its bargaining power vis-?-vis labor. Since the
--- Content provided by FirstRanker.com ---
sourcing base of the multinational firm knows no national boundaries ? it can
draw anywhere in the world the capital, technology, raw materials, ideas, and
--- Content provided by FirstRanker.com ---
labor that it needs ? management is not dependent on any one country`s laborsupply or labor union`s policies, but can choose from among a number of
potential hosts for any particular operation. In the short run, this new
--- Content provided by FirstRanker.com ---
managerial latitude may be limited by the relative immobility of investment in
given facilities ? the sunk cost constraint ? but in the long run nearly all
--- Content provided by FirstRanker.com ---
operations can be transferred from one location to another. More significantly,all new investment, whether for replacement or for replacement or for
expansion of plant capacity, is internationally footloose and will seek domicile
--- Content provided by FirstRanker.com ---
wherever the comparative advantages happen to lie.
To labor unions this international mobility of the MNC portends an ominous
--- Content provided by FirstRanker.com ---
doom. Though international in ideology, the unions have failed to acquire anyinternational operational capabilities of their own. Their organization and
policies have remained strictly national or sub national. Deriving their
--- Content provided by FirstRanker.com ---
legitimacy and enforceable powers through national and local legislation, labour
unions became an integral part of the nation state`s internal apparatus. This
--- Content provided by FirstRanker.com ---
worked in labor`s favor so long as business consisted of MNCs. By effectiveorganization and concentration of labor influences into large, well disciplined
unions, a sufficient counterweight to management power was created to allow
--- Content provided by FirstRanker.com ---
unions to bargain from a position of strength.Having focused its efforts on countervailing the powers of the domestic firm,
labor scored impressively by achieving equivalence, if not dominance, at the
--- Content provided by FirstRanker.com ---
bargaining table. But its narrow focus missed the broader scene. As the
international expansion of business started converting UNCs into MNCs at an
--- Content provided by FirstRanker.com ---
accelerating rate, labor`s domestic entrenchment provided no possibility tomatch the expansion of managerial powers. Thus a disparity gap was opened.
Given the continuation of the multinationalization of business, this gap is certain
--- Content provided by FirstRanker.com ---
to widen as long as labor unions remain uninational in scope and capacity.
This shift in the balance of power in management`s favor signals to labor leaders
--- Content provided by FirstRanker.com ---
a retreat to subservience and subordination that the movement can neither acceptnor endure. To labor, therefore, the MNC is not a villain or culprit of the normal
management sort, but an antagonist of an entirely new and mortally menacing
--- Content provided by FirstRanker.com ---
variety. Against it, a total struggle seems to be American labor`s resolute
response. The unions attack MNCs as inherently inimical to the domestic
--- Content provided by FirstRanker.com ---
economy and seek legislative remedies that would severely restrict multinationalcorporate operations. Labor`s lobbying campaign charges the MNC with the
following detrimental effects:
--- Content provided by FirstRanker.com ---
1. Investment depression. The MNC foreign investments deplete capital
resources needed for domestic investment, thus undermining economic
--- Content provided by FirstRanker.com ---
growth and new job creation in the United States.2. Technology drain. The MNC exports U.S. technology in order to exploit
low cost foreign labor, depriving the U.S. worked of his or her rightful
--- Content provided by FirstRanker.com ---
opportunity to share in the utilization and rewards of this technology.
Through technology transfers and foreign investments the MNC replaces
--- Content provided by FirstRanker.com ---
U.S. workers with foreign workers; that is, it exports jobs.3. Export displacement. The MNC displaces U.S. exports with foreign
produced goods, thereby decreasing domestic employment and payrolls,
--- Content provided by FirstRanker.com ---
causing the U.S. trade balance to deteriorate, and depressing economicconditions at home.
4. Low wage imports. The MNC substitutes imports from its U.S.-affiliates in
--- Content provided by FirstRanker.com ---
low wage countries for U.S.-made goods. These imports undermine U.S.
wage standards, cause unemployment, and idle plant facilities.
--- Content provided by FirstRanker.com ---
5. Tax evasion. The MNC evades taxes by deferring profit repatriation,manipulating transfer prices, and circumventing government regulations.
The revenues lost to the national treasury result in a higher tax burden on the
--- Content provided by FirstRanker.com ---
general public.
6. Payments disbalancing. The MNC`s activities have afflicted the United
--- Content provided by FirstRanker.com ---
States with chronic balance of payments deficits, fueled inflation, debasedthe dollar as a stable currency, and contributed to international monetary
disorders.
--- Content provided by FirstRanker.com ---
Offshore Plants
The recent proliferation of offshore manufacturing has become the focal point of
--- Content provided by FirstRanker.com ---
the labor union`s concern. Since the offshore plants represent clear-cut transfersof production rates to low wage countries, unions depict them as inherently
symptomatic of all multinationalization projects of business. What the unions
--- Content provided by FirstRanker.com ---
leave unsaid is that manufacturers have transferred offshore production
processes in which they have lost their international competitive advantage. It
--- Content provided by FirstRanker.com ---
has been a relatively successful way for threatened firms to retaincompetitiveness and for developing countries to exploit their own comparative
advantage.
--- Content provided by FirstRanker.com ---
For the MNCs the movement offshore is essentially a reactive strategy to low
cost competition which, from management`s perspective, can best be met by
--- Content provided by FirstRanker.com ---
international restructuring of production: locating capital intensive, high-technology facilities in industrial countries and labor intensive, low-skill plants
in les developed areas.
--- Content provided by FirstRanker.com ---
To remedy the situation, organized labor has lobbied for legislation to regulateMNC operations. It has called for (a) the creation of a federal investments
commission to license and supervise transnational capital transactions; (b)
--- Content provided by FirstRanker.com ---
restriction of outward transfers of technology, by subjecting patents to export
licensing and prohibiting foreign production of a patented product; and (c) by
--- Content provided by FirstRanker.com ---
eliminating the foreign tax credit and the deferred tax status of the affiliatesprofits.
Ideological Dilemma
--- Content provided by FirstRanker.com ---
International solidarity has long been an ideal of the labor movement. Workers`
organizations everywhere confronted the same problems and strove for the same
--- Content provided by FirstRanker.com ---
goals. Devoted to collective action as counterforce to exploitation, labor unionsfrom the start aspired to cooperation and communication with their brothers,
regardless of country.
--- Content provided by FirstRanker.com ---
Labor unions in countries hosting the affiliates of MNCs find the present
protectionist offensive aimed more against them than against the MNCs. This
--- Content provided by FirstRanker.com ---
confrontation between the home country and the host country unions remains anunpredictable source of conflict in multinational business relations.
--- Content provided by FirstRanker.com ---
MNC EFFECTS ON HOME COUNTRY
TRADE AND PAYMENTS
--- Content provided by FirstRanker.com ---
The mounting criticism of MNCs has produced a flurry of research projectsaimed at determining how the creation of foreign affiliates affects the domestic
economy. Several of thee studies have been conducted to support some group`s
--- Content provided by FirstRanker.com ---
special interest or ideological assertions; however, sometimes the truth is better
reflected by what the researchers failed to find than by what they did find.
--- Content provided by FirstRanker.com ---
MNCS AND HOST SOCIETIES
The presence of MNC affiliates is a profoundly significant reality in much of the
--- Content provided by FirstRanker.com ---
world. Most host countries have wooed MNCs through investment incentives
and many other means. To push back the tyranny of material wants, low
productivity, and aversion to change, various countries have sought the
--- Content provided by FirstRanker.com ---
cooperation and capabilities of MNCs. Even the Soviet Union and other
communist countries have started to seek ways to entice MNCs to cross their
--- Content provided by FirstRanker.com ---
previously ironclad borders. Thus, the push toward the propagation and growthof the MNCs has been global in scope.
Increasingly, however, the MNC has become a source of controversy, at times
--- Content provided by FirstRanker.com ---
acute resentment, in many countries. Canada, France, India, Iran, and some
African states are widely publicized sites of recent dramatic clashes between
--- Content provided by FirstRanker.com ---
governments and MNCs. Similar conflicts have surfaced elsewhere throughoutthe world.
ADAPTABILITY OF MNCs TO HOST ENVIRONMENTS
--- Content provided by FirstRanker.com ---
All MNCs are not equally likely to cause friction and tension in their host
economies. Some adapt with relative ease and become closely integrated with
--- Content provided by FirstRanker.com ---
their host environment, both economically and socioculturally; others remainisolated and insulated, often forming alien enclaves in the host society. There
appears to be a causal relationship between the MNC`s organizational structure
--- Content provided by FirstRanker.com ---
that is, its organizational design as well as its underlying objectives and
strategies ?and its capacity for social adaptation to host country conditions.
--- Content provided by FirstRanker.com ---
In terms of inducement to social conflict, MNCs fall into three categories: homedominated, host dominated, and internationally integrated.
Home or Parent Dominated MNCs
--- Content provided by FirstRanker.com ---
These enterprises are organized and managed in such a way that the foreign
based subsidiaries and other affiliates, whatever their specific legal form, serve
--- Content provided by FirstRanker.com ---
primarily in a complementary support role. Their function is to help the parentcompany achieve its business objectives in the headquarters country. The
subsidiaries have an entirely dependent role. Their local interests and needs,
--- Content provided by FirstRanker.com ---
including social adjustment, are subordinated to and, if necessary, sacrificed for
the parent company`s home operations. Highly centralized, run by absentee
decision makers, and serving purposes external to the host countries, the home
--- Content provided by FirstRanker.com ---
dominated MNC is very likely to cause host country conflict. Its insensitivity
toward host nation needs is compounded by its ethnocentric managerial
--- Content provided by FirstRanker.com ---
behavior.This type of MNC has been particularly, but not exclusively, characteristic of
extractive industries and notice entrants into multinational operations.
--- Content provided by FirstRanker.com ---
Increasing self-assertion of host country governments has put home dominated
MNCs under increasing pressure to reform or divest.
--- Content provided by FirstRanker.com ---
Federated or Host Dominated MNCsIn its pure form this model is an MNC whose headquarters is set up more like a
holding company than a management center. The actual management authority,
--- Content provided by FirstRanker.com ---
except for general policy guidelines, is delegated to individual subsidiaries. The
company is highly decentralized; the subsidiaries are managerially autonomous
--- Content provided by FirstRanker.com ---
or very nearly so. Each subsidiary is run by executives who are local nationals,who rely on local methods and decision-making processes, whose leadership
style derives from the indigenous social norms, and whose personal standards
--- Content provided by FirstRanker.com ---
and loyalties are identified with the host society. In brief, there is a tight
integration of each affiliate with its host country.
--- Content provided by FirstRanker.com ---
The federated MNCs are the least susceptible to social conflict ? they seem to bea sociologist`s ideal. From an economic perspective they are far less perfect.
The high degree of autonomy that each affiliate enjoys severely limits the
--- Content provided by FirstRanker.com ---
MNC`s ability to utilize its capacities as effectively as a more closely
coordinated structure.
--- Content provided by FirstRanker.com ---
Internationally Integrated MNCsThese firms are organized to pursue objectives and activities that are worldwide
in scope and concept. Their primary interests are not identified with the
--- Content provided by FirstRanker.com ---
headquarters country or with any other particular nation. They are apolitical and
anational institutions. To be sure, they must have nationality for the purposes of
--- Content provided by FirstRanker.com ---
meeting statutory requirements as legal entities to be licensed to do business, butthis is nationality only in form; in substance they are transnational or perhaps
even supranational. Their primary loyalty is to the company itself rather than to
--- Content provided by FirstRanker.com ---
any nation. Their purposes, behavior, vales, and operational incentives allderive from their own multinational structure, not from home country or host
county policies or patriotisms.
--- Content provided by FirstRanker.com ---
The substantive essence of such companies lies in international specialization
and managerial integration, a process often called international ration alization.
--- Content provided by FirstRanker.com ---
These MNCs specialize production according to the principle of comparativeadvantage: acquiring inputs from countries with lowest relative costs, that is,
locating production facilities for each component in the country best endowed
--- Content provided by FirstRanker.com ---
with the necessary resources, and distributing outputs in the markets where the
rewards are greatest. Thus, they possess a competitive advantage, a productive
--- Content provided by FirstRanker.com ---
superiority, over domestic or uninational firms in both developed or developingcountries. This productive superiority derives from the wider range of strategic
choices; they are always able to choose the least costly production alternative
--- Content provided by FirstRanker.com ---
and to combine it with the most profitable marketing alternative.
Because of their greater productive efficiency and profitability, the globally
--- Content provided by FirstRanker.com ---
integrated MNCs represent the fastest growing segment of internationalbusiness. The growth is propelled in part by the expansion of these companies
themselves and in an increasing part by the adoption of the globally integrated
--- Content provided by FirstRanker.com ---
model by other companies. The process of conversion from other structural
forms of international business to the globally integrated mode is only
--- Content provided by FirstRanker.com ---
beginning. Much further growth is certain to take place in the next severalyears. Only a return to ultraprotectionist trade barriers could thwart this trend.
Consequently, the integrated MNC is the most likely to demand attention in any
--- Content provided by FirstRanker.com ---
search for solutions to the problems of social responsibility of multinational
firms.
--- Content provided by FirstRanker.com ---
Conflicts between the globally integrated MNCs and host nations arise from thefundamental fact that the inner logic of such transnational enterprises is violated
if identification of corporate interest with the national interest of any particular
--- Content provided by FirstRanker.com ---
host state is imposed. The violation is interference with the internationaloptimalization process of the company, which tends to destroy its productive
superiority, not to mention profitability.
--- Content provided by FirstRanker.com ---
AREAS OF CONFLICT
Although the MNC has no power over the host government, if may have
--- Content provided by FirstRanker.com ---
considerable power under that government. By being able to influence certainfactors, the MNC has the opportunity to help or harm national economics; in this
sense, it may be said to have power against host governments. Critics of the
--- Content provided by FirstRanker.com ---
MNC perceive these powers as potential perils to host societies.
The strategic aspects of a host country`s national policy that are subject to the
--- Content provided by FirstRanker.com ---
influence of the MNC include:1. Planning and direction of industrial growth
--- Content provided by FirstRanker.com ---
2. National control of key industries3. Financial policy
4. Export-import policy
5. Pricing policy
6. Research and development
--- Content provided by FirstRanker.com ---
7. Human resource policy(1) Planning and Direction of Industrial Growth
--- Content provided by FirstRanker.com ---
Host nations have viewed with concern the tendencies of many MNCs to
centralize strategic decisions in their headquarters. For the host governments this
--- Content provided by FirstRanker.com ---
signifies loss of control over industrial strategy to the foreign-based MNC. TheMNCs` allegiances are geocentric; their overall objectives are growth and profits
globally rather than in the host economy. These objectives require efficiency in
--- Content provided by FirstRanker.com ---
the functional areas of management ? production, marketing, finance, and so on.
Many MNCs have sought greater efficiency through centralization, with
--- Content provided by FirstRanker.com ---
headquarters domination of affiliates as the unavoidable result.Risks of Excessive Centralization Empirical evidence indicates that a high
degree of centralization tends to lead to inflexibility of parent company polices,
--- Content provided by FirstRanker.com ---
Decisions are made in headquarters regarding the product mix for each affiliate,extent of interaffiliate sales of semi finished and finished products, export
pricing, interaffiliate sales, input procurement, packaging, long-rang planning,
--- Content provided by FirstRanker.com ---
research and development, and, particularly, financial management. When the
authority over these vital business decisions is located beyond their jurisdictions,
--- Content provided by FirstRanker.com ---
local authorities counter with restrictions on affiliate activities. Clearly,centralization extracts a price from the MNC. A satisfactory method of
calculating it is yet to be devised. When things are sorted out the price of
--- Content provided by FirstRanker.com ---
centralization many well turn out to be far greater for many firms than the
operational simplifications gained by it.
--- Content provided by FirstRanker.com ---
Government Goals Governments of all nations, particularly those of the less
developed countries, are assuming more responsibility for the achievement of
--- Content provided by FirstRanker.com ---
economic growth and social goals than formerly. To be successful they need a
fairly high degree of certainty in the business sector. The presence of affiliates
--- Content provided by FirstRanker.com ---
managed from foreign-based headquarters introduces uncontrollable factors thatinterfere with the government`s planning and policies of economic development.
With substantial segments of industry owned and directed from abroad and with
--- Content provided by FirstRanker.com ---
home country governments bent on perceiving the affiliates as foreign
extremities of their economies, the host governments see a serous challenge to
--- Content provided by FirstRanker.com ---
their ability to affect the desired goals.The more responsibility for economic growth and stability the government
accepts, the greater its direct involvement in business regulation and direction,
--- Content provided by FirstRanker.com ---
and the greater the possibility that the MNC will be perceived as a potential
agitator of the national plants.
--- Content provided by FirstRanker.com ---
(2) National Control of Key SectorsThe MNCs` technological power and their tendency to cluster in key industrial
sectors has given rise to another fear in the host countries. By permitting
--- Content provided by FirstRanker.com ---
foreign investors to control key industries, nations are in the precarious positionof losing control over strategic sectors. The fear of industrial domination is no
chauvinistic fiction but in many instances an obvious truth.
--- Content provided by FirstRanker.com ---
Technology Gap The ability of the headquarters company to determine
whether, when, and how the newest techniques are employed by affiliates has
--- Content provided by FirstRanker.com ---
aroused fears in host nations of an increasing dependence on the MNC fortechnological progress. It has been argued that this dependence is attributable to
a technology gap between the United States and other countries. A lesser
--- Content provided by FirstRanker.com ---
commitment of European- and other non-U.S.- based companies to research and
development is given as the cause of the gap. Researchers who have attempted
--- Content provided by FirstRanker.com ---
to go beyond the expenditure figures discredit the technology gap theory byshowing that technological inventions and innovations have come no less
frequently from Europe than from the United States. Furthermore, the European
--- Content provided by FirstRanker.com ---
inventions have tended to be major breakthroughs. The issue is by no means
clear as far as Europe or Japan are concerned; however, there is no room for
--- Content provided by FirstRanker.com ---
argument on this point in reference to the developing nations.The necessity of relying on the home country`s technology, in turn, leads to the
fear of foreign control and ownership of industry. As a given industry sector
--- Content provided by FirstRanker.com ---
becomes dominate by MNCs, the host country becomes dependent on the
technological in-transfers of the foreign-headquartered MNC for its growth and
--- Content provided by FirstRanker.com ---
product development. Once achieved, the dominant position of the MNC isbelieved to be self-perpetuating. Dominance itself provides the affiliate with
resources to help perpetuate its role as the major innovator.
--- Content provided by FirstRanker.com ---
National policies aimed at greater independence in technology are a mixture of
the desire for local research and development facilities and their ownership as
--- Content provided by FirstRanker.com ---
well as the desire for technically advanced items produced locally. However, itappears that many countries have no feasible alternative to relying on foreign
technology. They need MNCs in order to avoid stagnation of the economy and
--- Content provided by FirstRanker.com ---
bring about indigenous development.Foreign Takeovers The strategy of some MNCs has been to place their direct
investments in the host country into acquisitions of pre-existing indigenous
--- Content provided by FirstRanker.com ---
firms. To the host country this strategy conjures visions of takeover by
foreigners. In smaller or less industrialized countries the point is quickly
--- Content provided by FirstRanker.com ---
reached when no nationally owned companies may be left in a particularindustry. Thus, a foreign monopoly control is created. Larger nations, too, are
sensitive to foreign takeovers.
--- Content provided by FirstRanker.com ---
A number of nations are reacted to such fears by restricting acquisitions to
prevent the elimination of local competitors and by channeling foreign
--- Content provided by FirstRanker.com ---
investments into the establishment of new firms that make a larger realcontribution to the host economy and avoid the disturbance in the market that
major acquisitions typically cause.
--- Content provided by FirstRanker.com ---
The possibility of the MNC eliminating indigenous competitors is real. With its
superiority in resources (financial, managerial, and technical), the MNC is often
--- Content provided by FirstRanker.com ---
at an obvious competitive advantage compared to the domestic firm. Oftentimesthe MNC enters a host country in which it already possesses a strong market
position built on imports. This makes it a much more formidable threat to local
--- Content provided by FirstRanker.com ---
competitors.
(3) Financial Policy
--- Content provided by FirstRanker.com ---
As a matter of financial policy the MNC can choose to invest its profits either inthe host country or elsewhere. The host country government naturally prefers
domestic investment, but the power lies with the MNC to determine where the
--- Content provided by FirstRanker.com ---
profits will be allocated.
Balance of Payments The MNC may help relieve a deficit in the host country
--- Content provided by FirstRanker.com ---
balance of payments. No conflict arises in this situation. The firm may alsocontribute to the worsening of the host country balance of payments.
The MNC has been indicted for causing capital flows to fluctuate and even
--- Content provided by FirstRanker.com ---
reverse. In addition, increased investment in the host economy very likelyincreases the market share held by the affiliate, which can conflict with host
country interests. This makes the allocation of profits a very sensitive area. If
--- Content provided by FirstRanker.com ---
the aren`t decides to transfer the profits outside the borders of the host country,
the latter gains no benefits from the investment potential of the firm. If the
--- Content provided by FirstRanker.com ---
dividends to the parent company fluctuate from year to year, the paymentsposition of the host country may be destabilized.
Borrowing Power The source of borrowed funds can also create conflict.
--- Content provided by FirstRanker.com ---
This enables the MNC to import much larger sums than a uninational company
could. The potential threat to the balance of payments position of the host
--- Content provided by FirstRanker.com ---
country is similarly greater.Also, host government domestic monetary policy may be easily undermined by
the countering efforts of the MNC. A typical example involves the MNC`s
--- Content provided by FirstRanker.com ---
extension of credit to a foreign subsidiary at a time when the host nation is
attempting to dampen domestic purchasing power through import restrictions
--- Content provided by FirstRanker.com ---
and exchange controls. Thus, the foreign-owned affiliate has the power, cash,and credit to avoid efforts by the state to constrain credit and investment.
Even though the magnitudes involved are not large in comparison to major
--- Content provided by FirstRanker.com ---
elements in the balance of payments, and many countries have substantial
earnings from overseas investments, these points are overlooked when attitudes
--- Content provided by FirstRanker.com ---
toward foreign investment are formed within the host country. The exact impactof an inward foreign investment on a country`s balance of payments is usually
too complex to be easily explained.
--- Content provided by FirstRanker.com ---
(4) Export-Import Policy
The export-import activities of the MNC can also affect the host county balance
--- Content provided by FirstRanker.com ---
of payments. Exports from affiliates may be subject to decisions made in thehead office that seek to fit the affiliate`s trade into the international marketing
scheme of the MNC as a whole. This means the affiliate`s exports could go to
--- Content provided by FirstRanker.com ---
the parent or other affiliates instead of to customers desired by the hostgovernment.
Another host country criticism of the MNC is that it may allocate export markets
--- Content provided by FirstRanker.com ---
among its affiliates, thereby preventing them from exporting as they might
otherwise and damaging the prospects for expansion of exports of the host
--- Content provided by FirstRanker.com ---
country.Importing policies may be similarly dictated by the home office. Affiliates may
be directed to import from the parent itself or from other affiliates instead of
--- Content provided by FirstRanker.com ---
using resources from the host country, thus further contributing to a trade deficit
on the part of the host.
--- Content provided by FirstRanker.com ---
However much the MNC may contribute to economic growth and stability in thehost country, the fact that the parent has the ability to alter the activities of the
affiliates increases the uncertainty facing the host government. The fact that the
--- Content provided by FirstRanker.com ---
MNC`s decision center is outside the jurisdiction of the host government further
compounds the uncertainty.
--- Content provided by FirstRanker.com ---
(5) Pricing PolicyThe controversial aspects of MNC pricing relate in part to intracompany pricing
or transfer pricing and in part to pricing policies for customers outside the
--- Content provided by FirstRanker.com ---
company itself.
Leakages Through Transfer Pricing Transfer prices can be calculated so as to
--- Content provided by FirstRanker.com ---
shift assets among the entities of the MNC through intracompany (interaffiliate)sales, royalties, technical assistance fees, and the allocation of headquarters
expenses. The potential significance of these flows to the host country balance
--- Content provided by FirstRanker.com ---
of payments is indicated by the fact that remittances by foreign affiliates to the
headquarters of MNCs have been consistently far greater than the flow of funds
--- Content provided by FirstRanker.com ---
from headquarters to the affiliates.Transfer pricing is capable of serving various other objectives unless it is
prevented from doing so by effective government regulations. If the host
--- Content provided by FirstRanker.com ---
countries employ foreign exchange restrictions, the transfer price may be
designed to circumvent the restrictions. If a particular host country has high
profit taxes, the transfer price may be used to reallocate the profits to a low tax
--- Content provided by FirstRanker.com ---
country. When economic or political instability plagues a host country, transfer
prices can be used to keep to a minimum the company`s cash reserves in that
--- Content provided by FirstRanker.com ---
country. Transfer prices can also be used to strengthen the competitive positionof a company or to neutralize the competitive advantage of others. If used for
these or similar purposes the transfer price becomes an obviously objectionable
--- Content provided by FirstRanker.com ---
device.
--- Content provided by FirstRanker.com ---
Power to Undercut Local CompetitorsIn market pricing, local industry
often fears the ability of the MNC affiliate to cut prices to any level necessary to
--- Content provided by FirstRanker.com ---
achieve either a foothold or to increase its market share. It is possible for a large
MNC to absorb sizable per unit losses on its sales in a small host country
--- Content provided by FirstRanker.com ---
without sacrificing its overall profitability. Thus, there is reason for the localpeople in such countries to be on guard.
Some MNCs have established a global single price policy; that is, the same price
--- Content provided by FirstRanker.com ---
applies all over the world. By doing so the MNC denies itself the ability to
respond to the demands of individual country markets or to utilize to its
--- Content provided by FirstRanker.com ---
maximum advantage the oligopolistic market structure of most host countries.The problem becomes further complicated when trade barriers and government
regulations create inducements for differentiating prices among host country
--- Content provided by FirstRanker.com ---
markets.
(6) Research and Development
--- Content provided by FirstRanker.com ---
Research and development can cause a conflict of interests between the MNCand the host country in several ways. The first is the location of the research
and development facilities. Most host countries urge MNCs to establish local
--- Content provided by FirstRanker.com ---
research and development capacity. Having creative work going on helps to
accelerate efforts in other areas of scientific research and innovation in the host
--- Content provided by FirstRanker.com ---
society. MNCs, however, tend to concentrate research efforts in the homecountry. Of host countries the most advanced nations are preferred because of
their educational institutions and scientific talent. Whatever the scope of the
--- Content provided by FirstRanker.com ---
affiliate`s research and development program, growth of such a department isdependent on the home office. And whatever the pattern of relationships
concerning research within the firm, it is not one that eliminates the dependence
--- Content provided by FirstRanker.com ---
of the host economy on the parent company`s technological priorities.
Even if research is done by the affiliate in the host country, the issue of
--- Content provided by FirstRanker.com ---
ownership rights over the findings can cause conflict. Should the companydecide to use the results of the research in some other country, the benefit to the
local economy is minimized.
--- Content provided by FirstRanker.com ---
In sum, the MNC usually helps the host country reach a higher level of
technology, but not as fast as the nation wants, nor is the technology necessarily
--- Content provided by FirstRanker.com ---
the type that the host government deems appropriate for its needs. Further more,there is the problem of who controls the results of the research. So long as
domestic ownership and control over key sectors and key technology have not
--- Content provided by FirstRanker.com ---
been achieved, national governments feel threatened. The conflict over
ownership of technology is taking on new dimensions as MNCs expand their
--- Content provided by FirstRanker.com ---
research bases to host countries and as more and more host countries assume thedual role of both host and home country.
(7) Human Resource Policies
--- Content provided by FirstRanker.com ---
In the early stages of international growth, a firm tends to staff its foreign-based
affiliates with headquarters country managers, that is, home country expatriates.
--- Content provided by FirstRanker.com ---
The advantages here are twofold: first, simplicity of selection, appointment, andpromotion, all of which can be done in a unilateralist frame of reference without
disturbing the established practices and routines of the firm, and second, the
--- Content provided by FirstRanker.com ---
relative uniformity of backgrounds of all managerial cadres throughout the
multinational structure-everybody is the product of the same national and
--- Content provided by FirstRanker.com ---
corporate cultures and has reached his or her position by playing by the samerules.
Third Country Expatriates Another source of executive talent is the third
--- Content provided by FirstRanker.com ---
country expatriate, who may be defined as a manager who is a citizen ofCountry A and works in Country B for a company headquartered in Country C.
Most of these are multilingual Europeans or Orientals with a European
--- Content provided by FirstRanker.com ---
education. Many are refugees from communist countries. Third country
nationals are reported to be mo adept at integrating themselves into new
--- Content provided by FirstRanker.com ---
situations and making friends in a foreign social setting than the unilingual U.S.expatriates.
A number of U.S. companies have expressed a definite preference for third
--- Content provided by FirstRanker.com ---
country expatriates in overseas management positions. The versatility of third
country executives may indicate high mobility toward top management
--- Content provided by FirstRanker.com ---
positions. For example, one establishment MNC, Nestle of Switzerland, has longused non-Swiss in top corporate posts. Of the top eleven members of Nestle`s
present board of directors, six are non-Swiss.
--- Content provided by FirstRanker.com ---
All expatriates are a potential source of host country conflict. The local society
generally views them with mixed reactions. The upper classes may resist the
--- Content provided by FirstRanker.com ---
expatriate because he or she is an influential outsider who threatens the localpower and prestige structures. At the same time, they realize the expatriate
brings new technologies and behavior patterns that benefit their country and
--- Content provided by FirstRanker.com ---
themselves. The lower classes resent the presence of expatriates because they
are foreigners and because they hold prestigious high paying positions. Racial or
--- Content provided by FirstRanker.com ---
religious biases tend to compound the resentments further. The MNC mustlearn to sense and be guided by the strength of these nationalistic and
xenophobic feelings. Host society reactions will range from slowing of permits
--- Content provided by FirstRanker.com ---
and documents in government offices to acts of terrorism and destruction of
property.
--- Content provided by FirstRanker.com ---
Host Country Nationals Established MNCs have come to rely heavily on hostcountry nationals as the source of executive personnel. The reasons for this
switch have been the following: the need for understanding the local
--- Content provided by FirstRanker.com ---
environment, the rapid growth of overseas operations requiring speedyexpansion of the management group, the increased ability to utilize individuals
with different national backgrounds successfully in the corporate structure, and
--- Content provided by FirstRanker.com ---
direct or subtle pressures by host country authorities to replace expatriate
managers with indigenous employees.
--- Content provided by FirstRanker.com ---
While all host governments appear to favor their people strongly in executiveassignments, they nonetheless can violently object to the salary policy of the
MNC. In this area the MNC can be criticized if it holds fast to local salary
--- Content provided by FirstRanker.com ---
standards, for underpaying local nationals in comparison with headquarters
executives, and criticized if it exceeds the local standards, for under mining local
--- Content provided by FirstRanker.com ---
firms and pirating their best people. This is a real dilemma.Personnel Practices In the arena of employment policies, there are several
potential conflicts. One is the attempt to impose the home country`s methods,
--- Content provided by FirstRanker.com ---
mannerisms, and behavior patterns on the host society through the operations of
the affiliate. For example, an Italian affiliate of one MNC scheduled two hours
--- Content provided by FirstRanker.com ---
for lunch and a half day of work on Saturday, as is customary in Italy. Takingfor granted that shifting the working hours and workdays of the week would
lead to greater productivity, the head office ordered the affiliate to drop the
--- Content provided by FirstRanker.com ---
Saturday shift and to shorten the lunch time to 45 minutes. This change met
such strong resistance from the Italian workers that productivity plummeted.
--- Content provided by FirstRanker.com ---
The hiring and firing policies of affiliate of most U.S.-based MNCs parallelthose of the parent company; that is, firms shift management personnel, lay off
redundant employees, and regroup and retrain labor to meet new tasks. These
--- Content provided by FirstRanker.com ---
dynamic and sometimes harsh policies are contrary to the social values of many
foreign countries, where customarily both managers and labor receive more
--- Content provided by FirstRanker.com ---
stable treatment by the firm and are tied to the firm for extended periods of time.In the area of worker recruitment and training the MNC encounters several
problems. In less-developed countries, the most common problem is the
--- Content provided by FirstRanker.com ---
scarcity of skilled people ? workers, managerial personnel, research and
development scientists, and technicians. If the firm imports the needed skills,
the host country must forego both the training and the jobs for its own nations;
--- Content provided by FirstRanker.com ---
for the MNC to undertake the required training programs locally is often
financially prohibitive.
--- Content provided by FirstRanker.com ---
In certain host countries manual work cannot be included in any trainingprograms for supervisory personnel because of the strong social stigma attached
to it. The same may be true sales. There are difficulties in interesting educated
--- Content provided by FirstRanker.com ---
nationals in sales positions in certain countries because in those countries sales
work is low in social esteem.
--- Content provided by FirstRanker.com ---
Conflicts may arise also from the promotion policies of the MNC. Somecountries have rigid social stratification in which on-the-job achievement and
economic performance are not recognized. Merit-based promotion of the most
--- Content provided by FirstRanker.com ---
competent or deserving personnel to management or supervisory positions, thus,
flies in the face of expectations and notions of social propriety. Perhaps the best
--- Content provided by FirstRanker.com ---
example of this problem would be the promotion of a member of a lower casteto a position of supervision over a member of a relatively higher caste in India.
While less obvious, the same conflict is encountered in many other, particularly
--- Content provided by FirstRanker.com ---
developing, countries in a more subtle context.
Transborder Data Flow
--- Content provided by FirstRanker.com ---
Recent advances in both computer and telecommunication technologies have ledto their convergence into a new activity, telematics. Modern telecommunication
facilities have overcome time and distance as major obstacles to the access of
--- Content provided by FirstRanker.com ---
sophisticated computer services for the processing, storage, and retrieval of
machine-readable information.
--- Content provided by FirstRanker.com ---
Data did, of course, move across national boundaries before the advent oftelematics. But traditional media (such as postal, telephone, and telex services)
are increasingly being replaced by the electronic transmission of data. The
--- Content provided by FirstRanker.com ---
fusion of advanced electronic processing capabilities with modern tele-
communications facilities and the speed, accessibility, and interactive
capabilities through which time and distance are overcome as obstacles to large-
--- Content provided by FirstRanker.com ---
scale information mobility, give transborder data flow its potency.
--- Content provided by FirstRanker.com ---
MNCs play a central role in establishing the required telecommunicationsinfrastructure; they produce the necessary computer hardware, software, and
peripheral equipment; and they offer a growing range of data-processing
--- Content provided by FirstRanker.com ---
services as well as access to an expanding amount o machine-readable data.
This situation poses a dilemma to all LCDs. On one hand they recognize the
--- Content provided by FirstRanker.com ---
great significance of telematics for obtaining accurate economic and politicalinformation both in their domestic and international spheres; on the other hand
they feel vulnerable because of their inability to match the MNC`s capacity with
--- Content provided by FirstRanker.com ---
their own facilities of telematics and transborder data transmission. The
competitiveness of their domestic companies is thus threatened by the MNCs`
--- Content provided by FirstRanker.com ---
growing superiority in identifying alternatives and reducing uncertainties,facilitating implementations, and effectively pursuing profitable business
ventures. Beyond the activities of the MNCs, the host governments perceive the
--- Content provided by FirstRanker.com ---
increasing role of telematics and transboundary data flows as negatively
affecting all aspects of relations between the poor and the rich countries; to the
--- Content provided by FirstRanker.com ---
extent that their ability to collect, store, process, and access information isinferior ? and the lag has been increasing ? they fear their ability to negotiate
persuasively and interact effectively with other nations will be eroded.
--- Content provided by FirstRanker.com ---
Because of these concerns, less-developed host countries have started to
promulgate regulatory measures requiring MNCs to share their telematic
--- Content provided by FirstRanker.com ---
equipment and software technology with various indigenous installations for theproduction, processing, transmission, and dissemination of a wide variety of
data: economic, scientific, political, social, and legal. It is highly doubtful that
--- Content provided by FirstRanker.com ---
MNCs will be able to accommodate all these demands. The telematics issue is
too new to allow any informed predictions as to the compromises that will be
--- Content provided by FirstRanker.com ---
ultimately struck between the host governments and MNCs to resolve it.NATIONAL SOVEREIGNTY OF THE HOST COUNTRY
Erosion of national sovereignty appears to be the pervasive fear resulting from
--- Content provided by FirstRanker.com ---
the expansion of the MNC. This loss may be the consequence of dependence on
foreign technology, foreign industrial dominance, or the MNC`s ability to effect
--- Content provided by FirstRanker.com ---
its own desired results. Losing its sovereignty, the nation loses its power, andwithout power the existence of nationhood, even its identity, becomes
problematic.
--- Content provided by FirstRanker.com ---
By increasing the international influences, the MNC may reduce choices open to
the host government regarding the most appropriate means of guiding the
--- Content provided by FirstRanker.com ---
domestic economy. The policies and activities of MNCs do affect the balance ofpayments, economic planning, competitive climate, development of technology,
and many other aspects of host economics. Intensified by sensitized
--- Content provided by FirstRanker.com ---
nationalistic sentiments, these effects reinforce the perception of peril to the host
society. To alleviate host country fears, MNCs must learn to adjust their
--- Content provided by FirstRanker.com ---
activities to the indigenous needs and sociocultural attitudes of host societies.TECHNOLOGY TRANSFER
--- Content provided by FirstRanker.com ---
Technology is a new variable in the equation of economic relations. Traditional
--- Content provided by FirstRanker.com ---
theory assumes that all nations have equal access to technology and, therefore,that there is no need to transfer technology from one county to another. Recent
research findings have invalidated this assumption. In addition, they point to
--- Content provided by FirstRanker.com ---
technology differences as primary cause of international inequalities in
economic achievements. To reduce the inequalities, technology capabilities of
--- Content provided by FirstRanker.com ---
the backward nations must be strengthened. The quickest way to do so is totransfer technology from the developed to the developing nations.
--- Content provided by FirstRanker.com ---
Definition
Technology is any device or process used for productive purposes. In its
--- Content provided by FirstRanker.com ---
broadest sense, it is the sum of the ways in which a given group provides itself
with good and services, the group being a nation, an industry, or a single firm.
--- Content provided by FirstRanker.com ---
There is a fundamental characteristic of technology that demands clearrecognition. Q unites unlike commodities and capital, technology is not depleted
or its supply diminished when it is transferred or used. It is usable but not
--- Content provided by FirstRanker.com ---
consumable. Once created, technology is inexhaustible until it becomes
obsolete. Therefore; export of technology need not cause the source country to
--- Content provided by FirstRanker.com ---
reduce its use of the technology. Indirectly, a decline may result if the recipientcountry creates an industry large to change the global supply and demand
equilibrium of the goods produced by the technology involved. For most
--- Content provided by FirstRanker.com ---
technology sought by the developing nations this is not the case.
Sources of Technology
--- Content provided by FirstRanker.com ---
Contrary to the classical assumption, technology is not a free good but avaluable property, nor is it evenly distributed around the globe. The supply
schedules differ widely from country to country. To obtain new technology, a
--- Content provided by FirstRanker.com ---
nation has three alternatives:
1. Produce the technology capability at home
--- Content provided by FirstRanker.com ---
2. Import it from abroad3. Import goods containing the desired technology
For most LDCs, home production of technology is often uneconomic. Since
--- Content provided by FirstRanker.com ---
much of what they are seeking already exists in the industrially advanced areas,
they can fill their needs by importation. Normally, the importation can be
--- Content provided by FirstRanker.com ---
effected at savings over the domestic cost of research and development (R&D).R&D expenditures devoted to projects duplicating existing know-how are
obviously wasteful. Thus, economic rationale requires that LDCs concentrate
--- Content provided by FirstRanker.com ---
their home production of new technology on any unusual requirements that
cannot be met from import sources.
The access to technology depends on its ownership. Nonproprietary technology
--- Content provided by FirstRanker.com ---
belongs to the public. It is there for the taking, but it is not free. The taker must
have the ability to gather it from libraries, public research institutions, or
--- Content provided by FirstRanker.com ---
wherever it may be found. To locate the sources and to sort out what is usableand unsuitable from any given application may involve considerable cost, which
might be called the assembling and packaging of technology. Consulting firms
--- Content provided by FirstRanker.com ---
specialize in this type of service. They very sources and consumers of
technology but instead act as intermediaries between the sources and consumers
--- Content provided by FirstRanker.com ---
of technology.Proprietary technology is privately owned. It consists, trademarks, and secret
processes. The most efficient and profitable technology, often also the newest,
--- Content provided by FirstRanker.com ---
belong in this category. Access to proprietary technology is at the owner`s
discretion. It may or may not be for sale. If the sale creates potential
--- Content provided by FirstRanker.com ---
competitors, the owners` interest is served by not selling it unless the expectedloss from new competition is less than the price for which the technology can be
sold.
--- Content provided by FirstRanker.com ---
Much proprietary technology is not for sale. It can move only with investments
of owner firm. This is embodied technology, as distinguished from disembodied
--- Content provided by FirstRanker.com ---
technology, which can be transferred without the original owner`s investments.All nonproprietary technology is disembodied.
At the macro and micro levels, nations people, and Organizations increasingly
--- Content provided by FirstRanker.com ---
depend on technology for prosperity and quality of life.
The competitive edge of an individual firm vastly depends on technology. One
--- Content provided by FirstRanker.com ---
of the means of acquiring technology is through its transfer.Technology transfer coves various activities, including the internal transfer of
technology from the R&D or engineering department to the manufacturing
--- Content provided by FirstRanker.com ---
department of a firm based in a country. It also includes the same transfer of
technology from a laboratory or operations of a MNCs in one country to its
--- Content provided by FirstRanker.com ---
laboratory or operations in another country. Finally, It includes the transfer oftechnology from a research consortium supported by many firms to one of the
members. Simply told, technology transfer is a process that permits the flow of
--- Content provided by FirstRanker.com ---
technology from of technology from a source to a receiver .The source is theowner or the holder of the knowledge and it can be individual, a company, or a
country. The source is the owner or the or holder of the knowledge and it can be
--- Content provided by FirstRanker.com ---
individual, a company .or a country. The receiver is the beneficiary of the
transfer technology. Technology is transferred through published material (such
--- Content provided by FirstRanker.com ---
as journals, books): purchase and sale of machinery, equipment and intermediategoods, transfer of data and personal: and interpersonal communication.
Technology transfer comprises six categories:
--- Content provided by FirstRanker.com ---
1. International Technology Transfer, in which the transfer is across
national boundaries. Generally, such transfers take place between
developed and developing countries.
--- Content provided by FirstRanker.com ---
2. Regional Technology Transfer, in which technology is transferred from
one another .
--- Content provided by FirstRanker.com ---
3. Cross-industry or Cross-sector Technology Transfer, in whichtechnology is transferred from one industrial sector to another .
4. Interfirm Technology Transfer ,in which technology is transferred
--- Content provided by FirstRanker.com ---
from one company to another.
5. Intra-firm Technology Transfer, in which technology is transferred
--- Content provided by FirstRanker.com ---
within a firm ,from one location to another. Intrafirm transfers can alsobe made from one department to another within the same facility.
6. Pirating or Reverse-Engineering, whereby access to technology is
--- Content provided by FirstRanker.com ---
obtained at the expense of the property rights of the owners oftechnology.
Modes of Transfer
--- Content provided by FirstRanker.com ---
Since technology defies delineation as a discrete variable, the analysis of itstransfer is encumbered by such other factors as capital investments, economic
organization, labor resources, entrepreneurship, and even en sociocultural
--- Content provided by FirstRanker.com ---
systems. Lacking disaggregated data, different analysts have used different
composites as poxies for data on technology flows. Many economists treat direct
--- Content provided by FirstRanker.com ---
foreign investments and licensing agreements as synonymous with internationaltechnology transfers. Others tabulate scientific and professional conferences,
technical assistance programs, exchanges of educators and students, plus many
--- Content provided by FirstRanker.com ---
other kinds of information flows. Obviously, all of these have some technologycontent, but few are pure technology.
Importing Nonproprietary Technology
--- Content provided by FirstRanker.com ---
Non proprietary technology can be transferred from one country to another in
any number of ways. Technology in pure from can be imported if the transferee
--- Content provided by FirstRanker.com ---
possesses the capacities to collect and employ it. LDCs many rely on indigenousenterprises or on foreign firms to do the importing. Since LDCs often lack
indigenous firms who can affect the transfer, they rely heavily on foreign
--- Content provided by FirstRanker.com ---
consultants.
Another way for an LDC to obtain nonproprietary is by importing the hardware
--- Content provided by FirstRanker.com ---
required and then either implementing a training program for its use ordispatching managerial personnel to study how to use the hardware. Experience
tends to favor home-based training programs, initially with expatriate instructors
--- Content provided by FirstRanker.com ---
from developed countries and later with indigenous instructors, over the
alternative of sending people from LDCs to learn abroad. The advantage is
--- Content provided by FirstRanker.com ---
twofold:1. The home-based program ensures better adaptation of the technology to
local conditions.
--- Content provided by FirstRanker.com ---
2. Fallout from the program is minimized by reducing the risk of brain
drain, which has ravaged many foreign-based programs.
--- Content provided by FirstRanker.com ---
Importing technology intensive goods is the third method of obtaining newtechnology.
Importing Proprietary Technology
--- Content provided by FirstRanker.com ---
An LDC`s access to proprietary technology is far more complicated. To acquire
embodied technology it must attract direct investments by the desired industry.
--- Content provided by FirstRanker.com ---
The direct cost of such acquisition is any special incentives that the country isrequired to offer to interest the potential investor, who may have more profitable
investment alternatives elsewhere. If the incentives offered exceed the investor`s
--- Content provided by FirstRanker.com ---
opportunity cost of forgoing its other alternative, parties, the LDC and the
multinational corporation (MNC), benefit. The LDC has no concrete way of
assessing data and the MNC`s opportunity cost: it lack both the necessary data
--- Content provided by FirstRanker.com ---
and the expertise. This gives the MNC a strategic bargaining advantage and
wide latitude for its demands for incentives.
--- Content provided by FirstRanker.com ---
Proprietary technology that are readily for sale can be transferred by exportingturnkey projects, licensing patents or trademarks, selling formulas or blueprints,
organizing training programs, Orr dispatching experts. The choice depends
--- Content provided by FirstRanker.com ---
again on the seller`s preference-which serves the MNC`s objectives best. Owner
willingness to sell proprietary technologies varies widely. Some technologies,
--- Content provided by FirstRanker.com ---
such as that of the latest IBM computers or coca-cola syrup, are absolutelynonnegotiable. At the other extreme are the so-called sheleved technologies, for
which their owners are anxious to find any takers at all.
--- Content provided by FirstRanker.com ---
The shelved technologies are mainly by-products of corporate R & D activities.
For example, in the process of seeking improvements in aircraft and spacecraft
--- Content provided by FirstRanker.com ---
technologies, Boeing researchers have discovered numerous patent-abletechniques and compounds for which the company has no anticipated use.
The Market Model
--- Content provided by FirstRanker.com ---
LDCs` comparative technology deficiencies require access to technologies that
belong to private firms. The governments of developed nations can facilitate the
--- Content provided by FirstRanker.com ---
international transactional transfer process. But they cannot force the transfer totake place without expropriating private property. LDCs` requests for treaty
obligations or other official commitments by industrial national to guarantee an
--- Content provided by FirstRanker.com ---
expeditious and an expeditious and inexpensive transfer of technology is,
therefore, largely a misdirected rhetoric.
--- Content provided by FirstRanker.com ---
Right and Wrong TechnologyAny manufacturing process can usually set up using alternative configurations
of equipment. In selecting the optimal equipment configuration, we must look
--- Content provided by FirstRanker.com ---
beyond the general goals of low cost and high productivity and consider each
configuration`s demands for labor skills and attitudes, supervision, industrial
--- Content provided by FirstRanker.com ---
engineering for tools and manufacturing techniques, materials and supplies,maintenance, product scheduling, inventory controls, and quality control
procedures. Each of these ingredients is directly affected by the environment.
--- Content provided by FirstRanker.com ---
The economic environment affects costs and availability of workers; thepolitical environment establishes what is acceptable for a plant to make and
how. Thus, it is imperative that a technical strategy be derived in part from a
--- Content provided by FirstRanker.com ---
realistic assessment of the total environment in which it is to operate.
Nationalism
--- Content provided by FirstRanker.com ---
The technology supply of LDCs is powerfully influenced by the policies ofpublic authorities. Some groups in developing countries oppose technology
imports and insist on indigenous production of new technology. They argue that
--- Content provided by FirstRanker.com ---
since technology and growth are closely linked, those nations who are behind in
the production of technology are destined to perpetual backwardness. This is
--- Content provided by FirstRanker.com ---
false reasoning.As high technology applications--automation, computerization, and robotics--
are replacing many traditional factory systems in industrial countries, much old
--- Content provided by FirstRanker.com ---
equipment is surpluses as economically obsolete, though physically intact. Many
LDCs` needs for industrial systems can be met by utilizing this technological
--- Content provided by FirstRanker.com ---
slack. Indeed, a number of multinationals have already affected transfers ofentire factories to their affiliates in LDCs. Automobiles, trucks, refrigerators,
shoes, pharmaceuticals, and metal fabrication head the list, but there are more
--- Content provided by FirstRanker.com ---
and more others. Such they benefit the multinationals by extending the
productive life of their capital assets.
--- Content provided by FirstRanker.com ---
PARTIES IN THE TRANSFER PROCESSInternational technology transfer has both horizontal and a vertical dimension,
each with its own elements. From the horizontal perspective, the three basic
--- Content provided by FirstRanker.com ---
elements in technology transfer are the home country, the host country and the
transaction The vertical dimension of technology transfer refers to the issues
--- Content provided by FirstRanker.com ---
specific to the nation state, or to the industries or firms within the home and hostcountries.
In general, the various elements may be categorized as (i) home country, (ii)host
--- Content provided by FirstRanker.com ---
country ,and (iii)the transaction.Home Country's Reactions to Technology Transfers
Home countries express apprehensions about the export of their technology
--- Content provided by FirstRanker.com ---
.they have reasons to oppose the export of technology .They argue that the
established of production facilitates by MNCs in subsidiaries abroad decreases
--- Content provided by FirstRanker.com ---
their export potential .Additionally, they claim, because some of the MNCsimports stem from their subsidiaries, the volume of imports of the home
country tends to increase. Given the decrease in exports and increase in imports,
--- Content provided by FirstRanker.com ---
the balance of trade tends to be adverse to be adverse to the home country.
Besides technology transfer tends to affect adversely comparative advantages of
--- Content provided by FirstRanker.com ---
the country .Labour unions in the home country too oppose technology transferon the ground that the jobs generated from the new technology will benefit the
country citizens.
--- Content provided by FirstRanker.com ---
Host Country's Reactions to technology Transfers
More serious are the reactions of the host country to transfer. The subject of
--- Content provided by FirstRanker.com ---
technology transfers is highly sensitive, often evoking strong reservationsagainst it from the country citizens. The criticisms against technology transfer
are based on economic and social factory.
--- Content provided by FirstRanker.com ---
Economic Implications Economic implications include payment of fee, royalty,
dividends, interest and salaries to technicians and tax concessions resulting in
--- Content provided by FirstRanker.com ---
loss to the national exchequer. All these are payable to the transferring countryand might prove very expensive to the host country. In addition to the payments
just stated, the technology supplier often succeeds in extracting payments
--- Content provided by FirstRanker.com ---
through various other techniques like over-pricing and buying intermediates at
high prices. There are malpractices too, for example, tie-up purchase, and
--- Content provided by FirstRanker.com ---
restriction on exports, and charging excessive prices.Many times, the type of technology transferred by international business is not
appropriate to developing countries. The technology that is developed is
--- Content provided by FirstRanker.com ---
inevitably the one most suitable for industrial countries which are appropriate toresources endowment of developed nations. Such technology are not in the
interest of developing countries.
--- Content provided by FirstRanker.com ---
Social Implications The social and cultural implications of technology transfer
are more serious than the economic significance. Along with the transfer of
--- Content provided by FirstRanker.com ---
technology, there is the transmission of culture from the exporting countries.The Indians who work in firms using such imported technology get influenced
and accustomed to the skills, concepts, policies, practices, thoughts, and beliefs
--- Content provided by FirstRanker.com ---
.Then there are social problems like pollution, urbanisation , congestion,
depleted natural resources, and similar other evils.
--- Content provided by FirstRanker.com ---
TransactionThis element focuses on the nitty-gritties of the transfer. The issues here relate to
the terms and conditions of technology transfer.
--- Content provided by FirstRanker.com ---
INTERNATIONAL TECHNOLOGY ISSUES
The more important International technology issues are ways of technology
--- Content provided by FirstRanker.com ---
acquisition, choice of technology, terms of technology transfer, and creatinglocal capability.
--- Content provided by FirstRanker.com ---
Barriers
--- Content provided by FirstRanker.com ---
Foreign
--- Content provided by FirstRanker.com ---
ChoiceTechnology
of
--- Content provided by FirstRanker.com ---
Acquisition
--- Content provided by FirstRanker.com ---
Technology--- Content provided by FirstRanker.com ---
International
--- Content provided by FirstRanker.com ---
Technology
issues
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Creating
Terms of
--- Content provided by FirstRanker.com ---
Local
--- Content provided by FirstRanker.com ---
TechnologyCapability
Transfer
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Globalisation--- Content provided by FirstRanker.com ---
Fig. 3 Technology Issues
--- Content provided by FirstRanker.com ---
Foreign Technology AcquisitionOne of the major issues in technology relates to the mode of acquisition.
Developing new technology may conjure up visions of scientists and product
--- Content provided by FirstRanker.com ---
developers working in R&D laboratories. In reality, new technology comes from
many different sources, including suppliers, manufactures, users, other
--- Content provided by FirstRanker.com ---
industries, universities, government, and MNCs . While every source needs tobe explored, each firm has specific sources for most of the new technologies.
For example, because of the limited size of most farming operations,
--- Content provided by FirstRanker.com ---
innovations in farming mainly come from manufacturers, suppliers, and
government agencies. In many industries, however, the primary sources of new
--- Content provided by FirstRanker.com ---
technologies are the organizations that use the technology.Broadly the acquisition routes are three: (i)internal, (ii)external, and
(iii)combination.
--- Content provided by FirstRanker.com ---
(i) Internal Technology Acquisition This is result of technology developmentefforts that are initiated and controlled by the firm itself. Internal acquisition
requires the existence of a technology capability in the company .This capability
--- Content provided by FirstRanker.com ---
could vary from one expert who understands the technology application well
enough to manage a project conducted by an outside research and development
--- Content provided by FirstRanker.com ---
(R&D) group to full blown R&D department. Internal technology acquisitionoptions have the advantages that any innovation becomes the exclusive property
of the firm.
--- Content provided by FirstRanker.com ---
(ii) External Acquisition External technology acquisition is the process of
acquiring developed by others for use in the company .External technology
--- Content provided by FirstRanker.com ---
acquisition generally has the advantage of reduced cost and time implement andlower and risks. However, technology available from outside sources was
generally developed for different applications.
--- Content provided by FirstRanker.com ---
(iii) Combined Sources Many of technology acquisition are combinations of
external and internet activities. Combined acquisition seek to limitations and
--- Content provided by FirstRanker.com ---
external sources, taking advantages of both the actions at the same time.Making Decision
The technology manager must weigh the advantages and limitations of each
--- Content provided by FirstRanker.com ---
specific route of technology acquisition and then make a decision about its
choice.
--- Content provided by FirstRanker.com ---
Seizing Tacit Knowledge Taking advantage of knowledge available in- house isleast expensive and has no risks. It will not leave when the knowledgeable
person leaves the firm. Every firm will have employees who are knowledgeable
--- Content provided by FirstRanker.com ---
and it is up to the company to identify and make use of the know-how.
Internal R&D Technology acquisition via internal R&D consists of having a
--- Content provided by FirstRanker.com ---
research and development group within the firm. The group is responsible forcreating the technology that the firm uses. This source of technology acquisition
enables the firm to become stronger, has the advantage to exclusivity, and may
--- Content provided by FirstRanker.com ---
entail tax or other government incentives. Long time required, high cost andrisk of failure are the demerits of this internal route of technology acquisition.
Internal R&D with Networking Internal R&D networking has all the same
--- Content provided by FirstRanker.com ---
advantages and disadvantages discussed under internal R&D. the main
difference is the fact that the R&D staff make a fairly concerted effort to keep
--- Content provided by FirstRanker.com ---
abreast of the state of development of the technologies affecting their products.They network with technology creators at conferences and trade shows.
Reverse Engineering Reverse Engineering is the determining of the technology
--- Content provided by FirstRanker.com ---
embedded in a product through rigorous study of its attributes. It entails the
acquisition of a product that the firm believes would be an asset, disassembling
--- Content provided by FirstRanker.com ---
it, and subjecting its components to a series of tests and engineering analysis toascertain how it works and studying the engineering design criteria used in the
product`s creations.
--- Content provided by FirstRanker.com ---
Reverse Brain Drain This involves attracting expatriate entrepreneurs and
experts who have gained adequate experience abroad to set up or develop
--- Content provided by FirstRanker.com ---
enterprises in their countries of origin. Taiwan and China are known for thistype of technology transfer.
Covert Acquisition with Internal R&D It entails finding out the technology
--- Content provided by FirstRanker.com ---
developments being conducted by a competitor that are not open to the public.
Most businesses do this to some extent by questioning suppliers about
--- Content provided by FirstRanker.com ---
components being sold to the competitors or by socializing with thecompetitor`s employees. The less scrupulous firms even become involved in
industrial espionage using cameras, binoculars, and break-and-enter techniques
--- Content provided by FirstRanker.com ---
to learn about the happening inside the competitor`s plant.
Covert Acquisition This without internal R&D, guarantees that the product will
--- Content provided by FirstRanker.com ---
be a copy (generally a poor one) of the competitor`s product. The firm canintroduce it at a lower price because there are no development costs to recover.
However, with the exception of the price, the product will have no other
--- Content provided by FirstRanker.com ---
competitive advantage.Technology Transfer and Absorption This route is similar to internal R&D
with networking. The difference is that there is much more effort put into
--- Content provided by FirstRanker.com ---
searching for, learning about, and translating, no-cost technology to the firm`s
applications. Internal technical ability is necessary to understand the
--- Content provided by FirstRanker.com ---
technologies found and to develop them into solutions for the firm`s application.Contract R&D Firms resort to contract R&D for more than one reason. This is
the ideal option for those that lack the necessary facilities and expertise to
--- Content provided by FirstRanker.com ---
conduct the required work but still want to maintain control over the
development and own the results exclusively. It is also a good choice for those
--- Content provided by FirstRanker.com ---
that need a specialized set of equipment or expertise for occasional short termprojects. This avoids the investment in these facilities and the on-going
commitment to staff that would be underutilized. It allows short-term access to
--- Content provided by FirstRanker.com ---
world class personnel and facilities for specialized projects that would otherwise
be completely beyond the company`s means. The advantages of this route are no
--- Content provided by FirstRanker.com ---
investment in facilities, and low investment in staff. The disadvantages are: nohands ?on-knowledge in house and difficulty in keeping information
confidential.
--- Content provided by FirstRanker.com ---
R&D Strategic Partnership R&D strategic partnerships are almost the same as
contracting R&D. They generally consist of a group of companies with a
--- Content provided by FirstRanker.com ---
common need that collectively contract a research institution to conduct thework for them. This allows the firms to share the risk and costs. It also creates
a situation where they can learn from each other as well as from the experts
--- Content provided by FirstRanker.com ---
conducting the research.
The advantages of this route of technology acquisition are : shared risks,
--- Content provided by FirstRanker.com ---
reduced cost, and possibility of learning from others. Need to share knowledgewith others and the necessity of adopting research results to own application are
the drawbacks of this route.
--- Content provided by FirstRanker.com ---
Licensing Another route of technology acquisition is licensing. Its major benefitis a significant reduction in time to market relative to other forms of technology
acquisition that require development. It also enables the acquiring firm to share
--- Content provided by FirstRanker.com ---
the financials risks of acquiring the technology with the provider because the
bulk of the payments are generally in the form of royalty-a percentage of sales
--- Content provided by FirstRanker.com ---
of product made using the new technology.The circumstances under which licensing may be a preferred strategy are
the following :
--- Content provided by FirstRanker.com ---
Where host countries restrict imports and/ or direct investment.
--- Content provided by FirstRanker.com ---
Where a specific foreign market is small.Where prospects of technology feedback are high.
Where licensing is a way of testing and developing a market that can be
--- Content provided by FirstRanker.com ---
later exploited by direct investment.
Where the pace of technology change is sufficiently. Rapid that the seller
--- Content provided by FirstRanker.com ---
can remain technologically superior.Where opportunities exist for licensing auxiliary processes without
having a licenses of basic product technologies.
--- Content provided by FirstRanker.com ---
Where small companies have limited resources and expertise for direct
foreign expansion.
--- Content provided by FirstRanker.com ---
Among the advantages of licensing technologies are costs and risks are less thaninternal R&D and time required to commercialise is less. The disadvantages are
: exclusivity may be lost and internal capability may not be developed.
--- Content provided by FirstRanker.com ---
Purchasing A common and effective external technology acquisition method is
--- Content provided by FirstRanker.com ---
purchasing. This is normally done in the form of buying a piece of productionmachinery with embedded technology. This is the quickest form of technology
transfer because the technology is already packaged and is ready for use. It is
--- Content provided by FirstRanker.com ---
low risk because the equipment has been proven to be technically competent andthere are already users to evidence the machine`s capability.
Joint Venture Entering into a joint venture agreement with a technology
--- Content provided by FirstRanker.com ---
provider is another form of external acquisition that can be very effective.
Typically, this is a partnership between two firms, one with a technology and
--- Content provided by FirstRanker.com ---
another with market access. It can take the form of the creation of a new firmwith each of the partners owning shares in the new firm in proportion to the
value of their contribution to the new firm. In this case production facilities are
--- Content provided by FirstRanker.com ---
installed in the new firm with the partners bringing technology and market know
? how along with capital investment into the new firm. The distribution and
--- Content provided by FirstRanker.com ---
marketing of the product may use the system that the firm with market accesshas in place, or that firm`s know-how may be used to create a dedicated system
for the new firm. The advantages are the technology can be implemented
--- Content provided by FirstRanker.com ---
immediately, as it is already proven. Risk involved is less and there are
possibilities of learning from the provider of technology. The disadvantages are
--- Content provided by FirstRanker.com ---
market risks are high and there are no chances of developing technical strengths.Acquisition of a Technology Rich Firm The final form of external technology
acquisition is the acquisition of a firm that has the know how which the
--- Content provided by FirstRanker.com ---
acquiring firm desires. This can happen when one firm has a technological
innovation that is impacting another company`s innovation the second company
--- Content provided by FirstRanker.com ---
negotiates to purchase the entire company. This can result from a defensiveaction or it can be deliberate strategy to acquire technology.
The outright purchase has advantages and disadvantages. On the positive side
--- Content provided by FirstRanker.com ---
are: short time to market, low risk, and probability of buying good image. The
problems are: possibility of acquiring negative baggage and merger problems.
--- Content provided by FirstRanker.com ---
Choice of TechnologyThe second major issue relating to technology transfer is its choice. It is argued
that it is the industrialized countries that develop technology, and the know-how
--- Content provided by FirstRanker.com ---
thus developed will be mainly useful to them. This means that the rich countries
become monopolists in developing, using and managing technology. This also
means that the technologies tend to be designed for the production of high
--- Content provided by FirstRanker.com ---
quality sophisticated goods on a large scale, using as much as possible capital
and higher-level professional skills in place of sheer labour, and replacing
--- Content provided by FirstRanker.com ---
natural resources by synthetics.Terms and Conditions of Technology Transfer
The issue relating to terms and conditions of technology transfer and the
--- Content provided by FirstRanker.com ---
question of the suitability of the transferred technology are related to each other.
Some of the restrictive conditions, for example, make technology less suitable
--- Content provided by FirstRanker.com ---
than it would otherwise be. This clearly applies to such restrictions asprohibitions on the adaptation of the imported technology, preventing the use of
imported technology as a basis for local R&D development, and clauses
--- Content provided by FirstRanker.com ---
stipulating that the results of local technological research and development
based on the imported technology must be transferred to the owner or supplier
--- Content provided by FirstRanker.com ---
of the technology.Creating Local Capability
Creating local technological capability is essential to absorb imported
--- Content provided by FirstRanker.com ---
technology. This stems from several reasons. Technology, it may be stated, is
not simply a matter of blueprints, which can be transferred without any local
--- Content provided by FirstRanker.com ---
effort, to any part of the world, Each time some technology is installed, somelocal adoption to required, which demands local technological capability. The
greater the capacity, the more efficient the resulting operations. The need for
--- Content provided by FirstRanker.com ---
local adaptation arises from the fact that the environment in which any
technology operates is unique in any situation when it is installed and may even
--- Content provided by FirstRanker.com ---
differ radically from the environment for which the know-how was developed inthe first place. This is especially true when technology is transferred from
MNCs to developing countries.
--- Content provided by FirstRanker.com ---
Globalisation :
The world economy is passing through structural changes. These changes are
driven by globalization business as well as by the revolution in information,
--- Content provided by FirstRanker.com ---
communication, and transportation technology, Non now have powerful
technology in their hands, fundamentally transforming the way in which
--- Content provided by FirstRanker.com ---
business conducted around the globe.The World Trade Organization (WTO) is contributing to globalization by
removing trade barriers between countries and evolving mechanisms to manage
--- Content provided by FirstRanker.com ---
technology better. The main provisions of we WTO that influence technology
transfer are included under the following sections:
--- Content provided by FirstRanker.com ---
Trade Related Aspects of Intellectual Property Rights (TRIPs)Trade Related Investment Measures (TRIMs)
Subsidies and Countervailing Measures (SCMs)
The Information Technology Agreements
--- Content provided by FirstRanker.com ---
Barriers to Technology Transfers
The final international technology issue relates to barriers. The problems
--- Content provided by FirstRanker.com ---
encountered in transfer of technology are :
A limited general understanding of the concept of technology, and the lack
--- Content provided by FirstRanker.com ---
of a consistent framework for its study.Lack of systematic planning for technology transfer in developing countries
or misunderstanding of its underlying philosophy.
--- Content provided by FirstRanker.com ---
Lack of bilateral scientific/ technology advantages in the process of
technology transfer (mutual benefits).
--- Content provided by FirstRanker.com ---
Lack of systematic and integrated engineering and socio-economic approachto the technology transfer process.
Lack of a relevant quantitative framework/approach to the analysis and
--- Content provided by FirstRanker.com ---
evaluation of technology transfer to developing countries.
SUMMARY
MNCs have their business activities in corss national boundaries. MNCs has its
--- Content provided by FirstRanker.com ---
own critics as well as the defenders too. Mainly the transfer of technology plays
a vital role in MNCs and the nation`s development. Since their inception the
--- Content provided by FirstRanker.com ---
affiliates of MNCs have been a source of controversy in host countries. In thelast few years the controversies have been complicated by the fact that an
increasing number of host countries have started to acquire a dual status as some
--- Content provided by FirstRanker.com ---
of their own firms multinationalize.
The most troubled MNCs are the home dominated ones, while the host
--- Content provided by FirstRanker.com ---
dominated MNCs enjoy the greatest political tranquility. Neither can complete,however, with the internationally integrated MNC when it comes to productive
efficiency and market power. Through international integration, MNCs locate
--- Content provided by FirstRanker.com ---
their production facilities in the least cost countries and market their outputs in
the most profitable countries.
--- Content provided by FirstRanker.com ---
Conflicts between MNCs and host nations often arise from differences betweenthe internal structure of MNCs and the government of host nations. Other
conflicts can be traced to the specific policies of MNCs, especially in highly
--- Content provided by FirstRanker.com ---
centralized firms. Takeovers of local enterprises, financial policies, pricing, and
export-import activities are typical areas of MNC government confrontations.
--- Content provided by FirstRanker.com ---
The employment of expatriate managers and technicians has met with increasing
hostility in host nations. This has led to hiring and training of local nationals for
--- Content provided by FirstRanker.com ---
management roles in affiliates. The compensation and promotion of local
nationals in light of pay scales and opportunities elsewhere remain controversial
--- Content provided by FirstRanker.com ---
issues.SELF ASSESSMENT QUESTIONS
1. Define MNCs and explain the types of MNCs
--- Content provided by FirstRanker.com ---
2. List the MNCs critics and defenders3. Centralization may decrease not only costs but also earnings of an MNC.
Comment.
4. A number of MNC-host nation conflicts derive from central economic
--- Content provided by FirstRanker.com ---
planning. Why?
5. Some MNCs expand by building new facilities; others by buying up
--- Content provided by FirstRanker.com ---
existing firms. Which is preferable? Under what conditions?6. Identify and analyze conflicts that arise from MNC financial policies and
practices.
--- Content provided by FirstRanker.com ---
7. Explain international Technology issues
8. Describe the advantages and limitations in technology acquisition
9. Analyse the scope and mode of technology transfer
10. Enlist the barriers to technology transfer.
--- Content provided by FirstRanker.com ---
UNIT IV
--- Content provided by FirstRanker.com ---
4.1 Nature of International Business Environment
Learning Objectives
--- Content provided by FirstRanker.com ---
4.1 Introduction
4.1.1 The Forces
4.1.2 Bases for going global
--- Content provided by FirstRanker.com ---
4.1.3 The Frame work for analyzing International Business Environmenta).Methods
--- Content provided by FirstRanker.com ---
b).The PEST Analysis
--- Content provided by FirstRanker.com ---
c) The Macro-Environment
4.2 Political Environment
--- Content provided by FirstRanker.com ---
4.2.1 Types of Political Systems
--- Content provided by FirstRanker.com ---
4.2.2 Political Risks Of Global Business4.2.3 Forecasting Political Risks
4.2.4 Good Corporate Citizenship
--- Content provided by FirstRanker.com ---
4.2.5 Strategies To Lessen Political Risks
4.2.6 Government Encouragement Of Global Business
4.2.7 Instruments used by government for trade control
--- Content provided by FirstRanker.com ---
4.2.8 The Impact of the Political System on Management Decisions4.2.9 Formulating and Implementing Political Strategies
4.2.10 Governmental Influence On Trade
4.3 Legal Environment
--- Content provided by FirstRanker.com ---
4.3.1 Origins of International Law
--- Content provided by FirstRanker.com ---
4.3.2 Sources of International Law
4.3.3 International Dispute Resolution
4.3.4 Types of Legal Systems
--- Content provided by FirstRanker.com ---
4.4 Technological Environment4.4.1 Technological phases in production
4.4.2 Benefits of Technology in Management Decision Making
4.4.4 Effect of Technology on Strategy & Competition
--- Content provided by FirstRanker.com ---
4.4.5 Features of Technology4.4.6 Diffusion of Technology
4.4.7 The Technological Cycle
4.4.8 Business Implications of Technology
--- Content provided by FirstRanker.com ---
4.5 Cultural Environment
--- Content provided by FirstRanker.com ---
4.5.1 The Concept Of Culture
Mr. 4.
--- Content provided by FirstRanker.com ---
T. 5.Sud 2h aB
kare h
--- Content provided by FirstRanker.com ---
Pa aulvi
, o
--- Content provided by FirstRanker.com ---
HO rD aolf PMa rnaagcetmiecne
t, Isn dAf
--- Content provided by FirstRanker.com ---
ian fe
Aca cdetimn
--- Content provided by FirstRanker.com ---
ic gSc B
hoous
--- Content provided by FirstRanker.com ---
l of i ne
Man sas
--- Content provided by FirstRanker.com ---
ge ment Studies, Kalyan Nagar Post, Bangalore.4.5.3 Reconciliation Of International Differences
4.5.4 The Elements of culture
--- Content provided by FirstRanker.com ---
4.6 Country Classifications
4.7 Economic Environment
--- Content provided by FirstRanker.com ---
4.7.1 Economic Environment4.7.2 Classifying Economic Systems
--- Content provided by FirstRanker.com ---
4.7.3 Economic Trade Policies (Protectionism)--- Content provided by FirstRanker.com ---
Learning Objectives
--- Content provided by FirstRanker.com ---
After reading this unit you should be able toUnderstand the nature of international business environment
Understand the different forces acting upon international business
Understand political environment and its implications on international
--- Content provided by FirstRanker.com ---
business
Ascertain the legal practices in different countries
Understand what difference technology can create and know various
--- Content provided by FirstRanker.com ---
technological tools used in international business
Understand different cultures of the world and its impact on international
--- Content provided by FirstRanker.com ---
businessUnderstand different economic policies.
Introduction
--- Content provided by FirstRanker.com ---
Business has fascinated man down the centuries, starting form barter system to
the global business. Business plays a pivotal role in the growth of the economy
--- Content provided by FirstRanker.com ---
of any nation. Because of the explosion of knowledge and invention of Internet,time and distance are shrinking globally and the world has become a global
village.
--- Content provided by FirstRanker.com ---
In developing countries like India the traditional business are affected byMNC`s and many Indian firms are forced to compete with the global firms, and
it`s the game of The survival of the fittest, and many local companies are forced
--- Content provided by FirstRanker.com ---
to merge with global firms Eg. Vishya bank has merged with ING forming ING
Vishya Bank, ICICI Bank has merged with Prudential forming ICICI Prudential
--- Content provided by FirstRanker.com ---
Life insurance etc.As part of their expansion in international markets Indian firms like M.T.R,
Ranbaxy, Dabur, L.I.C, S.B.I etc are on their toes to globalize their operations.
--- Content provided by FirstRanker.com ---
In simple terms, the products which we use, in our day-to-day life are either
imported from other countries are produced in India in collaboration with
--- Content provided by FirstRanker.com ---
companies in other countries so international business is the process ofexchanging goods and services internationally for value.
4.1 Nature of International Business Environment
--- Content provided by FirstRanker.com ---
The business operations performed without any barriers, with the
implementation of L.P.G (Liberalization, Privatization, Globalization) there is
--- Content provided by FirstRanker.com ---
boom in the global business and the trade barriers have been liberalized.This has given rise to
Attracted F.D.I Foreign direct investment
--- Content provided by FirstRanker.com ---
Encouraged flexible import and export policiesImport of jobs in the field of I.T enabled services (B.P.O)
Increase in foreign currency reserves
Improved standard of living
Increase in purchasing power
--- Content provided by FirstRanker.com ---
Improved quality of goods and servicesToday, any company which is going globally need to assess different
environmental factors like economic, technological, political, cultural, legal and
--- Content provided by FirstRanker.com ---
design their operations.To understand the international business environment we divide the terms
International
--- Content provided by FirstRanker.com ---
Integration and interrelation of different nations.
Business
--- Content provided by FirstRanker.com ---
Systematic effort of an organization to meet the needs of customers with goodsand services for profit.
Environment
--- Content provided by FirstRanker.com ---
Environment is surroundings which we live in, the external forces acting upon
the business is business environment.
--- Content provided by FirstRanker.com ---
The environment includes the factors outside the firm, which can lead toopportunities for or threats to the firm. These factors can be economic,
technological, political, cultural etc.
--- Content provided by FirstRanker.com ---
Thus international business environment is the business operations in different
countries with different external forces acting upon them.
--- Content provided by FirstRanker.com ---
Environment is further classified as domestic environment, foreign environment,and international environment
Domestic Environment
--- Content provided by FirstRanker.com ---
Forces with in a country, which are very familiar and which are controllable or
uncontrollable
--- Content provided by FirstRanker.com ---
Foreign EnvironmentForces outside the country, which are not very familiar and which are
controllable or uncontrollable
--- Content provided by FirstRanker.com ---
International EnvironmentForces acting on business from different nations which are not familiar and
which are controllable or uncontrollable
--- Content provided by FirstRanker.com ---
4.1.1 The Forces
Forces acting upon business are classified as follows
--- Content provided by FirstRanker.com ---
Internal Environmental ForcesForces with in the organization, which are controllable, like production, finance,
marketing, human resources research and development etc
--- Content provided by FirstRanker.com ---
External Micro Environmental Forces
Forces outside the organization, which are controllable, like competitors,
--- Content provided by FirstRanker.com ---
suppliers, creditors, consumers, financial institutions etcExternal Macro Environmental Forces
Forces outside the organization, which are uncontrollable, like political
--- Content provided by FirstRanker.com ---
environment, legal environment, technological environment, economic
environment, cultural environment etc
--- Content provided by FirstRanker.com ---
External Macro Environmental Factors
--- Content provided by FirstRanker.com ---
Political
--- Content provided by FirstRanker.com ---
Legal
Technological
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
External Micro Environmental ForcesCompetitors
--- Content provided by FirstRanker.com ---
Suppliers
--- Content provided by FirstRanker.com ---
Internal Environmental Forces
--- Content provided by FirstRanker.com ---
Production
Human
--- Content provided by FirstRanker.com ---
Resources
--- Content provided by FirstRanker.com ---
Busine
Finance
--- Content provided by FirstRanker.com ---
ssR & D
Marketing
--- Content provided by FirstRanker.com ---
Customers
Creditors
--- Content provided by FirstRanker.com ---
CulturalEconomic
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Fig 4.1 Environmental Forces acting on Business4.1.2 Basis for going global
a) Arability of Highly Skilled & Cheap Labour
--- Content provided by FirstRanker.com ---
India is a country with the potential of highly skilled human resources with
comparatively cheaper labour, which has attracted many M.N.C s from U.S.A
--- Content provided by FirstRanker.com ---
and U.K to outsource these resources from India which will cut short their heavyexpenditure on wage and salary. Eg. T.I enabled services outsourced form India,
business process outsourcing (B.P.O) , knowledge process outsourcing (K.P.O),
--- Content provided by FirstRanker.com ---
recently legal process outsourcing (L.P.O)
b) Bigger Pie in Market Share
--- Content provided by FirstRanker.com ---
To increase the market share of the firm many companies are going global eg. In1888, less than four years after William Hesketh Lever launched Sunlight Soap
in England, his newly-founded company, Lever Brothers, started exporting the
--- Content provided by FirstRanker.com ---
revolutionary laundry soap to India. By the time the company merged with the
Netherlands-based Margarine Unie in 1930 to form Unilever, it had already
--- Content provided by FirstRanker.com ---
carved a niche for itself in the Indian market. Coincidentally, Margarine Uniealso had a strong presence in India, to which it exported Vanaspati
(hydrogenated edible fat).
--- Content provided by FirstRanker.com ---
A year after the merger, Unilever set up the Hindustan Vanaspati Manufacturing
Company, its first subsidiary in India and went on to strengthen its position by
establishing two more subsidiaries, Lever Brothers India Limited and United
--- Content provided by FirstRanker.com ---
Traders Limited, soon afterwards. The three companies, which marketed Soaps,
Vanaspati and Personal Products, merged in 1956 to form Hindustan Lever
--- Content provided by FirstRanker.com ---
Limitedc) Sever Competition in Home Country
Due to many players in the home country and the increase in competition the
--- Content provided by FirstRanker.com ---
weaker companies, which are unable to withstand competition has moved itsoperations to other countries
d) Quality Improvement and new product development
--- Content provided by FirstRanker.com ---
To improve the quality of existing products and developing new products the
companies with joint collaboration with companies of other countries has gone
--- Content provided by FirstRanker.com ---
globally eg. M.R.F a leader in Indian tyres market has entered into a technicalcollaboration with the B.F. Goodrich Tyre Company of USA, which was
involved with the development of tyres for the N.A.S.A space-shuttle. With this
--- Content provided by FirstRanker.com ---
began a significant exercise in quality improvement and new product
development.
--- Content provided by FirstRanker.com ---
e) To Reach Higher Profits LevelTo reach higher levels of profits the companies has expanded globally.eg The
roots of Nokia go back to the year 1865 with the establishment of a forest
--- Content provided by FirstRanker.com ---
industry enterprise in South-Western Finland by mining engineer Fredrik
Idestam. Elsewhere, the year 1898 witnessed the foundation of Finnish Rubber
--- Content provided by FirstRanker.com ---
Works Ltd, and in 1912 Finnish Cable Works began operations. Gradually, theownership of these two companies and Nokia began to shift into hands of just a
few owners. Finally in 1967 the three companies were merged to form Nokia
--- Content provided by FirstRanker.com ---
Corporation. Today we find Nokia in every part of the globe.
f) Free Trade Policies
The North American Free Trade Agreement (NAFTA) has lifted all the trade
--- Content provided by FirstRanker.com ---
barriers among U.S.A, Canada and Mexico which has enabled companies to
expand their operations among those countries eg. General Motors has 284
--- Content provided by FirstRanker.com ---
operations in 35 states and 158 cities in the United States. In addition GM ofCanada operates 21 locations, GM de Mexico operates 5 locations, and GM has
assembly, manufacturing, distribution or warehousing operations in 49 other
--- Content provided by FirstRanker.com ---
countries, including equity interests in associated companies.
g) Availability of Abundant Raw Materials
--- Content provided by FirstRanker.com ---
India is rich in natural resources like coal, iron etc which is attracting manyforeign companies to establish their facility. Eg. Volkswagan and Nokia are
planning to establish their facility in India
--- Content provided by FirstRanker.com ---
h) Government Regulations
Business firms prefer to enter the countries where there are flexible government
--- Content provided by FirstRanker.com ---
policies, which will not change because of political instability. Countries likeU.S.A has stable government policies which will attract business firms to enter
into their country eg. All the U.S automobile industry is flooded by Japanese
--- Content provided by FirstRanker.com ---
automobile companies like Toyota because of stable government regulations.
i) Availability of Technology
--- Content provided by FirstRanker.com ---
To keep abreast of world technology and to protect its competitive edge, AsianPaints has from time to time entered into technology alliances with world
leaders in the paint industry. It has a 50:50 joint venture with Pittsburgh Paints
--- Content provided by FirstRanker.com ---
& Glass Industries (PPG) of USA , the world leader in Automotive coatings, to
meet the increasing demand of the Indian automotive industry.
j) Limited Home Market
--- Content provided by FirstRanker.com ---
Toyota motors of Japan has extended its base to U.S and India because of
limited home market and U.S and India has got a greater demand for
--- Content provided by FirstRanker.com ---
Japanese automobiles.4.1.3 The Frame work for analyzing International Business Environment
--- Content provided by FirstRanker.com ---
a). Methods
There are three ways of scanning the International business environment:
--- Content provided by FirstRanker.com ---
Ad-hoc scanning - Short term, infrequent examinations usually initiatedby a crisis
Regular scanning - Studies done on a regular schedule (say, once a
--- Content provided by FirstRanker.com ---
year)
Continuous scanning - (also called continuous learning) - continuous
--- Content provided by FirstRanker.com ---
structured data collection and processing on a broad range ofenvironmental factors .
Most commentators feel that in today's turbulent business environment the
--- Content provided by FirstRanker.com ---
best scanning method available is continuous scanning. This allows the firmto act quickly, take advantage of opportunities before competitors do, and
respond to environmental threats before significant damage is done.
--- Content provided by FirstRanker.com ---
b). PEST analysis
PEST analysis stands for "Political, Economic, Social, and Technological
--- Content provided by FirstRanker.com ---
analysis" and describes a framework of macroenvironmental factors used inenvironmental scanning. It is also referred to as the STEP, STEEP or PESTLE
analysis (Political, Economic, Socio-cultural, Technological, Legal,
--- Content provided by FirstRanker.com ---
Environmental). Recently it was even further extended to STEEPLED, including
ethics and demographics.
It is a part of the external analysis when doing market research and gives a
--- Content provided by FirstRanker.com ---
certain overview of the different macroenvironmental factors that the company
has to take into consideration. Political factors include areas such as tax policy,
--- Content provided by FirstRanker.com ---
employment laws, environmental regulations, trade restrictions and tariffs andpolitical stability. The economic factors are the economic growth, interast rates,
exchange rates and inflation rate. Social factors often look at the cultural aspects
--- Content provided by FirstRanker.com ---
and include health consciousness, population growth rate, age distribution,
career attitudes and emphasis on safety. The technological factors also include
--- Content provided by FirstRanker.com ---
ecological and environmental aspects and can determine the bassiers to entry,minimum efficient production level and influence outsourcing decisions. It looks
at elements such as R&D activity, automation, technology incentives and the
--- Content provided by FirstRanker.com ---
rate of technological change.
The PEST factors combined with external microenvironmental factors can be
--- Content provided by FirstRanker.com ---
classified as opportunities and threats in a SWOT analysis--- Content provided by FirstRanker.com ---
Political Environment
--- Content provided by FirstRanker.com ---
Economic Environment
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Business--- Content provided by FirstRanker.com ---
Technological
--- Content provided by FirstRanker.com ---
Environment
Social
--- Content provided by FirstRanker.com ---
Environment
--- Content provided by FirstRanker.com ---
Fig 4.2 PEST analysis
--- Content provided by FirstRanker.com ---
A PESTLE analysis of Tesco must consider all the factors affecting a large supermarket company.--- Content provided by FirstRanker.com ---
A PE STLE analysis, in general, must create a good overall picture of the external impacts on anorganisation by breaking them into useful, and obvious, categories.
--- Content provided by FirstRanker.com ---
In Jamie Oliver's world, a pestle is a bowl in which different ingredients are mixed together to
create an overall good result. That's exactly what a PESTLE analysis aims to achieve. It looks
at all the "ingedients" that affect a company and tries to mix them together to create a tasty dish.
--- Content provided by FirstRanker.com ---
The external factors affecting a company range from the political to the environmental. The
politi
--- Content provided by FirstRanker.com ---
cal impacts can be local, national or international. Many governments can be involved.
For instance, Tesco might have to deal with British and Columbian politics in regards to its
coffee supply.
--- Content provided by FirstRanker.com ---
Economic factors have a large impact. Fluctuations in the stock market, or tax increases, can
serio
--- Content provided by FirstRanker.com ---
usly affect the bottom line of a company like Tesco
Sociological factors are more subtle, but still important.
--- Content provided by FirstRanker.com ---
Less subtle are the obvious impacts new technologies can have on a large corporation. For
--- Content provided by FirstRanker.com ---
instance, online shopping has become a major factor in Tesco's recent success. The nexus of
--- Content provided by FirstRanker.com ---
change created by all these factors lead to many legal problems, which keep the lawyers busy.Last, but not least, any large organisation has a massive environmental impact. For instance,
--- Content provided by FirstRanker.com ---
Tesco uses up vast amounts of fossil fuel in its transport network. Reducing this demand on
--- Content provided by FirstRanker.com ---
planetary resources is a major challenge for Tesco and similar organisations.
--- Content provided by FirstRanker.com ---
Any PESTLE Analysis for Tesco, must consider each external factor in detail, and how their
--- Content provided by FirstRanker.com ---
impact continually changes. Examples of possible drastic changes that could affect Tesco in thenext few years or decades:
--- Content provided by FirstRanker.com ---
Political: government bans the sale of alcohol to people over the age of 21.
--- Content provided by FirstRanker.com ---
Economic: the government decides to put a tax on food.
--- Content provided by FirstRanker.com ---
Sociological: Tesco moves into Russia, tries to adapt to the different shopping patterns of the
--- Content provided by FirstRanker.com ---
native population..Technological: Hydrogen powered lorries impact on Tesco's distribution costs.
--- Content provided by FirstRanker.com ---
Legal: Mad cow disease has a long term impact. How can Tesco avoid paying large
--- Content provided by FirstRanker.com ---
compensation claims?
--- Content provided by FirstRanker.com ---
Environmental: Climate change decimates Tesco's third world suppliers. How can it adapt?
--- Content provided by FirstRanker.com ---
Case Study 4.1
--- Content provided by FirstRanker.com ---
c) The MacroenvironmentEnvironmental scanning usually refers just to the macroenvironment, but it can
also include industry and competitioe analysis, consumer analysis, product
--- Content provided by FirstRanker.com ---
innovations, and the company's internal environment. Macroenvironmental
scanning involves analysing:
--- Content provided by FirstRanker.com ---
The Economy
GNP or GDP per capita
--- Content provided by FirstRanker.com ---
GNP or GDP growth
Unemployment rate
Inflation rate
--- Content provided by FirstRanker.com ---
Consumer and investor confidence
Inventory levels
Currency exchange rates
--- Content provided by FirstRanker.com ---
Merchandise trade balance
Financial and political health of trading partners
--- Content provided by FirstRanker.com ---
Balance of paymentsFuture trends
Government
--- Content provided by FirstRanker.com ---
Political climate - amount of government activity
Political stability and risk
--- Content provided by FirstRanker.com ---
Government debtBudget deficit or surplus
Corporate and personal tax rates
--- Content provided by FirstRanker.com ---
Payroll taxesImport tariffs and quotas
Export restrictions
--- Content provided by FirstRanker.com ---
Restrictions on international financial flows
Legal
--- Content provided by FirstRanker.com ---
Minimum wage lawsEnvironmental protection laws
Worker safety laws
--- Content provided by FirstRanker.com ---
Union lawsCopyright and patent laws
Anti- monopoly laws
--- Content provided by FirstRanker.com ---
Sunday closing laws
Municipal licences
Laws that favour business investment
--- Content provided by FirstRanker.com ---
Technology
Efficiency of infrastructure, including: roads, ports, airports, rolling
--- Content provided by FirstRanker.com ---
stock, hospitals, education, healthcare, communication, etc.Industrial productivity
New manufacturing processes
--- Content provided by FirstRanker.com ---
New products and services of competitorsNew products and services of supply chain partners
Any new technology that could impact the company
--- Content provided by FirstRanker.com ---
Cost and accessibility of electrical powerEcology
Ecological concerns that affect the firms production processes
--- Content provided by FirstRanker.com ---
Ecological concerns that affect customers' buying habits
Ecological concerns that affect customers' perception of the company or
--- Content provided by FirstRanker.com ---
productSocio-Cultural
Demographic factors such as:
--- Content provided by FirstRanker.com ---
Population size and distributionAge distribution
Education levels
--- Content provided by FirstRanker.com ---
Income levels
Ethnic origins
Religious affiliations
--- Content provided by FirstRanker.com ---
Attitudes towards:
Materialism, capitalism, free enterprise
--- Content provided by FirstRanker.com ---
Individualism, role of family, role of government, collectivismRole of church and religion
Consumerism
--- Content provided by FirstRanker.com ---
EnvironmentalismImportance of work, pride of accomplishment
Cultural structures including:
--- Content provided by FirstRanker.com ---
Diet and nutrition
Housing conditions
Potential suppliers
--- Content provided by FirstRanker.com ---
Labour supply
Quantity of labour available
--- Content provided by FirstRanker.com ---
Quality of labour availableStability of labour supply
Wage expectations
--- Content provided by FirstRanker.com ---
Employee turn-over rateStrikes and labour relations
Educational facilities
--- Content provided by FirstRanker.com ---
Material suppliersQuality, quantity, price, and stability of material inputs
Delivery delays
--- Content provided by FirstRanker.com ---
Proximity of bulky or heavy material inputsLevel of competition among suppliers
Service Providers
--- Content provided by FirstRanker.com ---
Quantity, quality, price, and stability of service facilitators
Special requirements
Scanning these macroenvironmental variables for threats and opportunities
--- Content provided by FirstRanker.com ---
requires that each issue be rated on two dimensions. It must be rated on its
potential impact on the company, and rated on its likeliness of occurrence.
--- Content provided by FirstRanker.com ---
Multiplying the potential impact parameter by the likeliness of occurrenceparameter gives us a good indication of its importance to the firm
Activity 4.1
--- Content provided by FirstRanker.com ---
Visit an MNC and study the method used by the firm to study the
macroenvironmentmental forces acting on the firm and list the forces
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
______________________________________________
--- Content provided by FirstRanker.com ---
4.2 Political Environment
--- Content provided by FirstRanker.com ---
The critical concern Political environment has a very important impact on everybusiness operation no matter what its size, its area of operation. Whether the
company is domestic, national, international, large or small political factors of
--- Content provided by FirstRanker.com ---
the country it is located in will have an impact on it. And the most crucial &
unavoidable realities of international business are that both host and home
--- Content provided by FirstRanker.com ---
governments are integral partners. Reflected in its policies and attitudes towardbusiness are a governments idea of how best to promote the national interest,
considering its own resources and political philosophy. A government control's
--- Content provided by FirstRanker.com ---
and restricts a company's activities by encouraging and offering support or by
discouraging and banning or restricting its activities depending on the
--- Content provided by FirstRanker.com ---
government. Here steps in international law. International law recognizes theright of nations to grant or withhold permission to do business within its
political boundaries and control its citizens when it comes to conducting
--- Content provided by FirstRanker.com ---
business. Thus, political environment of countries is a critical concern for the
international marketer and he should examine the salient features of political
--- Content provided by FirstRanker.com ---
features of global markets they plan to enter.The Sovereignty Of Nations
From the international laws point of view a sovereign state is independent and
--- Content provided by FirstRanker.com ---
free from external control; enjoys full legal equality; governs its own territory;
selects its own political, social, economic systems; and has the power to enter
--- Content provided by FirstRanker.com ---
into agreements with other nations. It is extension of national laws beyond acountry's borders that much of the conflict in international business arises.
Nations can and do abridge specific aspects of their sovereign rights in order to
--- Content provided by FirstRanker.com ---
coexist with other countries. Like the European Union, North American FreeTrade Agreement (NAFTA) are examples of nations voluntarily agreeing to give
up some of their sovereign rights in order to participate with member nations for
--- Content provided by FirstRanker.com ---
common, mutually beneficial goals.
The ideal political climate for a multinational firm is stable, friendly
--- Content provided by FirstRanker.com ---
environment. Unfortunately, that is never really the case, it's not always friendlyand stable. Since foreign businesses are judged by standards as variable as there
are nations, the friendliness and stability of the government in each country must
--- Content provided by FirstRanker.com ---
be assessed as an ongoing business practice.
Stability Of Government Policies
--- Content provided by FirstRanker.com ---
The most important of the political conditions that concern an internationalbusiness is the stability or instability of the prevailing government policies.
Political parties may change or get reelected but the main concern for MNCs is
--- Content provided by FirstRanker.com ---
the continuity of the set rules or code of behavior regardless of the party in
power. A change in the government does not always mean change in the level of
--- Content provided by FirstRanker.com ---
political risks. In Italy the political parties have changed 50 times since the endof World War II but the business continues to go on as usual inspite of the
political turmoil. In comparison is India, where the government has changed 51
--- Content provided by FirstRanker.com ---
times since 1945 but however much of the government policies remain hostile to
foreign investments. Conversely, radical changes in policies toward foreign
--- Content provided by FirstRanker.com ---
business can occur in the most stable of the governments. Some of the Africancountries are among the unstable with seemingly unending civil wars, boundary
disputes and oppressive military regimes. Like one of the region with the
--- Content provided by FirstRanker.com ---
greatest number of questions concerning long-term stability is Hong Kong as
since China has gained control, the official message is that nothing will change
--- Content provided by FirstRanker.com ---
and thus everything is seemingly going smoothly but the political analysts saythat it is too early to say how will the business climate change, if it will. If there
is potential for profit and if given permission to operate within a country, MNCs
--- Content provided by FirstRanker.com ---
can function under any type of government as long as there is some long-termpredictability and stability.
Political Parties
--- Content provided by FirstRanker.com ---
Particularly important to the marketer is the knowledge of all philosophies of all
major political parties within a country, since anyone might become dominant
--- Content provided by FirstRanker.com ---
and alter prevailing attitudes. In those countries where there are two strongpolitical parties where usually one succeeds the other, it is important to know the
direction each of the parties is likely to take. Changes in direction a country may
--- Content provided by FirstRanker.com ---
take toward trade and related issues are caused not only by political parties but
also by politically strong interest groups and factions within different political
--- Content provided by FirstRanker.com ---
parties, which cooperate to affect trade policies.4.2.1 Types of Political Systems
a). Democracy
--- Content provided by FirstRanker.com ---
Democracy is for the people, by the people, and of the people, its similar to
participative management, in this system people are encouraged to participate in
--- Content provided by FirstRanker.com ---
decision making, a peoples representative can be selected by the people througha process of election, and the responsibility of leading the nation is kept on the
shoulders of the elected representative. Eg. India
--- Content provided by FirstRanker.com ---
b). DictatorshipIt is also called as authoritarianism, which is quite opposite to democracy, here
the hole power is in the hands of the leader, and people should follow the leader,
--- Content provided by FirstRanker.com ---
all the policies related to economy, business etc are governed by the leader. Eg
Saudi Arabia
--- Content provided by FirstRanker.com ---
4.2.2 Political Risks Of Global Businessa) Confiscation
The most severe political risk is confiscation, which is seizing of company's
--- Content provided by FirstRanker.com ---
assets without payment.
b) Expropriation
--- Content provided by FirstRanker.com ---
Which requires reimbursement, for the government seized investment.c) Domestication
--- Content provided by FirstRanker.com ---
Which occurs when host country takes steps to transfer foreign investments to
national control and ownership through series of government decrees.
--- Content provided by FirstRanker.com ---
A change in the government's attitudes, policies, economic plans andphilosophies toward the role of foreign investment is the reason behind the
decision to confiscate, expropriate or domesticate existing foreign assets.
--- Content provided by FirstRanker.com ---
Assessing Political Vulnerability
Some products are more politically vulnerable than others, in that they receive
--- Content provided by FirstRanker.com ---
more government attention. This special attention may result in positive ornegative actions towards the company. Unfortunately there are no absolute
guidelines for marketer's to follow whether the product will receive government
--- Content provided by FirstRanker.com ---
attention or not.
Politically Sensitive Products
There are some generalizations that help to identify the tendency for products to
--- Content provided by FirstRanker.com ---
be politically sensitive. Products that have an effect upon the environment
exchange rates, national and economic security, and the welfare of the people
--- Content provided by FirstRanker.com ---
are more apt to be politically sensitive. For products judged non essential therisk would be greater, but for those thought to be making an important
contribution, encouragement and special considerations could be available.
--- Content provided by FirstRanker.com ---
4.2.3 Forecasting Political Risks
A number of firms are employing systematic methods of measuring political
--- Content provided by FirstRanker.com ---
risk. Political risk assessment can:Help managers decide if risk insurance is needed
Devise and intelligence network and an early warning system
--- Content provided by FirstRanker.com ---
Help managers develop a contingency plan
Build a database of past political events for use by corporate
management Interpret the data gathered and getting forewarnings about
--- Content provided by FirstRanker.com ---
political and economic situationsReducing Political Vulnerability
Even though the company cannot directly control or alter the political
--- Content provided by FirstRanker.com ---
environment, there are measures with which it can lessen the susceptibility of a
specific business venture.
--- Content provided by FirstRanker.com ---
4.2.4 Good Corporate CitizenshipA company can reduce its political vulnerability by being a corporate citizen and
remembering:
--- Content provided by FirstRanker.com ---
1. It is a guest in the country and should act accordingly
2. The profits are not it's solely, the local employees and the economy of
the nation should also benefit.
--- Content provided by FirstRanker.com ---
3. It is not wise to try and win over new customers by totally
Americanizing them.
--- Content provided by FirstRanker.com ---
4. A fluency in the local language helps making sales and cementing goodpublic relationships.
5. It should train its executives to act appropriately in the foreign
--- Content provided by FirstRanker.com ---
environment.4.2.5 Strategies To Lessen Political Risks
--- Content provided by FirstRanker.com ---
MNCs can use other strategies to minimize political risks and vulnerability.
They are:
--- Content provided by FirstRanker.com ---
Joint venturesExpanding the investment base
Marketing and distribution
--- Content provided by FirstRanker.com ---
Licensing
Planned domestication
Political payoffs
--- Content provided by FirstRanker.com ---
4.2.6 Government Encouragement Of Global Business
--- Content provided by FirstRanker.com ---
Foreign Government EncouragementGovernments also encourage foreign investment. The most important reason to
encourage investment is to accelerate the development of an economy. An
--- Content provided by FirstRanker.com ---
increasing number of countries are encouraging investments with specific
guidelines toward economic goals. MNCs may be expected to create local
--- Content provided by FirstRanker.com ---
employment, transfer technology, generate export sales, stimulate growth anddevelopment of the local industry.
National Government Encouragement
--- Content provided by FirstRanker.com ---
The US government is motivated for economic as well as political reasons to
encourage American firms to seek opportunities in the countries worldwide. It
--- Content provided by FirstRanker.com ---
seeks to create a favorable climate for overseas business by providing theassistance by providing the assistance that helps minimize some of the
troublesome politically motivated financial risks of doing business abroad.
--- Content provided by FirstRanker.com ---
Basic ways government controls trade
Economic Rationales for Governmental Intervention
--- Content provided by FirstRanker.com ---
UnemploymentProtection of infant industry
Using intervention to increase industrialization
--- Content provided by FirstRanker.com ---
Economic relationships with other countriesNon-Economic Rationales for Governmental Intervention
Maintaining essential industries
--- Content provided by FirstRanker.com ---
"Unfriendly" countries
Maintaining spheres of influence
--- Content provided by FirstRanker.com ---
Preserving culture and national identity4.2.7 Instruments used by government for trade control
--- Content provided by FirstRanker.com ---
Trade Restrictions / Trade Barriers
Dumping
--- Content provided by FirstRanker.com ---
SubsidiesCountervailing Duties
Tariffs
--- Content provided by FirstRanker.com ---
Quotas
VERs - Voluntary Export Restraints
--- Content provided by FirstRanker.com ---
Tariffs and the "Political Environment"
"The United Steelworkers union [in Canada] wants provincial governments to
--- Content provided by FirstRanker.com ---
lobby Ottawa to protect the country's steel industry now that federal officialshave decided against penalizing low-cost imports....A spokesperson for Finance
Minister John Manley confirmed yesterday that the government had decided
--- Content provided by FirstRanker.com ---
against
imposing
--- Content provided by FirstRanker.com ---
tariffson
steel
--- Content provided by FirstRanker.com ---
imports"
Canadian Press (as quoted by the Toronto Star 2003 Oct 7th) reported
--- Content provided by FirstRanker.com ---
This is a part of the "Political Environment" because if the Steelworkers do notget tariffs they may go on strike, or they may work to make sure the local
Member of Parliament is not re-elected in that constituency. If the governing
--- Content provided by FirstRanker.com ---
party [in the case the liberals] really needs to hold that constituency they maygive in
--- Content provided by FirstRanker.com ---
Non-Tariff Barriers
Subsidies
--- Content provided by FirstRanker.com ---
Aid (loans and grants)Customs valuation
Quotas
--- Content provided by FirstRanker.com ---
"Buy national" policies
Standards
Trade sanctions
--- Content provided by FirstRanker.com ---
The WTO Initiative
--- Content provided by FirstRanker.com ---
The WTO has become increasingly involved in dealing with the "challenging"area of non-tariff barriers. It is challenging because more and more countries are
trying to show they will abide by bi-lateral and multi-lateral trade agreements so
--- Content provided by FirstRanker.com ---
they cut tariffs - but at the same time, domestic political pressure cause the
politicians to think of ways they can erect non-tariff barriers to still keep out
--- Content provided by FirstRanker.com ---
lower priced foreign products, so that domestic industries can still sellcompetitively to their citizens.
Case: The Taipan's Dilemma
--- Content provided by FirstRanker.com ---
Hong Kong comprises Hong Kong Island, Kowloon Peninsula andthe New territories. Mutual distrust and misunderstanding
between the Chinese and foreigners. Trade with foreigners
restricted to the port of Macao Around the early 1830s, trade
between Britain and China became particularly important (tea
--- Content provided by FirstRanker.com ---
for opium). Three opium wars. Netted for the Britishtemporary ownership of Hong Kong. Lease expired June 30,
1997. The new arrangement, China assumed control of Hong
Kong, two systems Hong Kong will retain its separate
political and economic status for 50 years. Democracy has
--- Content provided by FirstRanker.com ---
never been a major part of the political landscape in HongKong. Given the political instability in Hong Kong, why don't
more companies leave? Hong is the world's eighth-largest
trading nation, boasts a higher per capita income than
Britain, has one of the world's lowest tax rates. It was once
--- Content provided by FirstRanker.com ---
a heaven for low cost manufacturing. Manufacturing jobs aremoving to China. Singapore is trying to grab away business
from Hong Kong.
--- Content provided by FirstRanker.com ---
Case Study 4.2
4.2.8 The Impact of the Political System on Management Decisions
--- Content provided by FirstRanker.com ---
Managers must deal with varying degrees of governmental intervention and
varying degrees of political stability.
--- Content provided by FirstRanker.com ---
Managers must understand the critical functions that a government performs inthe economy.
In a democracy, for instance:
--- Content provided by FirstRanker.com ---
a) Protect the liberty of its citizens
b) Promote the common welfare of its citizens
c) Provide for public goods
d) Handle market defects ; and spillover effects
--- Content provided by FirstRanker.com ---
The political process also affects international business through laws that
regulate business activity at both the domestic and international levels.
--- Content provided by FirstRanker.com ---
In addition government action is not always consistent.For instance in the U.S. at least three government agencies share responsibility
for regulating nonagricultural exports (The Department of Commerce; The State
--- Content provided by FirstRanker.com ---
Department; and the Department of Defense).4.2.9
Formulating
--- Content provided by FirstRanker.com ---
and
Implementing
--- Content provided by FirstRanker.com ---
PoliticalStrategies
Political action always is a sensitive area. However, there are certain steps that a
--- Content provided by FirstRanker.com ---
company must follow if it wants to establish an appropriate political strategy:a) What is the specific issue facing the firm - protectionism, environmental
rights, worker rights?
b) Assess the potential political action of other companies and of special interest
groups.
--- Content provided by FirstRanker.com ---
c) Identify important institutions and key individualsd) Formulate strategies and implement
Case: United States - Japanese Auto Trade
--- Content provided by FirstRanker.com ---
Imports started in 1973VERs: ceiling 1.68 million cars (Voluntary Export Restraints)
Arguments for helping the U.S. industry:
- The costs of unemployment are higher than the increased
costs to consumers
--- Content provided by FirstRanker.com ---
- Help overcome temporary problemsAntiprotectionists: blame poor management and taxpayers should
not be expected to reward the companies
Efforts to penetrate the Japanese market
--- Content provided by FirstRanker.com ---
Case Study 4.3
--- Content provided by FirstRanker.com ---
4.2.10 Governmental Influence On Trade
The Rationale For Governmental Intervention
--- Content provided by FirstRanker.com ---
a) UnemploymentImport restrictions may lead to retaliation by other countries, may decrease
--- Content provided by FirstRanker.com ---
export jobs. Loss of jobs in industries that rely on imported Products
Cost of protectionism: higher prices, low quality, lack of Innovation
--- Content provided by FirstRanker.com ---
b) Infant Industry Argument
--- Content provided by FirstRanker.com ---
Production becomes more competitive over time because of increasedeconomies of scale and greater workers efficiency
c) Industrialization Argument
--- Content provided by FirstRanker.com ---
Countries seek protection to promote industrialization Because:
a) Brings faster growth than agriculture
--- Content provided by FirstRanker.com ---
b) Diversifies the economyc) Brings more price increases than primary products do.
d) Shifting Workers from Agriculture into Manufacturing
--- Content provided by FirstRanker.com ---
a) Output increases if the marginal productivity of agricultural workers is very
low.
--- Content provided by FirstRanker.com ---
b) Social concernse) Promoting Investment Inflows
Import restrictions increase direct investment
--- Content provided by FirstRanker.com ---
f) Diversification
g) Terms of Trade
--- Content provided by FirstRanker.com ---
Deterioration of terms of trade may prompt countries to protect and promoteindustrialization
h) Import Substitution versus Export Promotion
--- Content provided by FirstRanker.com ---
Export-Led Development
i) Balance-of-Payments Adjustments
--- Content provided by FirstRanker.com ---
-Countries may choose to restrict the least essential Imports-Export restrictions
- Import Restrictions may prevent dumping
--- Content provided by FirstRanker.com ---
j) Maintaining Essential Industries
k) Preserving Cultures and National Identity
--- Content provided by FirstRanker.com ---
Activity 4.2
--- Content provided by FirstRanker.com ---
Visit an MNC and study the impact of political system on management'sdecision making
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
Activity 4.3List out the instruments used by Indian government to control the trade
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
4.3 Legal Environment
--- Content provided by FirstRanker.com ---
All business occurs within a particular legal and regulatory environment
the current legal environment in the United States spins on a variety of complex
--- Content provided by FirstRanker.com ---
issues that have an impact on business: international trade, capital gains taxes,unemployment, aging baby boomers, technology, employment laws, and social
concerns such as health care, child care, and job training. This legal tapestry
--- Content provided by FirstRanker.com ---
means businesses must be even more vigilant to include consideration of the
legal environment in their strategic planning. The legal environment is well
--- Content provided by FirstRanker.com ---
recognized as one of the most significant influences with which strategic plansmust contend.
4.3.1 Origins of International Law
--- Content provided by FirstRanker.com ---
There is no comprehensive system of laws or regulations for guiding business
transactions between two countries. The legal environment consists of laws and
--- Content provided by FirstRanker.com ---
policies from all countries engaged in international commercial activity. Earlytrade customs centered around the law of the sea and provided, among other
things, for rights of shipping in foreign ports, salvage rights, and freedom of
--- Content provided by FirstRanker.com ---
passage. During the Middle Ages, international principles embodied in the lex
mercatoria (law merchant) governed commercial transactions throughout
Europe. Although laws governing international transactions were more
--- Content provided by FirstRanker.com ---
extensive in some countries than others, the customs and codes of conduct
created a workable legal structure for the protection and encouragement of
--- Content provided by FirstRanker.com ---
international transactions. The international commerce codes in use today inmuch of Europe and in the United States are derived in part from those old
codes.
--- Content provided by FirstRanker.com ---
4.3.2 Sources of International Law
The main sources of international commercial law are the laws of individual
--- Content provided by FirstRanker.com ---
countries, the laws embodied in trade agreements between or among countries,and the rules enacted by a worldwide or regional organization--such as the
United Nations or the European Union. There is no international regulatory
--- Content provided by FirstRanker.com ---
agency or system of courts universally accepted for controlling international
business behavior or resolving international conflicts among businesses or
--- Content provided by FirstRanker.com ---
countries. International law can be enforced to some degree through (1) theInternational Court of Justice, (2) international arbitration, or (3) the courts of an
individual country. However, the decisions of those tribunals in resolving
--- Content provided by FirstRanker.com ---
international business disputes can be enforced only if the countries involved
agree to be bound by them.
--- Content provided by FirstRanker.com ---
a) International Trade AgreementsCountries improve economic relations through trade agreements that cover a
variety of potential commercial problems. This helps the investment and trade
--- Content provided by FirstRanker.com ---
climates among countries. For example, virtually all industrialized countries
have bilateral tax agreements to prevent double taxation of individuals and
--- Content provided by FirstRanker.com ---
businesses. Two important trade agreements for the U.S. are the North AmericanFree Trade Agreement (NAFTA) and the World Trade Organization (WTO)
b) North American Free Trade Agreement
--- Content provided by FirstRanker.com ---
NAFTA is a treaty that was ratified by the legislatures in Canada, Mexico, andthe U.S. and went into effect in 1994. It reduces or eliminates tariffs and trade
barriers among those nations. Although some tariffs were eliminated
--- Content provided by FirstRanker.com ---
immediately, many are phased out through the year 2009. The industries most
affected include agricultural products, automobiles, pharmaceuticals, and
--- Content provided by FirstRanker.com ---
textiles. NAFTA will create the largest free trade area in the world; 360 millionpeople. NAFTA includes a variety of issues not usually found in trade
agreements, such as protection of intellectual property and the environment, and
--- Content provided by FirstRanker.com ---
the creation of special panels to resolve disputes involving unfair trade practices,
investment restrictions, and environmental issues. NAFTA could eventually
--- Content provided by FirstRanker.com ---
include North and South America; 850 million people with over $18 trillion inannual purchasing power.
c) World Trade Organization
--- Content provided by FirstRanker.com ---
For 48 years, GATT worked to reduce trade barriers imposed by governments.
GATT focused on trade restrictions (import quotas and tariffs); it published
--- Content provided by FirstRanker.com ---
tariff schedules to which its signers agreed. Tariff schedules were developed inmultinational trade negotiations or rounds. In the most recent round--the
Uruguay Round--124 nations participated. GATT was replaced by the WTO,
--- Content provided by FirstRanker.com ---
one of the most significant developments of the last round. Since 1995, WTO
has overseen the trade agreement and has a dispute-resolution system, using
--- Content provided by FirstRanker.com ---
three person arbitration panels. The panels follow strict schedules for renderingdecisions. WTO members cannot veto decisions, unlike before (unless they
withdraw from the agreement). The latest round will eventually lower world
--- Content provided by FirstRanker.com ---
tariffs by 40 percent. The U.S., Japan, members of the EU, and other
industrialized nations agreed to eliminate all tariffs in 10 industries:
--- Content provided by FirstRanker.com ---
BeerConstruction equipment
Distilled spirits
--- Content provided by FirstRanker.com ---
Farm machineryFurniture
Medical equipment
--- Content provided by FirstRanker.com ---
Paper
Pharmaceuticals
--- Content provided by FirstRanker.com ---
SteelToys
The WTO agreement provides world protection for intellectual property; 7 years
--- Content provided by FirstRanker.com ---
of protection for trademarks, 20 years for patents, and up to 50 years for
copyrights (generally moving to 75 years plus in most places). Only in the film
--- Content provided by FirstRanker.com ---
and television industry was the U.S. not able to gain a barrier to trade reductionin Europe. France was particularly adamant about maintaining the barrier
because of its concerns about the heavy cultural influence of such programming
--- Content provided by FirstRanker.com ---
(and the demise of the not very successful French film industry).
d) Import Policy
--- Content provided by FirstRanker.com ---
Countries have long imposed restrictions or prohibitions on the importation andexportation of certain products. In addition, export laws and regulations are
often enacted to encourage international business activity by domestic
--- Content provided by FirstRanker.com ---
industries.
e) Taxes on Imports
--- Content provided by FirstRanker.com ---
Restrictions on imports may be imposed to generate revenue for the governmentor to protect domestic industries from foreign competition. Import licensing
procedures, quotas, testing requirements, safety and manufacturing standards,
--- Content provided by FirstRanker.com ---
government procurement policies, and complicated customs procedures are all
ways to regulate imports. The most common means of regulating imports into a
--- Content provided by FirstRanker.com ---
country is through tariffs.Tariff Classes
A tariff is a duty or tax levied by a government on imports. Tariffs can be
--- Content provided by FirstRanker.com ---
classified into:Specific Tariffs which impose a fixed tax or duty on each unit of the product,
Ad Valorem Tariffs which impose a tax based on a percentage of the price of
--- Content provided by FirstRanker.com ---
the product. In the U.S. the duty or tax is published in the Tariff Schedules that
apply to all products entering U.S. ports. Customs officials classify products and
--- Content provided by FirstRanker.com ---
determine the tariff rates when products enter the country. Any tariff imposedmust be paid before the good may enter the country. Most disputes that occur in
this area arise over the classification of products under the tariff schedules.
--- Content provided by FirstRanker.com ---
f) Import Controls
The Department of Commerce, the International Trade Administration (ITA),
--- Content provided by FirstRanker.com ---
and the International Trade Commission (ITC) have certain abilities to restrictforeign imports. The agencies are concerned with foreign companies that
practice dumping or receive a subsidy from their governments to lower their
--- Content provided by FirstRanker.com ---
costs of production. The agencies may also restrict imports in the absence of
dumping or subsidies. As barriers to trade are lowered, some domestic industries
--- Content provided by FirstRanker.com ---
and their workers face economic hardships due to foreign competition. The ITCcan temporarily restrict imports to provide those industries with an opportunity
to adjust to the new competitive environment created by the lower trade barriers.
--- Content provided by FirstRanker.com ---
Antidumping Orders--Under both the WTO and U.S. antidumping laws,
dumping is the business practice of charging a lower price in the export market
--- Content provided by FirstRanker.com ---
then in the home market, after taking into consideration important differences inthe sale (such as credit terms and transportation) and the goods being sold. This
was first prohibited in 1916, when Congress enacted the Antidumping Duty
--- Content provided by FirstRanker.com ---
Act. If a company is dumping goods in the U.S., an antidumping order will be
issued. Goods from the company are subject to payment of an antidumping duty
--- Content provided by FirstRanker.com ---
(tax). The amount of the duty is determined by comparing the market price inthe company`s home market with the price charged in the U.S. The percentage
difference between the home and U.S. markets will form an ad valorem duty to
--- Content provided by FirstRanker.com ---
be applied to the price when sold in the U.S. This duty is paid to Customs bycash deposit at the port, normally by the importer. Duty orders generally remain
in place until the importer has demonstrated three consecutive years of fair
--- Content provided by FirstRanker.com ---
market value sales and Commerce is convinced there is a low likelihood of
less than fair market value sales in the future.
--- Content provided by FirstRanker.com ---
g) Export Regulation and PromotionMost governments encourage exporting to stimulate domestic employment and
bring in foreign exchange. This is believed needed to help prevent a trade
--- Content provided by FirstRanker.com ---
deficit. at the same time, for policy reasons, it a governments may restrict
exports of certain products.
--- Content provided by FirstRanker.com ---
Export RestrictionsThe U.S. imposes restrictions on the sale of a good or a technology may
a) Injure domestic industry (e.g., the export of a raw material in short
--- Content provided by FirstRanker.com ---
supply),
b) Jeopardize national security (e.g., selling military hardware to the wrong
--- Content provided by FirstRanker.com ---
country)c) Conflict with national policy (e.g., selling goods to a country the
government has embargoed because of terrorist activities).
--- Content provided by FirstRanker.com ---
Restrictions are managed by licensing according to terms of the Export
Administration Act (EAA).Commerce imposes licensing requirements under
--- Content provided by FirstRanker.com ---
strict standards. Licensing Agreements. The EAA allows Commerce to requirethe following export licenses, depending on the type of good or technology
being exported:
--- Content provided by FirstRanker.com ---
1) A validated license, authorizing a specific export;
2) A qualified general license, authorizing multiple exports;
--- Content provided by FirstRanker.com ---
3) A general license that applies to most U.S. goods; and4) Other licenses as may assist in the implementation of the Act.
The Commodity Control List lists products subject to licenses and the
--- Content provided by FirstRanker.com ---
restrictions imposed. Goods not on the List are subject to a general license--which often only requires a Shipper`s Export Declaration filed with Commerce.
A validated export license is required for the export of certain goods on the List
--- Content provided by FirstRanker.com ---
because of national security. Commerce may impose controls only to the extent
necessary to restrict the export of goods and technology which would make a
--- Content provided by FirstRanker.com ---
significant contribution to the military potential of any other country orcombination of countries which would prove detrimental to the national security
of the United States. Application to Reexported U.S. Goods. Commerce`s
--- Content provided by FirstRanker.com ---
licensing requirements apply to the reexport of U.S. goods. That is, an export
license is needed to ship U.S.-origin controlled goods from say, India to Taiwan.
--- Content provided by FirstRanker.com ---
This is to stop shipment of sensitive goods from the U.S. to a safe country andthen to a controlled country.
--- Content provided by FirstRanker.com ---
Case: International Perspective: Controlling International Pirates
The U.S. International Trade Commission estimates that pirates (companies or
--- Content provided by FirstRanker.com ---
individuals that copy or clone) cost U.S. industry more than $100 billion inlost profits each year. Microsoft Corporation found an extensive network
pirating its Windows software. The group was talented enough to even copy
the hologram used to discourage pirating. Microsoft filed a lawsuit privately
and elicited the
--- Content provided by FirstRanker.com ---
assistance of the International Trade Commission to sanction Taiwan (thelocation of the pirating organization). For the computer industry, pirating is
one of the most serious problems facing management.
--- Content provided by FirstRanker.com ---
Case Study 4.4
h) Foreign Corrupt Practices Act
--- Content provided by FirstRanker.com ---
Government is more involved in business in many countries than in the U.S.
When approval of business action is at the discretion of a government official,
the likelihood of corruption rises. Scandals shook many countries in the 1990s,
--- Content provided by FirstRanker.com ---
notably in Italy, Japan, and Korea. The Foreign Corrupt Practices Act (FCPA)
prohibits U.S. companies from bribing foreign officials. A study of U.S.
--- Content provided by FirstRanker.com ---
companies by the SEC found the practice was wide spread--over 400companies (117 were Fortune 500 companies) admitted making bribes to
foreignofficials.
--- Content provided by FirstRanker.com ---
Corruption
Many countries are rife with corruption; even the U.S. only gets a score of 7.5
--- Content provided by FirstRanker.com ---
on a 10 point scale used by experts on international corruption of governmentofficials.
i) International Antibribery Movement
--- Content provided by FirstRanker.com ---
The U.S. encourages other countries to enact antibribery laws, but until recently
has been the only nation with such a law. Numerous other nations have agreed
--- Content provided by FirstRanker.com ---
in principle to the Convention on Combating Bribery of Foreign Officials, butwhile Congress ratified the treaty in 1998, other countries have been slow to act.
j) Antibribery Provisions
--- Content provided by FirstRanker.com ---
The FCPA prohibits U.S. companies from corruptly paying or offering
to pay a foreign official to gain assistance in obtaining or retaining business.
--- Content provided by FirstRanker.com ---
The Act also prohibits payments to a person--such as a foreign agent--whenthe payment will go to bribe an official. The ability to know of such payments
by an agent is controversial. An exception is made for a payment that is a
--- Content provided by FirstRanker.com ---
facilitating or expediting payment ... the purpose of which is to expedite or
secure the performance of a routine government action. Routine actions may
--- Content provided by FirstRanker.com ---
include processing visas and providing utilities. The basic test of whether thebribe is allowed focuses not on the person to whom payment is made, but on the
purpose for which payment is made. It is complicated by the fact that payments
--- Content provided by FirstRanker.com ---
are often made by local freight forwarders or other service organizations without
the knowledge of the U.S. manager.
k) International Contracts
--- Content provided by FirstRanker.com ---
The basis for any international agreement is the contract between parties.
International contracts often involve parties from differing cultural backgrounds
--- Content provided by FirstRanker.com ---
who do not know each other well at the outset of negotiations.i) Cultural Aspects
Sensitivity to cultural differences is important in international contracting.
--- Content provided by FirstRanker.com ---
Although language should not be a barrier, contract terms must be clearly
defined and understood. Attitude toward relationships is a cultural difference in
--- Content provided by FirstRanker.com ---
some countries. Contracts based on trust are often relatively short in length, withfew contingencies expressly provided. The expectation is that issues can be
worked out as they arise with the parties working to maintain the underlying
--- Content provided by FirstRanker.com ---
relationship.
ii) Financial Aspects
--- Content provided by FirstRanker.com ---
In managing financial risks that may arise, care should be taken in thespecification of the method of payment and the currency in which payment is to
be made.
--- Content provided by FirstRanker.com ---
iii) Exchange Markets
Foreign exchange markets allow trading (buying and selling) currencies. In
--- Content provided by FirstRanker.com ---
general, trade between countries can occur only if it is possible to exchange thecurrency of one country for the currency of another country. Exchange of money
is not always simple. Losses in international business sometimes center on
--- Content provided by FirstRanker.com ---
exchange risk--the potential loss or profit that occurs
between the time the currency is acquired and the time the currency is
--- Content provided by FirstRanker.com ---
exchanged for another currency.iv) Financial Instruments Used in International Contracts
Although many financial instruments are available, two commonly used are bills
--- Content provided by FirstRanker.com ---
of exchange and letters of credit.
A bill of exchange is a written instrument that orders the payment of a certain
sum of money to the party specified by the bill. Payment is made at the time
--- Content provided by FirstRanker.com ---
specified on the bill or understood from the form of the standardized bill used. A
sight bill specifies immediate payment upon receipt of the goods by the buyer. A
--- Content provided by FirstRanker.com ---
time bill specifies payment at a later date, usually 30, 90, or 180 days after thegoods have been received by the buyer.
A letter of credit is an agreement or assurance by the buyer`s bank to pay a
--- Content provided by FirstRanker.com ---
specified amount to the seller upon receipt of documentation proving that the
goods have been shipped and that any other contractual obligations on the seller
--- Content provided by FirstRanker.com ---
have been fulfilled. The usual documentation required includes a certificate oforigin, an export license, a certificate of inspection, a bill of lading, a
commercial invoice, and an insurance policy. Letters of credit can be either
--- Content provided by FirstRanker.com ---
revocable or irrevocable.
v) Repatriation of Monetary Profits
--- Content provided by FirstRanker.com ---
Repatriation refers to the ability of a foreign business to return money earned inthe foreign country to its home country. It is often governed by a country`s laws.
vi) Key Clauses in International Contracts
--- Content provided by FirstRanker.com ---
Certain clauses are often included in international contracts and have become
standard items to consider.
--- Content provided by FirstRanker.com ---
a) Payment ClausesHow payment is to be received should be clearly specified. The problems of
repatriation should be addressed. Problems with inflation and currency exchange
--- Content provided by FirstRanker.com ---
risks, especially in unstable economies or in long-term agreements, should also
be addressed in this clause of the contract.
b) Choice of Language Clause
--- Content provided by FirstRanker.com ---
A word or phrase in one language may not be readily translatable to another. A
contract should have a choice of language clause, which sets out the language by
--- Content provided by FirstRanker.com ---
which the contract is to be interpreted.c) Force Majeure Clause
Force majeure is a French term meaning a superior or irresistible force. It
--- Content provided by FirstRanker.com ---
protects the contracting parties from problems or contingencies beyond their
control.
--- Content provided by FirstRanker.com ---
d) Forum Selection and Choice-of-Law ClausesTo reduce uncertainty in the event of a dispute, the parties select the court in
which disputes are to be resolved and the law that is to be applied. This
--- Content provided by FirstRanker.com ---
eliminates the possibility that the parties will go forum shopping--looking for
the most favorable forum for the resolution of a dispute.
--- Content provided by FirstRanker.com ---
e) UN Convention on Contracts: Most major trading countries have agreed tothe U.N. Convention on Contracts for the International Sale of Goods. Contracts
that incorporate that law are subject to rules very essentially the same as the
--- Content provided by FirstRanker.com ---
Uniform Commercial Code. See 71 F.3d 1024.
f) Loss of Investment
--- Content provided by FirstRanker.com ---
Governmental action can result in loss of investment through nationalization,expropriation, and confiscation. Investors concerned about such losses may
purchase insurance.
--- Content provided by FirstRanker.com ---
g) Nationalization
Occurs when a country takes over, or nationalizes, a foreign investment.
--- Content provided by FirstRanker.com ---
Compensation by the government is often less than the true value of thebusiness. The stated purpose of nationalization is related to public welfare.
Nationalization is not uncommon, averaging over 100 incidents per decade.
--- Content provided by FirstRanker.com ---
h) Insuring against Risk of LossInvestors concerned with the risk of loss of investment may obtain insurance.
An all-risk insurance policy can help in case of nationalization or upon
--- Content provided by FirstRanker.com ---
occurrence of a specific problem. Outstanding risks such as currency blockages,
embargoes, and a government`s arbitrary decision to recall letters of credit may
--- Content provided by FirstRanker.com ---
be insured through major insurers such as Lloyds of London. Some countrieshave agencies to assist in insuring their exporters from risk of loss. In the
U.S., the Overseas Private Investment Corporation (OPIC) insures investors
--- Content provided by FirstRanker.com ---
willing to invest in less-developed countries friendly to the U.S.
4.3.3 International Dispute Resolution
--- Content provided by FirstRanker.com ---
Contract disputes arise for any number of reasons. Disputes must be resolved asparties wish to enforce their rights under a contract.
a) Litigation
--- Content provided by FirstRanker.com ---
Parties in a contract dispute may seek relief in the court system of either
country. Litigation is complicated; evidence, individuals, and documents central
--- Content provided by FirstRanker.com ---
to the dispute are often located in two or more countries. If the action is in aforeign court, the U.S. participant may encounter a very different judicial
system. Courts in some countries are influenced by political pressures. Another
--- Content provided by FirstRanker.com ---
difficulty may be attempting to establish jurisdiction. U.S. courts require proof
of minimum contacts within the country for the courts to have proper
--- Content provided by FirstRanker.com ---
jurisdiction over a foreign defendant.b) Arbitration
Courts are not effective in resolving many international disagreements. One of
--- Content provided by FirstRanker.com ---
the most effective alternative techniques has been the arbitration process.
Attempts to standardize arbitral rules resulted in creation of organizations such
--- Content provided by FirstRanker.com ---
as the U.N. Commission on International Trade Law, the International Chamberof Commerce, the American Arbitration Association, the InterAmerican
Commercial Arbitration Commission, and the London Court of Arbitration. In
--- Content provided by FirstRanker.com ---
over fifty countries, including the United States, enforcement of arbitral awardsis facilitated by the 1958 U.N. Convention on the Recognition and Enforcement
of Foreign Arbitral Awards. U.S. federal district courts have jurisdiction to
--- Content provided by FirstRanker.com ---
entertain motions to confirm or challenge a foreign arbitration award involving a
U.S. business.
--- Content provided by FirstRanker.com ---
c) International Court of JusticeCertain disputes may be taken to the International Court of Justice (ICJ) for
resolution. The ICJ is headquartered at The Hague, Netherlands, and is a part of
--- Content provided by FirstRanker.com ---
the United Nations. Only countries have standing to go before the Court;
individuals and businesses have no standing to initiate a suit. The countries
--- Content provided by FirstRanker.com ---
decide whether to pursue claims on behalf of their citizens. IJC decisionsproviding monetary judgments or injunctive relief may be referred to the United
Nations Security Council for enforcement.
--- Content provided by FirstRanker.com ---
d) Doctrine of Sovereign Immunity
This allows a court to give up its jurisdiction over foreign parties that otherwise
--- Content provided by FirstRanker.com ---
would be subject to the court`s jurisdiction. This is based on traditional notionsthat a sovereign should not be subject to litigation in a foreign court. The
application of the doctrine can have severe consequences on parties when the
--- Content provided by FirstRanker.com ---
suit involves a commercial transaction. The Foreign Sovereign Immunities Act
(FSIA) of 1976 is intended to provide a uniform rule for the determination of
--- Content provided by FirstRanker.com ---
sovereign immunity in legal actions in U.S. courts and to bring the U.S. intoconformity with other countries in its application of the doctrine.
--- Content provided by FirstRanker.com ---
4.3.4 Types of Legal Systemsa) Common Law System
Based on tradition, precedent, and custom and usage, and the courts fulfill an
--- Content provided by FirstRanker.com ---
important role in interpreting the law according to those characteristics.
b) Civil Law System or a Codified Legal System
Based on a very detailed set of laws that are organized into a code. This code is
--- Content provided by FirstRanker.com ---
the foundation for doing business. Over 70 countries operate on a civil law
basis.
--- Content provided by FirstRanker.com ---
The two legal systems differ primarily in that common law is based on thecourts interpretation of events, whereas civil law is based on how the law is
applied to the facts. Ex: Contracts.
--- Content provided by FirstRanker.com ---
c) Theocratic Law System
Based on religious preceps. Islamic law
--- Content provided by FirstRanker.com ---
The U.S. has the most lawyers of any country in the world and is one of the
highest in the number of lawyers per capita. Ex: 312 lawyers per 100,000
--- Content provided by FirstRanker.com ---
compared to 101 lawyers per 100,000 in Japan
Activity 4.4
--- Content provided by FirstRanker.com ---
Visit an MNC and study impact of legal system on business operations________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________4.4 Technological Environment
Technology has played a major role in the life of people, right from snail mail to
--- Content provided by FirstRanker.com ---
e-mail the way we live has dramatically changed from the past decade.
Technology has removed the global barriers like distance, time etc thanks to the
--- Content provided by FirstRanker.com ---
latest technological developments like Internet, e-mail, video conferencing, cellphone etc that plays a major role in international business.
4.4.1 Technological phases in production
--- Content provided by FirstRanker.com ---
a) Cottage System
Before 1700s
--- Content provided by FirstRanker.com ---
b) Industrial Revolution 1770-1800sEight inventions were made
Substitution of machine power from man power
--- Content provided by FirstRanker.com ---
Establishment of factory systemc) Scientific Management
Developing science for each person`s work
--- Content provided by FirstRanker.com ---
Selecting workers scientifically
Dividing work & responsibility
--- Content provided by FirstRanker.com ---
d) Human Relations MovementBasic understanding of workers & their attitudes towards their work
e) Operations Research(O.R)
--- Content provided by FirstRanker.com ---
Mathematical techniques to solve management problems
First OR team formed by British army to solve complex problems in
--- Content provided by FirstRanker.com ---
World war IIf) Computers & Advanced Production Technology
Clerical Job
--- Content provided by FirstRanker.com ---
Decision Support System (DSS)
Executive Support System(ESS)
--- Content provided by FirstRanker.com ---
Artificial IntelligenceNeural Networks
g) Service Revolution
--- Content provided by FirstRanker.com ---
Design Engineers
Computer Operators
--- Content provided by FirstRanker.com ---
Production Planners4.4.2 Benefits of Technology in Management Decision Making
The managerial decisions are of two types
--- Content provided by FirstRanker.com ---
a) Structured or programmed decisions
b) Un-structures or non-programmed decisions
--- Content provided by FirstRanker.com ---
Technology helps the manager to make decisions related to business in thefollowing ways
--- Content provided by FirstRanker.com ---
a) Decision Support SystemIt is an information system which collects the information from various sources
like government, customers and suppliers and global market and competitors
--- Content provided by FirstRanker.com ---
and helps the manager to interact with the mathematical decision models to
make decision.
--- Content provided by FirstRanker.com ---
b) Group Decision Support SystemAn expert system with set of hardware, software & procedures that support a
group of people engaged in a decision-related meeting
--- Content provided by FirstRanker.com ---
c) Office Automation System
An office automation system uses computers or networks to carry out various
--- Content provided by FirstRanker.com ---
office operationsd) Transaction Processing System
A system that handles the processing and tracking of transactions is called TPS
--- Content provided by FirstRanker.com ---
e) Management Information System
MIS is a set of software tools that enables managers to gather, organize, &
--- Content provided by FirstRanker.com ---
evaluate information about a workgroup, department or entire organizationf) Expert System
Expert System is a specialized application that performs tasks that would
--- Content provided by FirstRanker.com ---
normally be done by a human.
Ex: Medical diagnosis
--- Content provided by FirstRanker.com ---
Credit History4.4.3 Communication Tools used in International Business
a) Video Conferencing
--- Content provided by FirstRanker.com ---
b) E-mailc) Internet
d) Laptop
e) Cell Phone
--- Content provided by FirstRanker.com ---
4.4.4 Effect of Technology on Strategy & Competitiona) Creating Barriers to entry
The cutting edge technology used by MNCs has created barriers for the new
--- Content provided by FirstRanker.com ---
entrants into the industry and also caused a major threat to the domesticindustries this has given rise to the increase in competition and importance for
companies to invest in research and development
--- Content provided by FirstRanker.com ---
b) Generating New Products
Technology has always created new to the world products and modified new
--- Content provided by FirstRanker.com ---
products; there is a greater need for the business organizations to invest in largevolumes in research and development to bring out new products
Some minor changes in features of the product with the same technology has
--- Content provided by FirstRanker.com ---
given rise to new products eg. The modified features of the tape recorder has
given rise to Walkman where both uses the same technology
--- Content provided by FirstRanker.com ---
c) Changing Relationships with SuppliersThe relationships maintained by the suppliers has dramatically changed from
traditional procurement to e-procurement, e-supply chain management, global
--- Content provided by FirstRanker.com ---
integration etc which has given rise to quality, efficiency, of production in less
time.
--- Content provided by FirstRanker.com ---
d) Changing the Basis for CompetitionTechnology has formed as a main basis for competition, the superior technology
used by the business firms has resulted in improved quality of producing goods,
--- Content provided by FirstRanker.com ---
improved efficiency by automation and mechanization, Total Quality
Management (TQM)
--- Content provided by FirstRanker.com ---
4.4.5 Features of Technologya) Technology Brings Change
Technology brings change in every walk of life, like the way we cook, the way
--- Content provided by FirstRanker.com ---
we commute, the way we communicate etc. technology has brought lot of
changes in business from barter system to e-business
--- Content provided by FirstRanker.com ---
b) Technology Reduces TimeTechnology has drastically reduced time between conceiving an idea and
implementing that idea. The world has become a global village, which has no
--- Content provided by FirstRanker.com ---
barriers by the invention of internet technologies which has reduced time oftransferring information in no time.
c) Technology Reduces Distance
--- Content provided by FirstRanker.com ---
With the invention of advanced transportation systems which has reduced the
time to travel
--- Content provided by FirstRanker.com ---
e.g. By the invention of supersonic jets etcd) Technology Improves Quality of Life
The quality of life of people has definitely improved, the advancements of
--- Content provided by FirstRanker.com ---
medical technology the life expectancy rate is increased and the control of
various diseases is possible
--- Content provided by FirstRanker.com ---
4.4.6 Diffusion of TechnologyDiffusion is a process of spreading, if a bottle of perfume is opened the
molecules will diffuse in the entire atmosphere similarly the technology will
--- Content provided by FirstRanker.com ---
diffuse in the following ways
Joint Ventures
--- Content provided by FirstRanker.com ---
Two companies A and B can jointly work on a venture for a certain period byexchanging technology, human resources etc
Licensing
--- Content provided by FirstRanker.com ---
Companies in the domestic market can produce the produce the products by
license permission from MNCs
--- Content provided by FirstRanker.com ---
E.g. Coco-cola is produced in India by the way of licenseTechnological Transfer
Technology can be transferred from on country to another by way of
--- Content provided by FirstRanker.com ---
collaboration many times we hear terms like German collaboration, Japanese
collaboration etc
--- Content provided by FirstRanker.com ---
e.g. Maruti Suzuki is collaboration between Maruthi Udyog of India and Suzukimotors of Japan
4.4.7 The Technological Cycle
--- Content provided by FirstRanker.com ---
The technological cycle is an organized way to develop technology
Needs analysis
Design of Technology
--- Content provided by FirstRanker.com ---
Development of Technology
Implementation of Technology
--- Content provided by FirstRanker.com ---
Maintenance of TechnologyPhase 1: Need Analysis
--- Content provided by FirstRanker.com ---
Defining the problem and deciding weather to proceed and analyzing thecurrent system in depth and developing possible solutions to the problem and
selecting the best solution and defining its function
--- Content provided by FirstRanker.com ---
Phase 2: Designing Technology
The project team describes how the selected solution will work. Each system
--- Content provided by FirstRanker.com ---
activity is identifiedPhase 3: Development of Technology
Includes creating or customizing the technology for various parts of the system.
--- Content provided by FirstRanker.com ---
There two alternative paths:
1.Acquisition 2.Local development
--- Content provided by FirstRanker.com ---
Technical & user documentation is written testing is also integral part of thisphase
Phase 4: Implementation of Technology
--- Content provided by FirstRanker.com ---
The technology is installed in the user environment
Phase 5: Maintenance of Technology
--- Content provided by FirstRanker.com ---
Training & support to the users of technology, improvements to the technologyare made regularly during the remaining cycle.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Need
Analysis
Maintenan
--- Content provided by FirstRanker.com ---
Designing
ce
--- Content provided by FirstRanker.com ---
TechnologyImplementat
Developm
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Fig 4.2 The Technological Cycle
--- Content provided by FirstRanker.com ---
4.4.8 Business Implications of TechnologyLaunch new products and services to your sales force without taking
them out of the field.
--- Content provided by FirstRanker.com ---
Highlight introductions and product releases to employees, shareholders,
and clients.
--- Content provided by FirstRanker.com ---
Provide certification programs to geographically dispersed audiences.Conduct focus group sessions to help bring products to market faster.
Create personalized sales presentations for your customers and reduce
--- Content provided by FirstRanker.com ---
timely sales cycles.
Provide a simple but effective way to get more out of training sessions
--- Content provided by FirstRanker.com ---
by giving your audience something for their eyes as well as their ears.Great for Human Resources departments to get out information about
policy and procedure changes. Ideal for new employee orientations and
--- Content provided by FirstRanker.com ---
employment interviews.4.5 Cultural Environment
--- Content provided by FirstRanker.com ---
When doing business abroad, a company first should determine whether a usual
business practice in a foreign country differs from its home-country experience.
--- Content provided by FirstRanker.com ---
Understanding the cultures of groups of people is useful because businessemploys, sells to, buys from, is regulated by, and is owned by people.
4.5.1 The Concept Of Culture
--- Content provided by FirstRanker.com ---
The word culture, from the Latin colo, -ere, with its root meaning "to cultivate",
generally refers to patterns of human activity and the symbolic structures that
--- Content provided by FirstRanker.com ---
give such activity significance Culture consists of specific learned norms based
on attitudes, values, and beliefs, all of which exist in every society. Culture
--- Content provided by FirstRanker.com ---
cannot easily be isolated from such factors as economic and political conditions.4.5.2 Behavioral Practices Affecting Business
a) Group Affiliation
--- Content provided by FirstRanker.com ---
A person's affiliations reflecting class or status.
b) Role of Competence
--- Content provided by FirstRanker.com ---
Rewarded highly in some societies. Seniority in Japanc) Gender Based Groups
There are strong country-specific differences in attitudes towards males and
--- Content provided by FirstRanker.com ---
females.
d) Age-Based Groups
--- Content provided by FirstRanker.com ---
Many cultures assume that age and wisdom are correlatede) Family-Based Groups
f) Importance of Work
--- Content provided by FirstRanker.com ---
Protestant ethic, belief in success and reward; work as a habit, high-need
achiever.
--- Content provided by FirstRanker.com ---
g) Need HierarchyPeople try to fulfill lower-order needs sufficiently before moving on to higher
ones. The hierarchy of needs theory is helpful for differentiating the reward
--- Content provided by FirstRanker.com ---
preferences of employees.
--- Content provided by FirstRanker.com ---
h) Importance of OccupationThe importance of business as a profession
i) Self-Reliance
--- Content provided by FirstRanker.com ---
Uncertainty avoidance, trust, fatalism, individual versus group
j) Preference for Autocratic versus Consultative Management
--- Content provided by FirstRanker.com ---
4.5.3 Reconciliation Of International Differences
a) Stereotypes
--- Content provided by FirstRanker.com ---
A generalized picture of a person, created without taking the whole person intoaccount; to make such a generalization.
--- Content provided by FirstRanker.com ---
When we stereotype a group of people, we depict all of the individuals within
that group as having the same characteristics Differences in our society are
--- Content provided by FirstRanker.com ---
many, including age, religion, physical and mental abilities, gender, sexualorientation, income, family or social status, and physical appearance. Anyplace
where
--- Content provided by FirstRanker.com ---
differences
are
--- Content provided by FirstRanker.com ---
foundleaves
room
--- Content provided by FirstRanker.com ---
for
stereotypes.
--- Content provided by FirstRanker.com ---
Stereotypes are generalizations about people usually based on inaccurateinformation or assumptions rather than facts. Stereotypes do not take into
account the great diversity of people within a group of people. Nor do
--- Content provided by FirstRanker.com ---
stereotypes consider the present circumstances of the individual. Even worse,
stereotypes
--- Content provided by FirstRanker.com ---
canlead
to
--- Content provided by FirstRanker.com ---
prejudicial
or
--- Content provided by FirstRanker.com ---
discriminatorybehavior
b) Cultural Shock
--- Content provided by FirstRanker.com ---
The term, culture shock, was introduced for the first time in 1958 to describe the
anxiety produced when a person moves to a completely new environment. This
--- Content provided by FirstRanker.com ---
term expresses the lack of direction, the feeling of not knowing what to do orhow to do things in a new environment, and not knowing what is appropriate or
inappropriate. The feeling of culture shock generally sets in after the first few
--- Content provided by FirstRanker.com ---
weeks of coming to a new place.
--- Content provided by FirstRanker.com ---
c) PolycentrismPolycentrism is the principle of organisation of a region around several political,
social or financial centres. An example of a polycentric city is the Ruhr area in
--- Content provided by FirstRanker.com ---
Germany: Today, the area is a large city that grew from a dozen smaller cities.
As a result, the "city" has no single centre, but several.
A county is said to be polycentric if its population is distributed almost evenly
--- Content provided by FirstRanker.com ---
among several centres in different parts of the county.
d) Ethnocentrism
--- Content provided by FirstRanker.com ---
The belief that one's own culture is superior to all others and is the standard bywhich all other cultures should be measured. Early social scientists in the
nineteenth century operated from an ethnocentric point of view. So-called
--- Content provided by FirstRanker.com ---
primitive tribes, for example, were studied by anthropologists to illustrate how
human civilization had progressed from savage customs toward the
--- Content provided by FirstRanker.com ---
accomplishments of Western industrial society. The feeling that one's group hasa mode of living, values, and patterns of adaptation that are superior to those of
other groups. It is coupled with a generalized contempt for members of other
--- Content provided by FirstRanker.com ---
groups. Ethnocentrism may manifest itself in attitudes of superiority or
sometimes hostility. Violence, discrimination, proselytizing, and verbal
--- Content provided by FirstRanker.com ---
aggressiveness are other means whereby ethnocentrism may be expressed.--- Content provided by FirstRanker.com ---
The view of things in which one`s group is the center of everything, all others
are scaled & rated with references to his own cultural value.
--- Content provided by FirstRanker.com ---
Symptom: self reference criteria
--- Content provided by FirstRanker.com ---
Example : criticism about diet patterns.
Danger : provoke retaliation
--- Content provided by FirstRanker.com ---
e) GeocentrismThe view of things in which one looks at positive aspects of
both home & host cultures & accept the differences.
--- Content provided by FirstRanker.com ---
e) Cultural Dimensions
Sl.No Dimension
--- Content provided by FirstRanker.com ---
Criteria1.
Low Context Vs High Context
--- Content provided by FirstRanker.com ---
Communication Style
2.
--- Content provided by FirstRanker.com ---
Doing Vs BeingAmount of action
3.
--- Content provided by FirstRanker.com ---
High Contact Vs Low Contact
Amount of physical contact
4.
--- Content provided by FirstRanker.com ---
Dionysian Vs Apollonian
Ways to handle emotion
--- Content provided by FirstRanker.com ---
5.Masculine Vs Feminine
Attitude towards sex
--- Content provided by FirstRanker.com ---
6.
Collective Vs individualistic
--- Content provided by FirstRanker.com ---
Attitude about themselves7.
High Vs Low Risk avoidance
--- Content provided by FirstRanker.com ---
Amount of anxiety
8.
--- Content provided by FirstRanker.com ---
High Vs Low Power distanceAttitude about power
9.
--- Content provided by FirstRanker.com ---
Universalistic Vs Particularistic
Obligation
--- Content provided by FirstRanker.com ---
10.Regressive Vs Progressive
Time
--- Content provided by FirstRanker.com ---
4.5.4 The Elements of Culture
--- Content provided by FirstRanker.com ---
The major elements of culture are material culture, language, aesthetics,education, religion, attitudes and values and social organisation.
a) Material Culture
--- Content provided by FirstRanker.com ---
Material culture refers to tools, artifacts and technology. Before marketing in a
foreign culture it is important to assess the material culture like transportation,
--- Content provided by FirstRanker.com ---
power, communications and so on. All aspects of marketing are affected bymaterial culture like sources of power for products, media availability and
distribution. For example, refrigerated transport does not exist in many African
--- Content provided by FirstRanker.com ---
countries. Material culture introductions into a country may bring about cultural
changes which may or may not be desirable.
--- Content provided by FirstRanker.com ---
b) LanguageLanguage reflects the nature and values of society. There may be many sub-
cultural languages like dialects which may have to be accounted for. Some
--- Content provided by FirstRanker.com ---
countries have two or three languages. In Zimbabwe there are three languages -
English, Shona and Ndebele with numerous dialects. In Nigeria, some linguistic
--- Content provided by FirstRanker.com ---
groups have engaged in hostile activities. Language can cause communicationproblems - especially in the use of media or written material. It is best to learn
the language or engage someone who understands it well.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
MaterialLanguage
--- Content provided by FirstRanker.com ---
Culture
Aestheti
cs
--- Content provided by FirstRanker.com ---
Social
Organization
Culture
--- Content provided by FirstRanker.com ---
Education
Attitudes
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Fig 4.3 Elements of Culture
--- Content provided by FirstRanker.com ---
c) AestheticsAesthetics refer to the ideas in a culture concerning beauty and good taste as
expressed in the arts -music, art, drama and dancing and the particular
--- Content provided by FirstRanker.com ---
appreciation of colour and form. African music is different in form to Western
music. Aesthetic differences affect design, colours, packaging, brand names and
--- Content provided by FirstRanker.com ---
media messages. For example, unless explained, the brand name FAVCO wouldmean nothing to Western importers, in Zimbabwe most people would instantly
recognise FAVCO as the brand of horticultural produce.
--- Content provided by FirstRanker.com ---
d) Education
Education refers to the transmission of skills, ideas and attitudes as well as
--- Content provided by FirstRanker.com ---
training in particular disciplines. Education can transmit cultural ideas or beused for change, for example the local university can build up an economy's
performance.
--- Content provided by FirstRanker.com ---
The UN agency UNESCO gathers data on education information. For example it
shows in Ethiopia only 12% of the viable age group enrol at secondary school,
--- Content provided by FirstRanker.com ---
but the figure is 97% in the USA.Education levels, or lack of it, affect marketers in a number of ways:
Advertising programmes and labeling
--- Content provided by FirstRanker.com ---
Girls and women excluded from formal education (literacy rates)Conducting market research
Complex products with instructions
--- Content provided by FirstRanker.com ---
Relations with distributors and,
Support sources - finance, advancing agencies etc.
--- Content provided by FirstRanker.com ---
e) Religion
Religion provides the best insight into a society's behaviour and helps answer
--- Content provided by FirstRanker.com ---
the question why people behave rather than how they behave.A survey in the early 1980s revealed the following religious groupings (see table
3.1)3.
--- Content provided by FirstRanker.com ---
Table 3.1 Religious groupings
Groups
--- Content provided by FirstRanker.com ---
MillionAnimism
300
--- Content provided by FirstRanker.com ---
Buddhism 280
Christianity 1500
--- Content provided by FirstRanker.com ---
Hinduism 600Islam
800
--- Content provided by FirstRanker.com ---
Shinto
120
--- Content provided by FirstRanker.com ---
Religion can affect marketing in a number of ways:
Religious holidays - Ramadan cannot get access to consumers as shops
--- Content provided by FirstRanker.com ---
are closed.
Consumption patterns - fish for Catholics on Friday
--- Content provided by FirstRanker.com ---
Economic role of women ? IslamCaste systems - difficulty in getting to different costs for
segmentation/niche marketing
--- Content provided by FirstRanker.com ---
Joint and extended families - Hinduism and organizational structures;
Institution of the church - Iran and its effect on advertising, "Western"
--- Content provided by FirstRanker.com ---
imagesMarket segments - Maylasia - Malay, Chinese and Indian cultures
making market segmentation
--- Content provided by FirstRanker.com ---
Sensitivity is needed to be alert to religious differences.f) Attitudes and values
--- Content provided by FirstRanker.com ---
Values often have a religious foundation, and attitudes relate to economicactivities. It is essential to ascertain attitudes towards marketing activities which
lead to wealth or material gain, for example, in Buddhist society these may not
--- Content provided by FirstRanker.com ---
be relevant. Also "change" may not be needed, or even wanted, and it may be
better to relate products to traditional values rather than just new ones. Many
--- Content provided by FirstRanker.com ---
African societies are risk averse, therefore, entrepreneurialism may not alwaysbe relevant. Attitudes are always precursors of human behaviour and so it is
essential that research is done carefully on these.
--- Content provided by FirstRanker.com ---
g) Social Organisation
Refers to the way people relate to each other, for example, extended families,
--- Content provided by FirstRanker.com ---
units, kinship. In some countries kinship may be a tribe and so segmentationmay have to be based on this. Other forms of groups may be religious or
political, age, caste and so on. All these groups may affect the marketer in his
--- Content provided by FirstRanker.com ---
planning.
There are other aspects of culture, but the above covers the main ingredients. In
--- Content provided by FirstRanker.com ---
one form or another these have to be taken account of when marketinginternationally.
Activity 4.5
--- Content provided by FirstRanker.com ---
Visit an MNC and study the impact of culture on business
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________
4.6 Classifying Countries
A country's international competitiveness is a function of several factors,
--- Content provided by FirstRanker.com ---
including factor conditions and demand conditions
Factors Conditions
--- Content provided by FirstRanker.com ---
Essential inputs to the production process (human resources, physical resources,knowledge resources, capital resources, and infrastructure)
Demand Conditions
--- Content provided by FirstRanker.com ---
Composition of home demand, the size and pattern of growth of home demand.
Gross National product (GNP): broadest measure of economic activity. Defined
--- Content provided by FirstRanker.com ---
as the market value of final goods and services newly produced by domesticfactors of demand.
Note: the production by domestic factors could take place at home or abroad.
--- Content provided by FirstRanker.com ---
a) Gross Domestic Product
Measures the value of production that occurs within a country's borders without
--- Content provided by FirstRanker.com ---
regard to whether the production is done by domestic or foreign factors ofproduction.
b) Per Capita GNP
--- Content provided by FirstRanker.com ---
Low-income ($725 or less),Mozambique ($80)
Middle-income ($726-$8,955) Colombia ((2,140)
--- Content provided by FirstRanker.com ---
High-Income ($8,956 or more)Ex: Luxemburg (45,360)
Japan (40,940)
--- Content provided by FirstRanker.com ---
U.S. (28,020)
Low-and middle-income countries is where the vast majority of the world's
--- Content provided by FirstRanker.com ---
population lives.North-South Dialogue
c) Relative Importance of High-Income Countries
--- Content provided by FirstRanker.com ---
They represent only 21% of the number of economies and 15.2% of thepopulation, but they generate 79.5% of the world's GNP.
d) Relative Importance of Middle-Income Countries
--- Content provided by FirstRanker.com ---
They represent 28.1% of the world's population, 15.6% of its GNP, and
represent 48.3% of the total countries.
--- Content provided by FirstRanker.com ---
e) Relative Importance of Low-Income CountriesAccount for 30.6% of the number of economies in the world, 56.7% of the
population, but only 4.9% of the GNP.
--- Content provided by FirstRanker.com ---
f) Purchasing Power Parity (PPP):
The basic idea is to identify the number of units of a country's currency required
--- Content provided by FirstRanker.com ---
to buy the same amounts of goods and services in the domestic economy as onedollar would buy in the U.S.
Thus, even though per capita GNP is the primary measure of wealth in a
--- Content provided by FirstRanker.com ---
country, purchasing power GNP is an alternative way to measure wealth that is
more indicative of the purchasing power of a country's currency.
--- Content provided by FirstRanker.com ---
Structure of Production: percentage of GDP generated by agriculture, industry,manufacturing, and services.
The key is to note that as income rises, the percentage of GDP devoted to
--- Content provided by FirstRanker.com ---
agriculture falls, and the percentage devoted to services rises.
g) Other Indicators
--- Content provided by FirstRanker.com ---
i) Quality of LifeLife expectancy, educational standards, individual purchasing power, health,
sanitation, and treatment of women (Canada, the U.S., Japan, Norway, the
--- Content provided by FirstRanker.com ---
Netherlands)
ii) Capability Poverty Measures
Rate of female illiteracy, number of children in school, proportion of tended
--- Content provided by FirstRanker.com ---
births. Widening Gap between the Rich and Poor; Income Distribution
Sector-Wise Distribution of GDP
--- Content provided by FirstRanker.com ---
GDPCountry
Agriculture
--- Content provided by FirstRanker.com ---
Industry
Service
--- Content provided by FirstRanker.com ---
World3.9
29.8
--- Content provided by FirstRanker.com ---
66.3
Australia
--- Content provided by FirstRanker.com ---
3.526.1
70.4
--- Content provided by FirstRanker.com ---
Brazil
7.4
--- Content provided by FirstRanker.com ---
28.364.3
China
--- Content provided by FirstRanker.com ---
15.9
50.9
--- Content provided by FirstRanker.com ---
33.2Egypt Arab Republic
16.7
--- Content provided by FirstRanker.com ---
33.1
50.2
--- Content provided by FirstRanker.com ---
France2.8
25.3
--- Content provided by FirstRanker.com ---
71.8
Germany
--- Content provided by FirstRanker.com ---
1.231.5
67.3
--- Content provided by FirstRanker.com ---
Hong Kong
0.1
--- Content provided by FirstRanker.com ---
14.385.6
India
--- Content provided by FirstRanker.com ---
24.9
26.9
--- Content provided by FirstRanker.com ---
48.2Indonesia
17.0
--- Content provided by FirstRanker.com ---
47.0
35.9
--- Content provided by FirstRanker.com ---
Itlay2.9
29.2
--- Content provided by FirstRanker.com ---
67.9
Japan
--- Content provided by FirstRanker.com ---
1.431.8
66.8
--- Content provided by FirstRanker.com ---
Korea Republic
4.7
--- Content provided by FirstRanker.com ---
42.452.9
Malaysia
--- Content provided by FirstRanker.com ---
8.7
51.2
--- Content provided by FirstRanker.com ---
40.1Mexico
4.1
--- Content provided by FirstRanker.com ---
27.9
68.0
--- Content provided by FirstRanker.com ---
Nepal40.7
22.1
--- Content provided by FirstRanker.com ---
37.2
Netherlands
--- Content provided by FirstRanker.com ---
2.727.2
70.1
--- Content provided by FirstRanker.com ---
Nigeria
29.5
--- Content provided by FirstRanker.com ---
46.024.5
Norway
--- Content provided by FirstRanker.com ---
1.8
42.9
--- Content provided by FirstRanker.com ---
55.2Philippines
15.9
--- Content provided by FirstRanker.com ---
31.1
52.9
--- Content provided by FirstRanker.com ---
Portugal3.7
30.5
--- Content provided by FirstRanker.com ---
65.8
Russian Federation
--- Content provided by FirstRanker.com ---
6.439.0
54.6
--- Content provided by FirstRanker.com ---
Singapore
-
--- Content provided by FirstRanker.com ---
34.765.2
South Africa
--- Content provided by FirstRanker.com ---
3.2
30.9
--- Content provided by FirstRanker.com ---
65.9Spain
3.7
--- Content provided by FirstRanker.com ---
30.3
66.0
Sri Lanka
--- Content provided by FirstRanker.com ---
19.5
27.5
--- Content provided by FirstRanker.com ---
53.0Sweden
1.8
--- Content provided by FirstRanker.com ---
28.0
70.2
--- Content provided by FirstRanker.com ---
Thailand10.3
40.5
--- Content provided by FirstRanker.com ---
49.3
Turkey
--- Content provided by FirstRanker.com ---
15.425.3
59.4
--- Content provided by FirstRanker.com ---
United Kingdom
1.1
--- Content provided by FirstRanker.com ---
28.770.3
USA
--- Content provided by FirstRanker.com ---
1.6
24.9
--- Content provided by FirstRanker.com ---
73.5--- Content provided by FirstRanker.com ---
POPULATION
(Million)
--- Content provided by FirstRanker.com ---
2001
2002
--- Content provided by FirstRanker.com ---
2003
World
--- Content provided by FirstRanker.com ---
6130.16214.8
6271.6
--- Content provided by FirstRanker.com ---
Australia
19.4
--- Content provided by FirstRanker.com ---
19.619.8
Brazil
--- Content provided by FirstRanker.com ---
172.4
174.4
--- Content provided by FirstRanker.com ---
176.5China
1300
--- Content provided by FirstRanker.com ---
1280.4
1288.4
--- Content provided by FirstRanker.com ---
Egypt Arab Republic65.2
66.3
--- Content provided by FirstRanker.com ---
67.5
France
--- Content provided by FirstRanker.com ---
59.259.4
59.7
--- Content provided by FirstRanker.com ---
Germany
82.3
--- Content provided by FirstRanker.com ---
82.482.5
Hong Kong
--- Content provided by FirstRanker.com ---
6.7
6.7
--- Content provided by FirstRanker.com ---
6.8India
1000
--- Content provided by FirstRanker.com ---
1048.6
1064.3
--- Content provided by FirstRanker.com ---
Indonesia209
211.7
--- Content provided by FirstRanker.com ---
214.4
Italy
--- Content provided by FirstRanker.com ---
57.957.6
57.6
--- Content provided by FirstRanker.com ---
Japan
127
--- Content provided by FirstRanker.com ---
127.15127.2
Korea Republic
--- Content provided by FirstRanker.com ---
47.3
47.6
--- Content provided by FirstRanker.com ---
47.9Malaysia
23.8
--- Content provided by FirstRanker.com ---
24.3
24.7
--- Content provided by FirstRanker.com ---
Mexico99.4
100.8
--- Content provided by FirstRanker.com ---
102.2
Nepal
--- Content provided by FirstRanker.com ---
23.624.1
24.6
--- Content provided by FirstRanker.com ---
Netherlands
16
--- Content provided by FirstRanker.com ---
16.116.2
Nigeria
--- Content provided by FirstRanker.com ---
129.9
132.7
--- Content provided by FirstRanker.com ---
135.6Norway
4.5
--- Content provided by FirstRanker.com ---
4.5
4.5
--- Content provided by FirstRanker.com ---
Philippines78.3
79.9
--- Content provided by FirstRanker.com ---
81.5
Portugal
--- Content provided by FirstRanker.com ---
1010.1
10.1
--- Content provided by FirstRanker.com ---
Russian Federation
144.8
--- Content provided by FirstRanker.com ---
144143.4
Singapore
--- Content provided by FirstRanker.com ---
4.14.1
4.2
--- Content provided by FirstRanker.com ---
South Africa
43.2
--- Content provided by FirstRanker.com ---
47.645.2
Spain
--- Content provided by FirstRanker.com ---
41.1
40.9
--- Content provided by FirstRanker.com ---
41.1Srilanka
18.7
--- Content provided by FirstRanker.com ---
18.9
19.1
--- Content provided by FirstRanker.com ---
Sweden8.9
8.9
--- Content provided by FirstRanker.com ---
8.9
Switzerland
--- Content provided by FirstRanker.com ---
7.27.2
7.3
--- Content provided by FirstRanker.com ---
Thailand
61.2
--- Content provided by FirstRanker.com ---
61.662
Turkey
--- Content provided by FirstRanker.com ---
68.5
69.6
--- Content provided by FirstRanker.com ---
70.7United Kingdom
58.8
--- Content provided by FirstRanker.com ---
59.2
59.2
--- Content provided by FirstRanker.com ---
USA285.3
288.3
--- Content provided by FirstRanker.com ---
291
--- Content provided by FirstRanker.com ---
(Source: World Development Indicators Database: World Bank--- Content provided by FirstRanker.com ---
GNI (Fomerly )GNP
(Billion US$)
--- Content provided by FirstRanker.com ---
2001
2002
--- Content provided by FirstRanker.com ---
2003
World
--- Content provided by FirstRanker.com ---
3140031483.9
34491.4
--- Content provided by FirstRanker.com ---
Australia
385.9
--- Content provided by FirstRanker.com ---
386.6430.5
Brazil
--- Content provided by FirstRanker.com ---
528.9
497.3
--- Content provided by FirstRanker.com ---
478.9China
1100
--- Content provided by FirstRanker.com ---
1209.5
1417.3
--- Content provided by FirstRanker.com ---
Egypt Arab Republic 99.697.6
93.8
--- Content provided by FirstRanker.com ---
France
1400
--- Content provided by FirstRanker.com ---
1342.71523
Germany
--- Content provided by FirstRanker.com ---
1900
1870.3
--- Content provided by FirstRanker.com ---
2084.6Hong Kong
170.3
--- Content provided by FirstRanker.com ---
167.6
173.3
--- Content provided by FirstRanker.com ---
India477.4
501.5
--- Content provided by FirstRanker.com ---
567.6
Indonesia
--- Content provided by FirstRanker.com ---
144.7149.8
172.7
--- Content provided by FirstRanker.com ---
Italy
1100
--- Content provided by FirstRanker.com ---
1097.91242.9
Japan
--- Content provided by FirstRanker.com ---
45004265.6
4389.7
--- Content provided by FirstRanker.com ---
Korea Republic
447.6
--- Content provided by FirstRanker.com ---
473576.4
Malaysia
--- Content provided by FirstRanker.com ---
79.3
85.9
--- Content provided by FirstRanker.com ---
93.6Mexico
550.2
--- Content provided by FirstRanker.com ---
596.7
637.1
--- Content provided by FirstRanker.com ---
Nepal5.8
5.6
--- Content provided by FirstRanker.com ---
5.8
Netherlands
--- Content provided by FirstRanker.com ---
390.3386.7
426.6
--- Content provided by FirstRanker.com ---
Nigeria
37.1
--- Content provided by FirstRanker.com ---
38.642.9
Norway
--- Content provided by FirstRanker.com ---
160.8
171.7
--- Content provided by FirstRanker.com ---
197.6Philippines
80.8
--- Content provided by FirstRanker.com ---
81.4
87.7
--- Content provided by FirstRanker.com ---
Portugal109.3
108.7
--- Content provided by FirstRanker.com ---
123.6
Russian Federation
--- Content provided by FirstRanker.com ---
253.4307.9
374.9
--- Content provided by FirstRanker.com ---
Singapore
88.8
--- Content provided by FirstRanker.com ---
86.190.2
South Africa
--- Content provided by FirstRanker.com ---
121.9
113.4
--- Content provided by FirstRanker.com ---
125.9Spain
588
--- Content provided by FirstRanker.com ---
594.1
698.2
--- Content provided by FirstRanker.com ---
Srilanka16.4
15.8
--- Content provided by FirstRanker.com ---
17.8
Sweden
--- Content provided by FirstRanker.com ---
225.9221.5
258.3
--- Content provided by FirstRanker.com ---
Switzerland
277.2
--- Content provided by FirstRanker.com ---
274.1292.8
Thailand
--- Content provided by FirstRanker.com ---
118.5
122.2
--- Content provided by FirstRanker.com ---
136Turkey
167.3
--- Content provided by FirstRanker.com ---
173.9
197.2
--- Content provided by FirstRanker.com ---
United Kingdom1500
1486.1
--- Content provided by FirstRanker.com ---
1680.3
USA
--- Content provided by FirstRanker.com ---
980010110
10945.7
--- Content provided by FirstRanker.com ---
(Source: World Development Indicators Database: World Bank)
--- Content provided by FirstRanker.com ---
Surface Area
(Million Sq. KM)
--- Content provided by FirstRanker.com ---
World
133.80
--- Content provided by FirstRanker.com ---
Australia7.70
Brazil
--- Content provided by FirstRanker.com ---
8.50
China
--- Content provided by FirstRanker.com ---
9.60Egypt Arab Republic
1.00
--- Content provided by FirstRanker.com ---
France
0.55
--- Content provided by FirstRanker.com ---
Germany0.36
India
--- Content provided by FirstRanker.com ---
3.30
Indonesia
--- Content provided by FirstRanker.com ---
1.90Italy
0.30
--- Content provided by FirstRanker.com ---
Japan0.38
Korea Republic
--- Content provided by FirstRanker.com ---
99.26
Malaysia
--- Content provided by FirstRanker.com ---
0.33Mexico
2.00
--- Content provided by FirstRanker.com ---
Nepal
0.15
--- Content provided by FirstRanker.com ---
Netherlands41.53
Nigeria
--- Content provided by FirstRanker.com ---
0.92
Norway
--- Content provided by FirstRanker.com ---
0.32Philippines
0.30
--- Content provided by FirstRanker.com ---
Portugal
91.98
--- Content provided by FirstRanker.com ---
Russian Federation17.10
South Africa
--- Content provided by FirstRanker.com ---
1.20
Spain
--- Content provided by FirstRanker.com ---
0.51Srilanka
0.07
--- Content provided by FirstRanker.com ---
Sweden
0.45
--- Content provided by FirstRanker.com ---
Switzerland41.29
Thailand
--- Content provided by FirstRanker.com ---
0.51
Turkey
--- Content provided by FirstRanker.com ---
0.78United Kingdom
0.24
--- Content provided by FirstRanker.com ---
USA
9.60
--- Content provided by FirstRanker.com ---
(Source: World Development Indicators Database: World Bank)--- Content provided by FirstRanker.com ---
4.7.1 Economic Environment
As a company considers where in the world to build factories and sells products,
--- Content provided by FirstRanker.com ---
it must analyze the countries in which it may do businessCountry analysis requires, understanding national goals, priorities, and policies.
It also involves understanding economic performance, as indicated by economic
--- Content provided by FirstRanker.com ---
growth, inflation, and budget and trade deficits.
4.7.2 Classifying Economic Systems
--- Content provided by FirstRanker.com ---
Economic Systems usually are classified as capitalist, socialist, or mixed. Nocountry is purely market or purely command.
As the economy moves to more balance, between market and command or
--- Content provided by FirstRanker.com ---
between public and private ownership, it is considered mixed.
We can also classify economic systems according to two other criteria:
--- Content provided by FirstRanker.com ---
- Type of property ownership- Method of resource allocation and control
a) Market Economy:
--- Content provided by FirstRanker.com ---
The individual and the company play important roles.The market mechanism involves an interaction of price, quantity, supply and
demand for resources and products.
--- Content provided by FirstRanker.com ---
The key factors that make the market economy work:
-consumer sovereignty
--- Content provided by FirstRanker.com ---
-freedom of the enterprise to operate in the marketIn addition, freedom from government restrictions, and legal and Institutions
frameworks to safeguard economic freedoms
--- Content provided by FirstRanker.com ---
b) Centrally Planned Economy:
The government coordinates the activities of the different economic sectors.
--- Content provided by FirstRanker.com ---
Goals are set for every enterprise in the country.The government determines how much is produced, by whom, and for whom.
c) Mixed Economy
--- Content provided by FirstRanker.com ---
Partly Free, Mostly Not Free
Government intervention can be classified in two ways:
--- Content provided by FirstRanker.com ---
- Government ownership of the means of production- Government influence in decision making
--- Content provided by FirstRanker.com ---
Ex: MITI was organized to guide industrial development through "strategic
planing and authority over investment and production priorities."
--- Content provided by FirstRanker.com ---
d) Political-Economic SynthesisClearly, numerous combinations of political and economic systems are possible
Asian experience, Latin American experience, European, U.S.
--- Content provided by FirstRanker.com ---
Case: McDonald's Corporation
- Burgers round trip back to Russia
--- Content provided by FirstRanker.com ---
- Overseas moves compatible with McDonald's growth strategy
- From 1990-1995, 56% of the new restaurants have been opened
--- Content provided by FirstRanker.com ---
overseas- Of the 1,007 restaurants added in 1995, 45% were from 6
foreign markets (Australia, Canada, England, France, Germany,
--- Content provided by FirstRanker.com ---
and Japan)
- Supply procurement, a major problem
--- Content provided by FirstRanker.com ---
- 27,000 Russian applicants for its 650 positions- 30,000 people were served during the first day of
operations
--- Content provided by FirstRanker.com ---
- strong investment in training
--- Content provided by FirstRanker.com ---
Case Study 4.5
4.7.3 Economic Trade Policies (Protectionism)
--- Content provided by FirstRanker.com ---
Protectionism is the economic policy of restraining trade between nations,
through methods such as high tariffs on imported goods, restrictive quotas, and
--- Content provided by FirstRanker.com ---
anti-dumping laws in an attempt to protect domestic industries in a particularnation from foreign take-over or competition. This contrasts with free trade,
where no artificial barriers to entry are instituted.
--- Content provided by FirstRanker.com ---
The term is mostly used in the context of economics, where protectionism refers
to policies or doctrines which "protect" businesses and living wages by
--- Content provided by FirstRanker.com ---
restricting or regulating trade between foreign nations:Subsidies - To protect existing businesses from risk associated with change,
such as costs of labour, materials, etc.
--- Content provided by FirstRanker.com ---
Tariffs - to increase the price of a foreign competitor's goods. ( Including
restrictive quotas, and anti-dumping measures.) on par or higher than domestic
--- Content provided by FirstRanker.com ---
prices.Quotas - to prevent dumping of cheaper foreign goods that would overwhelm
the market.
--- Content provided by FirstRanker.com ---
Tax cuts- Alleviation of the burdens of social and business costs.Intervention - The use of state power to bolster an economic entity.
Protectionism has frequently been associated with economic theories such as
--- Content provided by FirstRanker.com ---
mercantilism, the belief that it is beneficial to maintain a positive trade balance,
and import substitution. There are two main variants of protectionism,
--- Content provided by FirstRanker.com ---
depending on whether the tariff is intended to be collected (traditionalprotectionism) or not (modern protectionism).
Modern protectionism
--- Content provided by FirstRanker.com ---
In the modern trade arena many other initiatives besides tariffs have been called
protectionist. For example some commentators, such as Jagdish Bhagwati, see
--- Content provided by FirstRanker.com ---
developed countries' efforts in imposing their own labor or environmentalstandards as protectionism. Also, the imposition of restrictive certification
procedures on imports are seen in this light.
--- Content provided by FirstRanker.com ---
Recent examples of protectionism are typically motivated by the desire to
protect the livelihoods of individuals in politically important domestic
--- Content provided by FirstRanker.com ---
industries. Whereas formerly blue-collar jobs were being lost to foreigncompetition, in recent years there has been a renewed discussion of
protectionism due to offshore outsourcing and the loss of white-collar jobs. Most
--- Content provided by FirstRanker.com ---
economists view this form of protectionism as a disguised transfer payment
from consumers (who pay higher prices for food or other protected goods) to
--- Content provided by FirstRanker.com ---
local high-cost producers.Traditional Protectionism
In its historic sense, protectionism is the economic policy of relying on revenue
--- Content provided by FirstRanker.com ---
tariffs for government funding in order to reduce or eliminate taxation on
domestic industries and labor (e.g., corporate and personal income taxes). In
protectionist theory, emphasis is placed on reducing taxation on domestic labor
--- Content provided by FirstRanker.com ---
and savings at a cost of higher tariffs on foreign products. This contrasts with
the free trade model, in which first emphasis is placed on exempting foreign
--- Content provided by FirstRanker.com ---
products from taxation, with the lost revenue to be compensated domestically.Traditional protectionism sees revenue tariffs as a source of government
funding, much like a sales tax, that can be used to reduce other domestic forms
--- Content provided by FirstRanker.com ---
of taxes. The goal of traditional protectionism is to maximize tax revenue from
the purchase of foreign products with the goal of being able to reduce or
--- Content provided by FirstRanker.com ---
eliminate other forms of domestic taxation (income taxes, sales taxes, etc.) as aresult. Tariffs were the predominant source of tax revenue in the United States
from its founding through World War II, allowing the country to operate
--- Content provided by FirstRanker.com ---
through most of that period without income and sales taxes. Traditional
protectionism remains highly dependent on large amounts of imports. It also
--- Content provided by FirstRanker.com ---
requires tariffs to be kept at reasonable rates to ensure maximum governmentrevenue.
--- Content provided by FirstRanker.com ---
a) Dumping
A practice of charging a very low price in a foreign market for such economic
--- Content provided by FirstRanker.com ---
purposes as putting rival suppliers out of business.If a company exports a product at a price lower than the price it normally
charges on its own home market, it is said to be dumping the product. Is this
--- Content provided by FirstRanker.com ---
unfair competition? The WTO agreement does not pass judgement. Its focus is
on how governments can or cannot react to dumping -- it disciplines anti-
--- Content provided by FirstRanker.com ---
dumping actions, and it is often called the Anti-dumping Agreement.Legal Framework
Based on Article VI of GATT 1994
--- Content provided by FirstRanker.com ---
Customs Tariff Act, 1975 - Sec 9A, 9B (as amended in1995)
Anti-Dumping Rules [Customs Tariff (Identification, Assessment and Collection
of Anti Dumping Duty on Dumped Articles and for Determination of Injury)
--- Content provided by FirstRanker.com ---
Rules,1995] Investigations and Recommendations by Designated
Authority, Ministry of Commerce Imposition and Collection by Ministry of
--- Content provided by FirstRanker.com ---
Financeb) Subsidies
In economics, a subsidy is generally a monetary grant given by government to
--- Content provided by FirstRanker.com ---
lower the price faced by producers or consumers of a good, generally because it
is considered to be in the public interest. Subsidies are also referred to as
--- Content provided by FirstRanker.com ---
corporate welfare by those who oppose their use. The term subsidy may alsorefer to assistance granted by others, such as individuals or non-government
institutions, although this is more usually described as charity. A subsidy
--- Content provided by FirstRanker.com ---
normally exemplifies the opposite of a tax, but can also be given using a
reduction of the tax burden. These kinds of subsidies are generally called tax
--- Content provided by FirstRanker.com ---
expenditures or tax breaks.Subsidies protect the consumer from paying the full price of the good consumed,
however they also prevent the consumer from receiving the full value of the
--- Content provided by FirstRanker.com ---
thing not consumed ? in that sense, a subsidized society is a consumption
society because it unfairly encourages consumption more than conservation.
--- Content provided by FirstRanker.com ---
Under free-market conditions, consumers would make choices which optimizethe value of their transactions; where it was less expensive to conserve, they
would conserve. In a subsidized economy however, consumers are denied the
--- Content provided by FirstRanker.com ---
benefit of conservation and as a result, subsidized goods have an artificially
higher value than expenditures which do not consume. Subsidies are paid for by
--- Content provided by FirstRanker.com ---
taxation which creates a deadweight loss for that activity which is taxedc) Countervailing Duties
Means to restrict international trade in cases where imports are subsidized by a
--- Content provided by FirstRanker.com ---
foreign country and hurt domestic producers. According to WTO rules, acountry can launch its own investigation and decide to charge extra duties. Since
countries can rule domestically whether domestic industries are in danger and
--- Content provided by FirstRanker.com ---
whether foreign countries subsidize the products, the institutional process
surrounding the investigation and determinations has significant impacts beyond
--- Content provided by FirstRanker.com ---
the countervailing duties.d) Tariffs
A tariff is a tax on imported goods. When a ship arrives in port a customs officer
--- Content provided by FirstRanker.com ---
inspects the contents and charges a tax according to the tariff formula. Since thegoods cannot be landed until the tax is paid it is the easiest tax to collect, and the
cost of collection is small. Smugglers of course seek to evade the tariff.
--- Content provided by FirstRanker.com ---
An ad valorem tax is a percentage of the value of the item, say 10 cents on the
dollar, while a specific tariff is so-much per weight, say $5 per ton.
--- Content provided by FirstRanker.com ---
A "revenue tariff" is a set of rates designed primarily to raise money for thegovernment. A tariff on coffee imports, for example (by a country that does not
grow coffee) raises a steady flow of revenue.
--- Content provided by FirstRanker.com ---
A "protective tariff" is intended to artificially inflate prices of imports and
"protect" domestic industries from foreign competition For example, a 50% tax
--- Content provided by FirstRanker.com ---
on a machine that importers formerly sold for $100 and now sell for $150.Without a tariff the local manufacturers could only charge $100 for the same
machine; now they can charge $149 and make the sale.
--- Content provided by FirstRanker.com ---
A prohibitive tariff is one so high that no one imports any of that item.
The distinction between protective and revenue tariffs is subtle: protective tariffs
--- Content provided by FirstRanker.com ---
in addition to protecting local producers also raise revenue; revenue tariffsproduce revenue but they also offer some protection to local producers. (A pure
revenue tariff is a tax on goods not produced in the country, like coffee perhaps.)
--- Content provided by FirstRanker.com ---
Tax, tariff and trade rules in modern times are usually set together because oftheir common impact on industrial policy, investment policy, and agricultural
policy.
--- Content provided by FirstRanker.com ---
There are two main ways of implementing a tariff:
Ad valorem tariff
--- Content provided by FirstRanker.com ---
Fixed percentage of the value of the good that is being imported. Sometimesthese are problematic as when the international price of a good falls, so does the
tariff, and domestic industries become more vulnerable to competition.
--- Content provided by FirstRanker.com ---
Conversely when the price of a good rises on the international market so does
the tariff, but a country is often less interested in protection when the price is
--- Content provided by FirstRanker.com ---
higher. They also face the problem of transfer pricing where a company declaresa value for goods being traded which differs from the market price, aimed at
reducing overall taxes due.
--- Content provided by FirstRanker.com ---
Specific tariff
Tariff of a specific amount of money that does not vary with the price of the
--- Content provided by FirstRanker.com ---
good. These tariffs may be harder to decide the amount at which to set them, andthey may need to be updated due to changes in the market or inflation.
Adherents of supply-side economics sometimes refer to domestic taxes, such as
--- Content provided by FirstRanker.com ---
income taxes, as being a "tariff" affecting inter-household trade.
--- Content provided by FirstRanker.com ---
QuotasA quota is a prescribed number or share of something.
In common language, especially in business, a quota is a time-measured goal for
--- Content provided by FirstRanker.com ---
production or achievement. An assembly line worker might have a quota for the
number of products made; a salesperson might have a quota to meet for weekly
--- Content provided by FirstRanker.com ---
sales; In trade, a quota is a form of protectionism used to restrict the import ofsomething to a specific quantity The number of cars imported from Japan may
have a quota of 50,000 vehicles per annum to protect auto manufacturers in the
--- Content provided by FirstRanker.com ---
United StatesIMF member`s quota is broadly determined by its economic position relative to
other members. Various economic factors are considered in determining changes
--- Content provided by FirstRanker.com ---
in quotas, including GDP, current account transactions, and official reserves.
When a country joins the IMF, it is assigned an initial quota in the same range as
--- Content provided by FirstRanker.com ---
the quotas of existing members considered by the IMF to be broadly comparablein economic size and characteristics.
Quotas are denominated in Special Drawing Rights, the IMF's unit of account.
--- Content provided by FirstRanker.com ---
The largest member of the IMF is the United States, with a quota of
SDR 37.1 billion (about $53.5 billion), and the smallest member is Palau, with a
--- Content provided by FirstRanker.com ---
quota of SDR 3.1 million (about $4.5 million).e) VERs - Voluntary Export Restraints
--- Content provided by FirstRanker.com ---
A voluntary export restraint is a restriction set by a government on the quantity
of goods that can be exported out of a country during a specified period of time.
--- Content provided by FirstRanker.com ---
Often the word voluntary is placed in quotes because these restraints are
typically implemented upon the insistence of the importing nations.
--- Content provided by FirstRanker.com ---
Typically VERs arise when the import-competing industries seek protectionfrom a surge of imports from particular exporting countries. VERs are then
offered by the exporter to appease the importing country and to avoid the effects
--- Content provided by FirstRanker.com ---
of possible trade restraints on the part of the importer. Thus VERs are rarely
completely voluntary.
--- Content provided by FirstRanker.com ---
Also, VERs are typically implemented on a bilateral basis, that is, on exportsfrom one exporter to one importing country. VERs have been used since the
1930s at least, and have been applied to products ranging from textiles and
--- Content provided by FirstRanker.com ---
footwear to steel, machine tools and automobiles. They became a popular form
of protection during the 1980s, perhaps in part because they did not violate
countries' agreements under the GATT. As a result of the Uruguay round of the
--- Content provided by FirstRanker.com ---
GATT, completed in 1994, WTO members agreed not to implement any new
VERs and to phase out any existing VERs over a four year period. Exceptions
--- Content provided by FirstRanker.com ---
can be granted for one sector in each importing country.Some interesting examples of VERs occured with auto exports from Japan in the
early 1980s and with textile exports in the 1950s and 60s.
--- Content provided by FirstRanker.com ---
US-Japan Automobile VERs
--- Content provided by FirstRanker.com ---
f) Customs ValuationThe rates of customs duties leviable on imported goods (& export items in
certain cases) are either specific or on ad valorem basis or at times specific cum
--- Content provided by FirstRanker.com ---
ad valorem. When customs duties are levied at ad valorem rates, i.e., depending
upon its value, it becomes essential to lay down in the law itself the broad
--- Content provided by FirstRanker.com ---
guidelines for such valuation to avoid arbitrariness and to ensure that there isuniformity in approach at different Customs formations. Section 14 of the
Customs Act, 1962 lays down the basis for valuation of import & export goods
--- Content provided by FirstRanker.com ---
in the country. It has been subject to certain changes ? basic last change being in
July-August, 1988 when present version came into operation. Briefly the
--- Content provided by FirstRanker.com ---
provisions are explained in the following paragraphs.--- Content provided by FirstRanker.com ---
g) Trade SanctionsTrade sanctions are trade penalties imposed by one or more countries on one or
more other countries. Typically the sanctions take the form of import
--- Content provided by FirstRanker.com ---
tariffs(duties), licensing schemes or other administrative hurdles. They tend to
arise in the context of an unresolved trade or policy dispute, such as a
disagreement about the fairness of some policy affecting international trade
--- Content provided by FirstRanker.com ---
(imports or exports).
For example, one country may conclude that another is unfairly subsidising
--- Content provided by FirstRanker.com ---
exports of one or more products, or unfairly protecting some sector fromcompetition (from imported goods or services). The first country may retaliate
by imposing import duties, or some other sanction, on goods or services from
--- Content provided by FirstRanker.com ---
the second.
Trade sanctions are distinguished from economic sanctions, which are used as a
--- Content provided by FirstRanker.com ---
punitive measure in international relations (examples being recent US ormultilateral sanctions against Cuba, Iraq, or North Korea).
Trade policy reviews: ensuring transparency
--- Content provided by FirstRanker.com ---
Individuals and companies involved in trade have to know as much as possible
about the conditions of trade. It is therefore fundamentally important that
--- Content provided by FirstRanker.com ---
regulations and policies are transparent. In the WTO, this is achieved in twoways: governments have to inform the WTO and fellow-members of specific
measures, policies or laws through regular notifications; and the WTO
--- Content provided by FirstRanker.com ---
conducts regular reviews of individual countries` trade policies -- the trade
policy reviews. These reviews are part of the Uruguay Round agreement, but
--- Content provided by FirstRanker.com ---
they began several years before the round ended -- they were an early result ofthe negotiations. Participants agreed to set up the reviews at the December 1988
ministerial meeting that was intended to be the midway assessment of the
--- Content provided by FirstRanker.com ---
Uruguay Round. The first review took place the following year. Initially they
operated under GATT and, like GATT, they focused on goods trade. With the
--- Content provided by FirstRanker.com ---
creation of the WTO in 1995, their scope was extended, like the WTO, toinclude services and intellectual property.
Activity 4.6
--- Content provided by FirstRanker.com ---
Collect and list all the trade policies of Indian government in relation to
International Business
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
--- Content provided by FirstRanker.com ---
Self-Assessment Questions (SAQs)
1.External Macro Environment Forces involves _________ ,_________,
--- Content provided by FirstRanker.com ---
___________, _____________a) Political, Economic, Marketing, Cultural
b) Legal, Finance, Technological, Competitors
--- Content provided by FirstRanker.com ---
c) Suppliers, Customers, Creditors, Competitors
d) Political, Economic, Social, Technological
--- Content provided by FirstRanker.com ---
2.List the internal micro environmental forces__________________________________________________________
3.List the ways of scanning international business environment
--- Content provided by FirstRanker.com ---
_________________, _______________________,_____________
4.Expand the following
--- Content provided by FirstRanker.com ---
a) PEST ___________________________________b) GDP _____________________________________
c) GNP _____________________________________
--- Content provided by FirstRanker.com ---
d) BPO _____________________________________
e) LPO _____________________________________
--- Content provided by FirstRanker.com ---
f) KPO _____________________________________g) FDI _______________________________________
h) LPG ______________________________________
--- Content provided by FirstRanker.com ---
i) NAFTA ___________________________________j) MNC _____________________________________
k) VER ______________________________________
--- Content provided by FirstRanker.com ---
l) GATT _____________________________________
m) WTO ______________________________________
--- Content provided by FirstRanker.com ---
n) ICJ _______________________________________o) PPP _______________________________________
p) IMF _______________________________________
--- Content provided by FirstRanker.com ---
5.List all the instruments used by government for trade control
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
6.The members of WTO has agreed to eliminate all tariffs in 10 industries list
them?
--- Content provided by FirstRanker.com ---
________________________________________________________________________________________________________________________________
7.List the strategies followed my MNCs to eliminate political risk?
--- Content provided by FirstRanker.com ---
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
8.List the conditions used in country classification?______________________________________________________________
9.The Economic System is classified into
--- Content provided by FirstRanker.com ---
________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
10.The Political System is classified into________________________________________________________________
________________________________________________________________
--- Content provided by FirstRanker.com ---
SummaryInternational business provides both opportunities for growth and
success and also poses threat to business
--- Content provided by FirstRanker.com ---
There are five macro-environmental forces acting on international
business, they are Political, Economic, Social, Technological, Legal etc
--- Content provided by FirstRanker.com ---
There are three ways of scanning international business environmentAd-hoc Scanning, Regular Scanning, Continuous Scanning
PEST analysis is the framework for analyzing international business
--- Content provided by FirstRanker.com ---
environment.
A stable political system is needed for the success of international
--- Content provided by FirstRanker.com ---
businessThe political system is classified into two they are democracy and
dictatorship
--- Content provided by FirstRanker.com ---
MNCs can play the strategies like Joint ventures, Expanding the
investment base, Marketing and distribution, Licensing, Planned
domestication, Political payoffs to reduce political risk
--- Content provided by FirstRanker.com ---
Government can actively control the trade by designing trade policies on
Dumping, Subsidies, Countervailing Duties, Tariffs, Quotas, VERs -
Voluntary Export Restraints
--- Content provided by FirstRanker.com ---
Political Risks Of Global Business Confiscation, Expropriation,
Domestication
--- Content provided by FirstRanker.com ---
MNCs can play strategies like Joint ventures, Expanding the investmentbase, Marketing and distribution, Licensing, Planned domestication,
Political payoffs to reduce political risk.
--- Content provided by FirstRanker.com ---
The Legal system is classified into common law system, civil law systemor codified legal system and theocratic law system
The different cultural behaviour practices will affect international
--- Content provided by FirstRanker.com ---
business
Technology plays a major role in removing the barriers like distance and
--- Content provided by FirstRanker.com ---
time to promote international businessCountries can be classified as High-Income countries, Middle-Income
countries and Low-Income countries
--- Content provided by FirstRanker.com ---
Countries can be classified based on Gross Domestic Product, Gross
National Product, Purchasing Power Parity
--- Content provided by FirstRanker.com ---
Protectionism is the economic policy of restraining trade betweennations, through methods such as high tariffs on imported goods,
restrictive quotas, and anti-dumping laws in an attempt to protect
domestic industries in a particular nation from foreign take-over or
--- Content provided by FirstRanker.com ---
competition.--- Content provided by FirstRanker.com ---
Answer Key for Self-Assessment Questions (SAQs)1.Political, Economic, Social, Technological
2.Competators, Suppliers, Customers, Creditors
--- Content provided by FirstRanker.com ---
3.Ad-hoc Scanning, Regular Scanning, Continuous Scanning
4. a) Political, Economic, Social, Technological
b) Gross Domestic Product
--- Content provided by FirstRanker.com ---
d) Gross National Producte) Business Process Outsourcing
f) Legal Process Outsourcing
g) Knowledge Process Outsourcing
h) Foreign Direct Investment
--- Content provided by FirstRanker.com ---
i) Liberalization Privatization Globalizationj) North American Free Trade Agreement
k) Multi National Company
l) Voluntary Export Restraints
m) Generally Accepted Tariff and Trade
--- Content provided by FirstRanker.com ---
n) World Health Organizationo) International Court of Justice
p) Purchasing Power Parity
q) International Monitory Fund
--- Content provided by FirstRanker.com ---
5. Trade Restrictions / Trade BarriersDumping
Subsidies
--- Content provided by FirstRanker.com ---
Countervailing Duties
Tariffs
Quotas
--- Content provided by FirstRanker.com ---
VERs - Voluntary Export Restraints6.Beer, Construction equipment, Distilled spirits, Farm machinery, Furniture
Medical equipment, Paper, Pharmaceuticals, Steel, Toys
--- Content provided by FirstRanker.com ---
7. Strategies To Lessen Political RisksJoint ventures
Expanding the investment base
--- Content provided by FirstRanker.com ---
Marketing and distributionLicensing
Planned domestication
--- Content provided by FirstRanker.com ---
Political payoffs8. Factors Conditions and Demand Conditions
9. Market Economy, Centrally Planned Economy, Mixed Economy
10. Democracy and Dictatorship
--- Content provided by FirstRanker.com ---
Keywords
Globalization
--- Content provided by FirstRanker.com ---
Tariffs
Ad Valorem Tariff
--- Content provided by FirstRanker.com ---
Subsidies
Dumping
--- Content provided by FirstRanker.com ---
PolycentrismEthnocentrism
Stereotypes
--- Content provided by FirstRanker.com ---
Cultural ShockGeocentrism
Home Country
--- Content provided by FirstRanker.com ---
Multi-National Company (MNC)
Protectionism
Technological Environment
--- Content provided by FirstRanker.com ---
Economic EnvironmentPolitical Environment
Legal Environment
--- Content provided by FirstRanker.com ---
Low-Income Countries
Middle-Income Countries
Litigation
--- Content provided by FirstRanker.com ---
Arbitration
Diversification
--- Content provided by FirstRanker.com ---
Political RiskMacro Environment
Micro Environment
--- Content provided by FirstRanker.com ---
Other References
Dr.P.Subba Rao, International Business, Himalaya Publishing House
--- Content provided by FirstRanker.com ---
K.Aswathappa, International Business, Tata McGraw HillReview Questions
1.Write short note on
--- Content provided by FirstRanker.com ---
a) Polycentrismb) Ethnocentrism
c) Stereotypes
d) Cultural Shock
e) Geocentrism
--- Content provided by FirstRanker.com ---
2. What do you understand by external macro environmental forces explain?
3.Explain the reasons for going global?
--- Content provided by FirstRanker.com ---
4. Give a note on PEST analysis?
5.What is political environment? What are the political risks faced by global
--- Content provided by FirstRanker.com ---
business?6.What do you mean by good corporate citizenship?
7.Give a note on the instruments used by the government to control trade?
--- Content provided by FirstRanker.com ---
8.What are the reasons for government`s involvement in business?
9.What do you understand by legal environment?
--- Content provided by FirstRanker.com ---
10. Give a note on International Court of Justice (ICJ)?11.Give a note on effect of technology on strategy and competition?
12.What is technological cycle explain?
--- Content provided by FirstRanker.com ---
13.What are the behaviour practices affecting business?
14.Write a note on classification of countries?
--- Content provided by FirstRanker.com ---
15.What do you understand by protectionism?Honesty and Hard Work gives Honor
--- Content provided by FirstRanker.com ---
UNIT V
--- Content provided by FirstRanker.com ---
FOREIGN INVESTMENT AND FDI
CONTENT OUTLINE
--- Content provided by FirstRanker.com ---
IntroductionThe role of foreign investment
Foreign Direct Investment (FDI)
--- Content provided by FirstRanker.com ---
Foreign Portfolio Investment (FPI)
Capital Inflows and Overheating
--- Content provided by FirstRanker.com ---
SummaryReview Questions
--- Content provided by FirstRanker.com ---
INTRODUCTIONEconomic development remains an urgent global need. Globalization ? which
links countries closer than ever before with each other - reinforces this need. The
--- Content provided by FirstRanker.com ---
countries have achieved impressive increases in income, over a billion people
than a hundred countries stilt live in poverty. Economic inequalities within co
--- Content provided by FirstRanker.com ---
remain large, and there is little sign of convergence in incomes across countries.A number of developing countries face increasing marginalisation.
Globalisation accentuates the increasing importance of the international
--- Content provided by FirstRanker.com ---
ecocomics for developing countries. Flows of finance, information, skills,
technology, go services between countries are increasing rapidly. FDI is one of
--- Content provided by FirstRanker.com ---
the most dynamic increasing international resource flows to developingcountries, FDI flows are particularly important because FDI is a package of
tangible and intangible assets, and because firms TNCs deploying them are
--- Content provided by FirstRanker.com ---
now important players in the global economy can affect development, by
complementing domestic investment and by undertaking trade and transfers of
--- Content provided by FirstRanker.com ---
knowledge, skills and technology. However, TNCs do not substitute fordomestic effort: they can only provide access to tangible and intangible assets
and catalyse domestic investment and capabilities. In a world of intensifying
--- Content provided by FirstRanker.com ---
competition and accelerating technological change, this complementary and
catalytic role can very valuable. Since globalisation has its dangers, countries
need to prepare their capabilities to harness its potential including through FDI.
--- Content provided by FirstRanker.com ---
However, FDI on its own cannot counteract the marginalization of developing
countries.
--- Content provided by FirstRanker.com ---
THE ROLE OF FOREIGN INVESTMENTThe factors that propel sustained economic development have not changed o
time. They include the generation and efficient allocation of capital and labour,
--- Content provided by FirstRanker.com ---
application of technology and the creation of skills and institutions. These fact
determine how well each economy uses its endowments and adds to them. They
--- Content provided by FirstRanker.com ---
also affect how flexibly and dynamically each country responds to changingeconomic conditions, However, the global context for development has changed
enormous the past three decades. These changes affect not only the role of FDI
--- Content provided by FirstRanker.com ---
in host countries, but also government policies on EDT. The following three are
of particular significance.
--- Content provided by FirstRanker.com ---
i) The nature and pace of knowledge - and, particularly, technologicalknowledge - change
The creation and diffusion of productive knowledge have become central to
--- Content provided by FirstRanker.com ---
growth and development. Knowledge includes not only technical knowledge
(research and development, design, process engineering), but also knowledge of
--- Content provided by FirstRanker.com ---
organisation, management and inter-firm and international relationships. Muchof this knowledge is tacit. Today, the resources devoted to such knowledge
exceed investment in tangible machinery and equipment in many of the world`s
--- Content provided by FirstRanker.com ---
most dynamic firms, and the costs of generating new knowledge are rising
constantly. The importance of knowledge is not limited to modern or high-tech
--- Content provided by FirstRanker.com ---
activities but pervades all sectors and industries, including traditional activitiesin the primary sector (for instance, vegetable and flower exports), manufacturing
(such as textiles, clothing and footwear), and services (such as tourism and
--- Content provided by FirstRanker.com ---
banking). As a result, achieving development objectives is, more than ever, a
continuous learning process.
The sheer pace of technological change, in particular, is unprecedented arid is
--- Content provided by FirstRanker.com ---
accelerating. This means that enterprises that want to be competitive
internationally reed both the knowledge to use technologies efficiently and to
--- Content provided by FirstRanker.com ---
keep pace with developments. Innovators need to invest more in creating newknowledge, but even followers need the capacity - difficult to acquire - to access
and use this new knowledge, or in fortuitous circumstances, to identify windows
--- Content provided by FirstRanker.com ---
of opportunity for technological caps. The skills required for this are changing
concomitantly, as are institutions and their relations with productive enterprises;
--- Content provided by FirstRanker.com ---
one development is the closer linking of science with technology-generation inindustry. An important result of this new technological paradigm is that
research-intensive activities are growing more rapidly than others in production
--- Content provided by FirstRanker.com ---
and trade; thus, sustained economic growth calls increasingly not just for the
application of new technology to existing activities, but also for a shift of
--- Content provided by FirstRanker.com ---
activities up the value-added chain.The most profound technological changes today emanate from a merger of
communications and information processing technologies. While the telegraph,
--- Content provided by FirstRanker.com ---
telephone and computer were significant technological achievements; they pale
in comparison with emerging technologies based on the interface between
--- Content provided by FirstRanker.com ---
microprocessors arid telecommunications. These are generic technologies thataffect practically the whole range of economic and even social and cultural
activities. Information can now be transmitted across the globe at very low cost.
--- Content provided by FirstRanker.com ---
ii) Shrinking economic space and changing competitive conditions
Technical progress in transport and communications has caused economic space
--- Content provided by FirstRanker.com ---
to shrink dramatically. Countries now face much more intense and immediatecompetition than ever before. This leads to a significant restructuring of their
comparative advantages ad activities. The nature of competition itself is
--- Content provided by FirstRanker.com ---
changing, with the rapid introduction of new products, shorter product cycles,
flexibility of response to demand, and customer interaction becoming more
--- Content provided by FirstRanker.com ---
important than traditional forms of competition based on lower costs. At theenterprise level, this calls for new management and technical skills and
organisational forms. In many instances, it leads to flatter hierarchies and greater
--- Content provided by FirstRanker.com ---
use of networking and cooperation between related firms and also competingfirms (for instance, component suppliers now play a much more direct role in
new technology development). At the national level, it requires countries to be
--- Content provided by FirstRanker.com ---
more open to international flows of information, and to improve national
capabilities to absorb and use that information: to develop new skills,
--- Content provided by FirstRanker.com ---
institutions and innovative capacities. Countries that cart do that - eithergenerally or in niche markets - can move up the value-added ladder.
iii) Changing attitudes and policy regimes
--- Content provided by FirstRanker.com ---
Most developing and transition countries have moved to market-oriented and
private sector led economies. This shift reflects disillusionment with past
--- Content provided by FirstRanker.com ---
strategies and growing. Difficulties in pursuing them in the new technologicaland competitive setting. The shrinking of economic space has itself rendered
elements of traditional strategies absolute while the flow of information has
--- Content provided by FirstRanker.com ---
made governments more aware of policies a performance in other countries.
Policy benchmarking in all areas is becoming more common which, in turn, puts
--- Content provided by FirstRanker.com ---
more pressure on countries to innovate in the policy arena. There is widespreadreduction and removal of trade barriers, deregulation of internal markets,
privatisation and liberalization of technology and investment flows at the
--- Content provided by FirstRanker.com ---
national level. At the international level, regulation has intensified and is being
harmonized. For instance, the TRIPS agreement of the Uruguay Round has
--- Content provided by FirstRanker.com ---
introduced a common more rigorous, system of intellectual property protection;the TRIMs agreement established disciplines over certain performance
requirements; and quality requirements such as ISO standards are becoming
--- Content provided by FirstRanker.com ---
prerequisites for participating in international production and trade.
Perhaps nowhere is the policy change more striking than in the changing attitude
--- Content provided by FirstRanker.com ---
o governments to TNCs. Why have governments changed their attitudes toTNCs? There are several reasons for the change in attitudes towards TNCs and
the intensification of competition for PD Governments recognize that TNCs can
--- Content provided by FirstRanker.com ---
provide a packag4 external resources that can contribute to development. Thereis also now an increasing number of TNCs from developing countries, reflected
in the fact that the share c developing countries in PD outflows has increased
--- Content provided by FirstRanker.com ---
from about two per cent at h beginning of the 1980s to approximately 15 per
cent of a much higher total in the mid, 1990s; their home governments want
--- Content provided by FirstRanker.com ---
access for their firms to foreign markets and locations. At the same time, manygovernments have improved their administrative capabilities and feel more
comfortable in dealing with TNCs. Efficient FDI screening has been difficult
--- Content provided by FirstRanker.com ---
even for countries with sophisticated bureaucracies, given the need to relate it to
changing country and sectoral advantages, changing firm strategies a
--- Content provided by FirstRanker.com ---
competition, and political pressures from other countries. On the aggregate 1evelexternal financing has shifted from official to private sources, especially towards
FDI. Finally, the liberalisation of FDI (and trade) policy is often part of the
--- Content provided by FirstRanker.com ---
conditionality in IMF and World Bank adjustment programmes, and is
promoted by many leading aid donors.
--- Content provided by FirstRanker.com ---
Reflecting this change of attitude, FDT is now not just permitted - it is avidlysought governments and, indeed, many sub- national public sector entities at all
levels, from provinces to individual communities. Apart from active promotion
--- Content provided by FirstRanker.com ---
(which has led to the establishment of investment promotion agencies in a great
number of counties, having their disposal an array of incentives), policy
--- Content provided by FirstRanker.com ---
liberalisation is the principal tool. Liberalisation has been extended to suchservice industries as telecommunication, transportation and power generation
and distribution, previously closed to foreign investors. Many developing
--- Content provided by FirstRanker.com ---
countries and economies in transition have concluded bilateral treaties to protect
FDI and avoid double taxation. A number of regional schemes (notably the
--- Content provided by FirstRanker.com ---
European Union, NAFTA, ASEAN and MERCOSUR) have reduced barriers toFDI or are in the process of doing so, facilitating intra-regional investment trade
flows. At the multilateral level, the General Agreement on Trade in Services has
--- Content provided by FirstRanker.com ---
contributed to the liberalisation of EDT in services, and the TRIMs Agreementhas r the use of certain performance requirements. The FDI global regime that
has emerged after these changes, though uneven, is much more friendly towards
--- Content provided by FirstRanker.com ---
foreign investors than in the past.
CHANGING CONTEXT FOR TNCs
--- Content provided by FirstRanker.com ---
Knowledge-intensive production, technological change, shrinking economicspace greater openness have also changed the context for TNCs. There are new
opportunities and pressures - to utilise them. The opening of markets creates
--- Content provided by FirstRanker.com ---
new geographical space TNCs to expand in and access tangible and intangible
resources. It also permits wider choice in the methods firms can use (PDI, trade,
--- Content provided by FirstRanker.com ---
licensing, subcontracting, franchising, partnering and so on) to operate indifferent locations. At the same time, advances in information, communication
and transportation technologies, as well as in managerial and organizational
--- Content provided by FirstRanker.com ---
methods, facilitate the transnationalisation of many firms, including SMEs. The
combination of better access to resources and a better ability to organise
--- Content provided by FirstRanker.com ---
production transnationally increases the pressure on firms to utilise newopportunities, lest their competitors do so first and gain a competitive advantage.
Competition is everywhere - there are fewer and fewer profit reservations and
--- Content provided by FirstRanker.com ---
market niches that remain protected from the fierce winds of competition.
Indeed, a portfolio of locational assets - allowing firms to combine their mobile
--- Content provided by FirstRanker.com ---
advantages most effectively with the mobile tangible arid intangible resources ofspecific locations - is becoming an increasingly important source of corporate
competitiveness.
--- Content provided by FirstRanker.com ---
Firms have reacted accordingly. A highly visible group of large traditional
TNCs continues to grow, often with turnovers larger than the national incomes
--- Content provided by FirstRanker.com ---
of many developing countries. There are also many new entrants, such as largefirms from developed countries that had confined themselves previously to
domestic operations (e.g., telecommunications operators). Many are smaller
--- Content provided by FirstRanker.com ---
firms from these countries that find it necessary to invest overseas to exploit
their ownership advantages or to see advantages and alliances. An increasing
number are firms from developing co both small and large. And some are large
--- Content provided by FirstRanker.com ---
and small firms from economies transition, countries that previously had
isolated them largely from international investment. As a result, the number of
--- Content provided by FirstRanker.com ---
TNCs has increased substantially, having reached at least 60,000 at the end ofthe 1990s. Their growth rate was faster than that of both and domestic
production.
--- Content provided by FirstRanker.com ---
The changing context and the quest for a portfolio of locational assets has
brought about a change in corporate strategies. The following developments are
--- Content provided by FirstRanker.com ---
particularly noteworthy:A shift from stand-alone, relatively independent, foreign affiliates to integrated
international production systems relying on specialised affiliates to service the
--- Content provided by FirstRanker.com ---
entire TNC system. Within the framework of this international intra-firm
division of labour, any part of the value-added chain of an enterprise can be
--- Content provided by FirstRanker.com ---
located abroad while remaining fully integrated into a corporate network.Corporate strategies of this kind seek to exploit regional or global economies of
higher degree of functional specialisation.
--- Content provided by FirstRanker.com ---
This shift broadens the range of resources sought by TNCs in host countries
making firms more selective if their choices. However, it can also encourage in
--- Content provided by FirstRanker.com ---
countries that cannot provide a wide range of resources but haves, specific assetsthat are sought by TNCs (eg. accounting or software skills).
A shift towards greater use of non-equity and cooperative relationthip with other
--- Content provided by FirstRanker.com ---
enterprises, such as alliances, partnerships, management contracts or
subcontracting arrangements. These arrangements serve a variety of corporate
--- Content provided by FirstRanker.com ---
objectives. They can provide better access to technologies or other assets firmsto share the cost and risk of innovatory activities. They can reduce production
cost of labour-intensive products.
--- Content provided by FirstRanker.com ---
Emergence of a network type of organisation. This expands the scope ofinteractions between TNCs and enterprises from host countries, and also the
forms of these interactions.
--- Content provided by FirstRanker.com ---
These changing corporate strategies bring with them a different pattern of
international economic integration. Originally, this involved the integration of
--- Content provided by FirstRanker.com ---
markets through length trade shallow integration. Integrated internationalproduction moves this integration to the level of production in all its aspects
deep integration. In process, a significant part of international transactions
--- Content provided by FirstRanker.com ---
becomes internalised, i.e. the form of transactions between various parts of
transnatioal corporate systems located in different countries. It is estimated that
--- Content provided by FirstRanker.com ---
more than one-third of world trade some four-fifths of technology flows areinternalised within TNCs. The share of world production under the common
governance of TNCs is estimated at one-quarter.
--- Content provided by FirstRanker.com ---
The ability of firms to allocate their economic assets internationally, and the
international production system created in the process, have become themselves
--- Content provided by FirstRanker.com ---
a part of the new global system. As a result, TNCs have indeed becomeimportant actors in the world economy and, hence, the development process - a
fact reflected in the competition of all countries for EDT. Indeed, increasingly,
--- Content provided by FirstRanker.com ---
the decision where to locate production facilities of any kind becomes crucial for
development, because the decision where to locate becomes a decision where to
--- Content provided by FirstRanker.com ---
invest and from where to trade. And it becomes an FIJI decision if the locationchosen is abroad.
FOREIGN DIRECT INVESTMENT
--- Content provided by FirstRanker.com ---
Direct investment abroad is a complex venture. As distinct from trade, licensing
or investment, EDT involves a long-term commitment to a business endeavour
--- Content provided by FirstRanker.com ---
in a foreign country. It often involves the engagement of considerable assetsand resources I that need to be coordinated and managed across countries and to
satisfy the principal of successful investment, such as sustainable profitability
--- Content provided by FirstRanker.com ---
and acceptable risk/profitability ratios. Typically, there are many host country
factors involved in deciding where an FDI project should be located and it is
often difficult to pinpoint the most decisive factor. However, it is widely agreed
--- Content provided by FirstRanker.com ---
that FDI takes place when three sets of determining factors exist simultaneonsly:
the presence of ownership-specific competitive ages in a transnational
--- Content provided by FirstRanker.com ---
corporation (MNC), the presence of locational advantages in a host country, andthe presence of superior commercial benefits in an intra-firm as against an
arm`s-length relationship between investor and recipient
--- Content provided by FirstRanker.com ---
The ownership-specific advantages (e.g. proprietary technology) of a firm if
exploited optimally can compensate for the additional costs of establishing
--- Content provided by FirstRanker.com ---
production facilities in a foreign environment and can overcome the firm`sdisadvantages vis-a-vis local firms.
The ownership-specific advantages of the firm should be combined with the
--- Content provided by FirstRanker.com ---
locational advantages of host countries (e.g. large markets or lower costs of
resources or superior infrastructure). Finally, the firm finds greater benefits in
--- Content provided by FirstRanker.com ---
exploiting both ownership specific and locational advantages by internalisation,i.e. through FDI rather than arm`s length transactions. This may be the case for
several reasons. For one, markets for assets or production inputs (technology,
--- Content provided by FirstRanker.com ---
knowledge or management) may be imperfect, if they exist at all, and may
involve significant transaction costs or time-lags. For another, it may be in a
--- Content provided by FirstRanker.com ---
firm`s interest to retain exclusive rights to assets (e.g., knowledge) which conferupon it a significant competitive advantage (e.g. monopoly rents).
While the first and third conditions are firm-specific determinants of FIJI, the
--- Content provided by FirstRanker.com ---
second is location-specific and has a crucial influence on a host country`s
inflows of FDI. If only the first condition is met, firms will rely on exports,
--- Content provided by FirstRanker.com ---
licensing or the sale of patents to service a foreign market. If the third conditionis added to the first, FDI becomes preferred mode of servicing foreign markets,
but only in the presence of boa specific advantages. Within the trinity of
--- Content provided by FirstRanker.com ---
conditions for FDI to occur, locational determinants are the only ones that host
governments can influence directly.
To explain differences in FDI inflows among countries and to formulate poll
--- Content provided by FirstRanker.com ---
capture inbound investment, it is necessary to understand how MNCs choose
investment locations. The relative importance of different location-specific
--- Content provided by FirstRanker.com ---
determinants depends on at least four aspects of investment: the motive forinvestment (e.g. resource-see or market seeking FDI, the type of investment (e.g.
new or sequential FDI), the sector investment (e.g. services or manufacturing)
--- Content provided by FirstRanker.com ---
and the size of investors (small and medium sized MNCs or large MNCs). The
relative importance of different determinants also changes as the economic
--- Content provided by FirstRanker.com ---
environment evolves over time. It is therefore entirely pos that a set of hostcountry determinants that explains FDI in a particular country at a given time
changes as the structures of its domestic economy and of the international
--- Content provided by FirstRanker.com ---
economy evolve. At the same time, there are also location determinants remain
constant. Therefore, there is need to review the location-specific (host-country)
--- Content provided by FirstRanker.com ---
determinants of FDI flows and stocks and to analyse how these have changed ina liberalising and globalising world economy. The review of host country
determinants begins with the role of national policies and especially the
--- Content provided by FirstRanker.com ---
liberalisation of policies key factor in globalisation) as FDI determinants. Then
follows a review of business facilitation measures: as the world economy
--- Content provided by FirstRanker.com ---
becomes more open to international bus transactions, countries competeincreasingly for FDI not only by improving their policy and economic
determinants, but also by implementing pro-active facilitation measures that go
--- Content provided by FirstRanker.com ---
beyond policy liberalisation. While not as important as the other two
determinants, these measures are receiving increased attention. Economic
--- Content provided by FirstRanker.com ---
determinants and, in particular, their changing significance in the context ofliberalisation, global and issues related to the impact of international investment
frameworks have bet all the more topical as discussions and negotiations
--- Content provided by FirstRanker.com ---
whether at the bilateral, regional or multilateral levels have gathered momentum
and the possibility of a multilateral framework on investment has raised
--- Content provided by FirstRanker.com ---
questions as to whether, why and how international investment agreementsmatter for the location of FDI and the activities of MNCs. In particular, a key
question (one similar to that faced by the creators of the post-Second World War
--- Content provided by FirstRanker.com ---
multilateral trading system) is what effect, if any, a multilateral framework oninvestment might have for the growth and pattern of FDI.
THE NATIONAL FDI POLICY FRAMEWORK
--- Content provided by FirstRanker.com ---
As a general principle, host countries that offer what MNCs are seeking, and/or
host countries whose policies are most conducive to MNC activities, stand a
--- Content provided by FirstRanker.com ---
good chance attracting FDI.But firms also see locational determinants in their interaction ownership-specific
and internalisation advantages in the broader context of their corpora strategies.
--- Content provided by FirstRanker.com ---
These strategies aim, for example, at spreading or reducing risks, pursuing,
oligopolistic, competition, and matching competitors` actions or looking for
--- Content provided by FirstRanker.com ---
distinct sources of competitive advantage. In the context of different strategies,the same motive and the corresponding host country determinants can acquire
different meanings. For example, the market-seeking motive can translate, in the
--- Content provided by FirstRanker.com ---
case of one MNC, into the need to enter new markets to increase the benefits
arising from multi plant operations; in the case of another MNC, it can translate
--- Content provided by FirstRanker.com ---
into the desire to acquire market power; and for N` another MNC, it can aim atdiversifying markets as part of a risk strategy.
Core FDT policies consist of rules and regulations governing the entry and
--- Content provided by FirstRanker.com ---
operations of foreign investors, the standards of treatment accorded to them, and
the functioning of the markets within which they operate. These policies can
--- Content provided by FirstRanker.com ---
range from outright prohibition of FDI entry to non-discrimination in thetreatment of foreign and domestic firms and even preferential treatment of
foreign firms. They typically satisfy various objectives reducing or increasing
--- Content provided by FirstRanker.com ---
FDI, influencing its sectoral composition or geographical origin, encouraging
specific contributions to the economy and affecting ways in which these
--- Content provided by FirstRanker.com ---
contributions are made. To achieve these objectives, PD policies are usuallyaccompanied by other policies that also influence investors` decisions.
Among these supplementary policies used to influence locational decisions,
--- Content provided by FirstRanker.com ---
trade policy plays the most prominent role. For example, to attract FDI and tomaximise its contributions to their import-substituting development strategies,
countries in Latin America used a mix of protectionist trade policies combined
--- Content provided by FirstRanker.com ---
with policies allowing FDI manufacturing. Asian countries, in contrast, used
both FDI and trade policies (e.g. exemptions from import duties) to encourage
--- Content provided by FirstRanker.com ---
MNCs to contribute to their export oriented economic strategies. For example,Hong Kong, China pursued laissez-faire trade and FDI policies. On the other
hand, the FDI policies of such economies as the Republic of Korea, Taiwan
--- Content provided by FirstRanker.com ---
Province of China and Japan were embedded in a broader set of industrial
policies guiding and selectively inducing MNCs to link up with local firms to
--- Content provided by FirstRanker.com ---
help increase local innovative and export capacities.Other related policies may include Privatisation policies and policies determined
by the international agreements a country has signed:
--- Content provided by FirstRanker.com ---
i) .
--- Content provided by FirstRanker.com ---
Privatisation is a special case of acquisition, as it involves purchases offirms from the state. It has two dimensions: an FDI-policy dimension and a
competition F policy dimension. If privatisation welcomes foreign investors, it
--- Content provided by FirstRanker.com ---
broadens the scope of FDI. The competition-policy dimension becomes relevant
if, in industries characterised as natural or near-natural monopolies, the sale of a
--- Content provided by FirstRanker.com ---
privatised company to a domestic or foreign investor only means the transfer ofa monopoly from the state to a private agent.
ii)
--- Content provided by FirstRanker.com ---
International investment agreements provide an international dimension
to national FDI policies. Some of them focus on insurance and, protection, while
--- Content provided by FirstRanker.com ---
others deal with broader issues.Policies used intentionally to influence FDI and its location constitutes the
inner ring of the policy framework for FDI. The features of such a framework
--- Content provided by FirstRanker.com ---
vary among countries and also vary over time in the same country. This has
become obvious since the broad-front advance of more market-based economic
policies began in the mid- 1980s. Core FDI policies themselves have become
--- Content provided by FirstRanker.com ---
more liberal and, coupled with more liberal trade policies; have contributed to a
more cohesive policy framework.
--- Content provided by FirstRanker.com ---
INCENTIVES TO ATTRACT FDIIncentives are any measurable economic advantage afforded to specific
enterprises or categories of enterprises by (or at the direction of) a government,
--- Content provided by FirstRanker.com ---
in order to encourage them to behave in a certain manner. They include
measures either to increase the rate of return of a particular FDI undertaking, or
--- Content provided by FirstRanker.com ---
to reduce (or redistribute) its costs or risks. They do not include broadernondiscriminatory policies, relating to the availability of physical and business
infrastructures, the general legal regime for FDI, the general regulatory and
--- Content provided by FirstRanker.com ---
fiscal regime for business operations, free repatriation of profits or the granting
of national treatment. While these policies certainly bear on the location
--- Content provided by FirstRanker.com ---
decisions of TNCs, they are not FDI incentives per se. The main types ofincentives used are fiscal incentives (e.g. reduction of the standard corporate
income-tax rate, investment and reinvestment allowances, tax holidays,
--- Content provided by FirstRanker.com ---
accelerated depreciation, exemptions from import duties), financial incentives
(e.g. government grants, subsidised credits, government equity participation,
--- Content provided by FirstRanker.com ---
government insurance at preferential rates) and market preferences (e.g. grantingof monopoly rights, protection from import competition, closing the market for
further entry, preferential government contracts). Other types of incentives
--- Content provided by FirstRanker.com ---
frequently used include preferential treatment on foreign exchange and
subsidised dedicated infrastructure and services.
--- Content provided by FirstRanker.com ---
ECONOMIC RATIONALE FOR INCENTIVESThe economic rationale behind incentives is to correct the failure of markets to
reflect the wider benefits arising from externalities in production -- for
--- Content provided by FirstRanker.com ---
example, those resulting from economies of scale, the creation of widely
diffused knowledge and the upgrading of skills of mobile workers. Incentives
--- Content provided by FirstRanker.com ---
can thus be justified to cover the wedge between the private and the socialreturns on an investment. In a more dynamic context of growth and
development, incentives can be justified to correct the failure of markets to
--- Content provided by FirstRanker.com ---
reflect the gains that can accrue over time from declining unit costs and learningby doing the classic infant-industry argument used in a very different context.
Incentives can also be justified to compensate investors for lost return due to
--- Content provided by FirstRanker.com ---
other government interventions (for example, duty remissions on imports or
performance requirements) or for carrying certain public costs where a
--- Content provided by FirstRanker.com ---
government lacks the institutional capacity to bear them itself. In sum,incentives can serve a number of development purposes. However, they also
have the potential to introduce economic distortions (especially when they are
--- Content provided by FirstRanker.com ---
more than marginal) that are analogous to subsidies on trade, and they involve
financial and administrative costs. It is not in the public interest that the cost of
--- Content provided by FirstRanker.com ---
incentives granted exceed the value of the benefits to the public.COMPETITION FOR FDI WITH INCENTIVES
Governments use incentives to attract FDI, to steer investment into favoured
--- Content provided by FirstRanker.com ---
industries, activities or regions, or to influence the character of an investment,
as, for example, when technology- intensive investment is being sought. Today,
--- Content provided by FirstRanker.com ---
most investment incentives are directed to domestic and foreign investors alike,although sometimes only foreign investors can access certain incentives (as
when special incentive packages are geared towards large projects or specific
--- Content provided by FirstRanker.com ---
foreign investors, or where advanced technologies are involved that can only be
provided by foreign investors). The range of incentives available to foreign
--- Content provided by FirstRanker.com ---
investors and the number of countries that offer incentives have both increasedconsiderably since the mid-1980s, as barriers to PDJ and trade have declined. In
addition, many countries are experiencing increasing incentives competition
--- Content provided by FirstRanker.com ---
among regional or even local authorities to attract FDI. Also, incentives are
becoming increasingly focused and targeted and are sometimes contingent upon
--- Content provided by FirstRanker.com ---
certain conditions being met by the investor, In fact, countries often offer abroad array of options linked to different objectives. Thus further multiplying
the number of incentive programmes available to foreign investors. However, it
--- Content provided by FirstRanker.com ---
is difficult to discern clear patterns across countries and regions on the type ofindustries or activities favoured by incentive programmes. An increasing
number of countries target investment activity in industries involving
--- Content provided by FirstRanker.com ---
technology and high value-added (such as electronics, robotics, computer
software) and in infrastructure projects. While manufacturing industries are still
--- Content provided by FirstRanker.com ---
the main focus of incentive programmes, some governments continue to offerincentives in agriculture, fisheries, mining and oil exploration. Some countries
are also offering incentives to encourage companies to locate specific corporate
--- Content provided by FirstRanker.com ---
functions within their territories (say, to set up regional headquarters). As a
general rule, developed countries make more use of financial incentives than of
--- Content provided by FirstRanker.com ---
fiscal ones, partly because fiscal incentives are less flexible and their adoptioninvolves more difficult parliamentary procedures. However, this pattern is
reversed in developing countries, presumably because these countries lack the
--- Content provided by FirstRanker.com ---
resources needed to provide financial incentives. Market incentives have played
an important role until recently, although market reforms and the introduction of
--- Content provided by FirstRanker.com ---
competition policy in an increasing number of countries are narrowing the scopefor these incentives.
Whatever the rationale for FDI incentives, they are ultimately successful only to
--- Content provided by FirstRanker.com ---
the extent that they succeed in attracting investment to a country away from
another; if it were otherwise, and the investment were to take place anyway, the
--- Content provided by FirstRanker.com ---
incentive would be superfluous. In an open world economy, in which barriers toFDI are falling, many countries have increased their incentives with the
intention of diverting investment away from competing host countries.
--- Content provided by FirstRanker.com ---
Competition for FDI with incentives is pervasive not only among national
governments but also among sub-national authorities. When governments
--- Content provided by FirstRanker.com ---
compete to attract FDI, there will be a tendency to overbid, if bidders may offermore than the wedge between public and private returns. The effects can be both
distorting and inequitable since the costs are ultimately borne by the public and
--- Content provided by FirstRanker.com ---
hence represent transfers from the local community to the ultimate owners of theforeign investment. In such competition for FDI, the poorer countries are
relatively disadvantaged.
--- Content provided by FirstRanker.com ---
THE EFFECT OF INCENTIVES ON INVESTMENT DECISIONS
In spite of this competition, there is considerable evidence to suggest that
--- Content provided by FirstRanker.com ---
incentives are a relatively minor factor in the locational decisions of TNCsrelative to other locational advantages, such as market size and growth,
production costs, skill levels, adequate infrastructure, economic stability and the
--- Content provided by FirstRanker.com ---
quality of the general regulatory framework. For example, in many companies
incentives are frequently not considered and simply made an already attractive
--- Content provided by FirstRanker.com ---
country more attractive. Investment decisions are made mainly on the basis ofeconomic and long-term strategic considerations concerning inputs, production
costs and markets. However, as regards individual investment projects, there is
--- Content provided by FirstRanker.com ---
increasing evidence that when the location is broadly determined, e.g. a member
country of the European Union or a country with a large national market, then
--- Content provided by FirstRanker.com ---
incentives can play a decisive role in choosing, e.g. between Scotland andWales; Ireland and Scotland; or North of England and North of France.
Foreign investors may respond differently to different types of incentives
--- Content provided by FirstRanker.com ---
depending on their-strategies. Generally, the export-oriented investors seeking
inexpensive labour valued fiscal incentives more highly than market protection
--- Content provided by FirstRanker.com ---
or other incentives. Market seeking investors, on the other hand, value marketprotection more than fiscal incentives. In the case of regional incentives,
financial incentives, particularly grants seem to have a greater impact on
--- Content provided by FirstRanker.com ---
investors` decisions than fiscal incentives. In recent years, a wide variety of
incentives are being offered for foreign investors to transfer advanced
--- Content provided by FirstRanker.com ---
technologies and attract R&D facilities (including tax reductions, subsidisedinfrastructure and land and industrial parks); governments have also intervened
through the creation of markets (with defence expenditures and government
--- Content provided by FirstRanker.com ---
purchasing) and research funding. However, a fiscal incentives and financial aid
did not influence location, while the establishment of enterprise zones and
research parks did.
--- Content provided by FirstRanker.com ---
In brief, while incentives do not rank high among the main FDI determinants,
their impact on locational choices can be perceptible at the margin, especially
--- Content provided by FirstRanker.com ---
for projects that are cost-oriented and mobile.FOREIGN PORTFOLIO INVESTMENT (FPI)
While FPI has traditionally been concentrated in developed markets, new
--- Content provided by FirstRanker.com ---
interest has been sparked by the so-called emerging capital markets. The
emerging markets have at least three attractive qualities, two of which are their
--- Content provided by FirstRanker.com ---
high average returns and their low correlations with developed markets.Diversification into these markets in expected to give higher expected returns
and lower overall volatility.
--- Content provided by FirstRanker.com ---
Many individual investors, as well as portfolio and pension fund managers, are
reexamining their basic investment strategies. The 1990s, fund managers
--- Content provided by FirstRanker.com ---
realised that significant performance gains could be obtained by diversifyinginto high-quality global equity markets. These gains are limited, however, by the
fairly high cross-correlations returns in these markets. The resulting investment
--- Content provided by FirstRanker.com ---
strategy reflects current information.
In terms of portfolio theory, adding low-correlation portfolios to an optimisation
--- Content provided by FirstRanker.com ---
enhances the reward-to-risk profile by shifting the mean-variance frontier to theleft.
The portfolio optimisation problem requires important inputs--the expected
--- Content provided by FirstRanker.com ---
returns and the variance-covariance matrix. In principal, all of these measures
should be forward-looking. That is, the returns, volatilities, and correlations
--- Content provided by FirstRanker.com ---
should be forecasted.An upsurge in portfolio investment in developing countries has marked the end
of the debt crisis, or perhaps even helped to end it. Using the World Bank`s
--- Content provided by FirstRanker.com ---
definition of portfolio flows as consisting of bonds, equity (comprising direct
stock market purchases, American Depository Receipts (ADRs), and country
funds), and money market instruments (such as certificates of deposits (CDs)
--- Content provided by FirstRanker.com ---
and commercial paper. Broadly speaking, there are six groups of investors in the
emerging markets, each having a tolerance for different degrees of risks and
--- Content provided by FirstRanker.com ---
returns:i) Domestic residents of developing countries with overseas holdings and other
private foreign investors, who constitute the dominant category of portfolio
--- Content provided by FirstRanker.com ---
investors who are currently active in the major emerging markets. These
investors keep abreast of developments in their country on a regular basis and
--- Content provided by FirstRanker.com ---
monitor change in government policy. Their investments in emerging marketsare motivated by expected short-term high yields. Preference is given to
instruments that are in bearer form and provide returns in hard currency. These
--- Content provided by FirstRanker.com ---
external fund as Hot Money which are kept in the Latin American Bank
which mayor may not be beneficial to the long-term growth prospects of
--- Content provided by FirstRanker.com ---
developing country depending on the manner in which they are invested.ii) Managed funds (closed-end country funds and mutual funds), whose portfolio
managed buy and sell shares and high-yield bonds in one or more of the
--- Content provided by FirstRanker.com ---
emerging markets for performance-based trading purposes.
iii) Foreign banks and brokerage firms, who allocate their portfolio for inventory
--- Content provided by FirstRanker.com ---
and trading purposes.iv) Retail clients of Eurobonds houses who are involved in emerging securities
markets due to portfolio diversification motives. They are generally interested in
--- Content provided by FirstRanker.com ---
high-yield, high portfolio investments in the emerging markets.
v) Institutional investors (such as pension funds, life insurance companies), who
--- Content provided by FirstRanker.com ---
have a longer time horizon for expected gains from their portfolio and look forstability and long-term growth prospects in the market in which they invest.
vi) Non resident nationals of developing countries, who could be a potential
--- Content provided by FirstRanker.com ---
source of portfolio investment from abroad (as opposed to flight capital).
The first three groups are active in the emerging securities markets primarily
--- Content provided by FirstRanker.com ---
because of expectations of short-term returns and have been observed to movefunds among different branches frequently. Purely speculative traders also
continuously move funds between the emerging markets and the developed
--- Content provided by FirstRanker.com ---
markets (primarily the United States).The lower degree of integration of the emerging markets in the global capital
markets , often makes them better avenues for achieving higher yields relative to
--- Content provided by FirstRanker.com ---
the more globally integrated developed securities markets. Since all listed
companies in the ESMs are not very well researched by foreign investors and
--- Content provided by FirstRanker.com ---
their market information may be limited, there exists the potential for findingundervalued stocks which may yield high returns to potential investors. In
general, P/E ratios in several ESMs may be lower than those in developed
--- Content provided by FirstRanker.com ---
markets. Therefore, one expects to see larger inflows of portfolio investments
into the emerging markets from institutional investors worldwide.
--- Content provided by FirstRanker.com ---
The integration of international equity markets observed in recent years can beattributed to several factors:
(a) the emergence of international banking syndicates and brokerage houses
--- Content provided by FirstRanker.com ---
which have the necessary information technology and communication
facilities to be able to place large international equity issues within
--- Content provided by FirstRanker.com ---
shorter periods of time at lower syndication and distribution fees thandomestic issues;
(b) the introduction of foreign equity-based instruments, such as ADRs and
--- Content provided by FirstRanker.com ---
Rule 144A issues in the United States, which have significantly reduced
the regulatory and physical impediments that in the past hindered such
--- Content provided by FirstRanker.com ---
investments; and(c) and widespread practice of multiple listing of shares across different
stock exchange in different countries have become widespread. The
--- Content provided by FirstRanker.com ---
globalisation of the international capital markets has resulted in global
allocation of portfolios in a relatively inexpensive manner.
--- Content provided by FirstRanker.com ---
It should be understood, however, that at the earlier stages of openness of theESMs, the return of flight capital that is observed is generally motivated by
short-term speculative motives. Significant movements of such funds in and out
--- Content provided by FirstRanker.com ---
of these markets give rise to increased volatility in stock prices as well aspotential problems for domestic monetary management. Rapid increases of
international reserves due to these large capital inflows have to be dealt with
--- Content provided by FirstRanker.com ---
carefully by policymakers. These rising international reserves will strengthen the
domestic currencies of the countries where these large inflows occur and have
--- Content provided by FirstRanker.com ---
lowered inflationary expectations. Investors have observed the underutilisedcapacity, especially in the infrastructure sector of the emerging markets, and
expect increased demand for manufactured products as a result of impending
--- Content provided by FirstRanker.com ---
free trade agreements.
It is crucial for developing countries that the experiencing such large capital
--- Content provided by FirstRanker.com ---
inflows in the short term to endeavor to continue to attract these privatefinancing flows in the long term. Given the increasing integration of the
international financial markets and the increasingly advanced communication
--- Content provided by FirstRanker.com ---
and information technology facilities that are emerging today, the task of
maintaining financial competitiveness in the international capital markets is a
--- Content provided by FirstRanker.com ---
challenge that the emerging markets must face. To this end, the role ofappropriate market-oriented domestic policy reforms and an endeavour to
maintain a sustained growth performance in the developing countries concerned
--- Content provided by FirstRanker.com ---
will go a long way in keeping the repatriated capital with their boundaries. From
the long-term point of view it has been observed that flight capital is the last to
--- Content provided by FirstRanker.com ---
return. This makes the task at hand for the emerging markets very challenging.If developing countries wish to attract a sustained inflows of portfolio
investment from abroad rather than short-term speculative movements of funds
--- Content provided by FirstRanker.com ---
in and out of their countries, it is crucial to address some of the major constraints
that inhibit such flows. These constraints exist both on the demand as well as the
--- Content provided by FirstRanker.com ---
supply side of ESM securities.On the demand side for emerging market securities, the most important hurdle
inhibiting institutional investors abroad from investing in these markets are
--- Content provided by FirstRanker.com ---
regulatory impediments imposed by source country governments and restrictionson investment practices imposed by the trustees of these institutions. Some
governments have imposed restrictions on foreign investment by their
--- Content provided by FirstRanker.com ---
institutional investors because they feel that possible large foreign exchange
outflows may have an adverse impact on the country`s balance of payments, by
--- Content provided by FirstRanker.com ---
institutionalising capital flight. However, institutional investors need to bestrictly monitored in the absence of a strong and transparent pension system and
when pension fund managers lack a thorough understanding of the complexities
--- Content provided by FirstRanker.com ---
of their investment in the international financial markets. The role of the
domestic securities and exchange commissions and regulatory agencies for
--- Content provided by FirstRanker.com ---
institutional investors in the emerging markets is crucial in maintaining a steadyinflow of foreign capital and ensuring responsible behaviour on the part of
domestic institutional investors.
--- Content provided by FirstRanker.com ---
Tight regulation of investment decisions by institutional investors (in both
developed and developing countries) is not necessary for ensuring for safety of
--- Content provided by FirstRanker.com ---
contractual savings.In the United Kingdom, for example pension funds and life insurance companies
are only expected to demonstrate that their portfolio of assets, when prudently
--- Content provided by FirstRanker.com ---
valued, meet the requirements for technical reserves and solvency margins. This
enables these institutions to appropriately manage their portfolios by ensuring
--- Content provided by FirstRanker.com ---
flexibility in matching assets and liabilities. Excessively strict investment limitsmay undermine the private management of a portfolio and, in effect, result in
government-directed investment. Nevertheless, pension funds and insurance
--- Content provided by FirstRanker.com ---
companies of most developed countries are still subject to restrictive regulations
on their foreign investment. These include Canada, Germany, and the
--- Content provided by FirstRanker.com ---
Netherlands.The introduction of Rule 144A ADRs in the U.S. stock exchanges has
considerably simplified trading in foreign equities by eliminating costly
--- Content provided by FirstRanker.com ---
settlement delays, registration difficulties, and divided payment problems.
Under Rule 144A, Qualified Institutional Buyers (QIBs) in the United States
also no longer need to hold the securities they traded the private placement
--- Content provided by FirstRanker.com ---
market for a two-year period before they can be sold. Foreign issues can now
gain access to a relatively large number of U.S. institutional investors. The
--- Content provided by FirstRanker.com ---
credit rating standards for public placements of bonds have also been relaxed.On the supply side of the emerging market securities, institutional fund
--- Content provided by FirstRanker.com ---
managers are concerned about the illiquidity of most of the emerging markets
due to restrictions on direct entry by foreigners, the small number of players
--- Content provided by FirstRanker.com ---
(and therefore inefficient market making), poor accounting practices, hightransaction costs, and unreliable settlement systems. Almost all ESMs suffer
from the shortage of good-quality, large capitalization shares. This results in
--- Content provided by FirstRanker.com ---
quick overheating (i.e. rapid increases in market capitalization) once domestic
and international interest is generated in these markets due to regulatory changes
--- Content provided by FirstRanker.com ---
or other factors. The relatively small turnover of most stock in the emergingmarkets also makes it difficult for large foreign investors to consider substantial
portfolio investment in these markets In fact, larger institutional investors often
--- Content provided by FirstRanker.com ---
prefer that companies they may invest in have a domestic market turnover of at
least $1 million per week. Custodial services in ESMs also continue to be a
--- Content provided by FirstRanker.com ---
major constraint to increased participation by large foreign institutionalinvestors.
Another concern among U.S. institutional investors is that the management staff
--- Content provided by FirstRanker.com ---
of the newly privatised firms may not be sufficiently concerned about enhancing
the value of their company`s shares (i.e. there appears to be an agency
--- Content provided by FirstRanker.com ---
problem). This will have adverse implications for attractiveness of theseinvestments from the long-term point of view. Under these circumstances, short-
term yields would be high (which may interest a different group of investors
--- Content provided by FirstRanker.com ---
private investors and performance-based traders). Regulatory constraints and the
tower level of sophistication of the capital markets in the developing countries
were cited by U.S. institutional investors as other impediments to greater
--- Content provided by FirstRanker.com ---
portfolio flows to emerging markets. U.S. institutional investors are expected to
take advantage of Rule 144A and significantly increase their investment in
--- Content provided by FirstRanker.com ---
private equity and debt offerings by non-U.S. entities.PORTFOLIO CAPITAL FLOWS: HOT OR COLD?
Much of the literature implicitly presumes that it is possible to distinguish hot
--- Content provided by FirstRanker.com ---
from cold capital flows simply by knowing the nature of the financial instrument
being traded or the identity of the transactor. Perhaps the most salient example
--- Content provided by FirstRanker.com ---
of this is the presumption that short-term flows are hotter than long-term flows.The basic idea in the literature is that a hot money inflow is likely to disappear
or even reverse itself in the near future, whereas a cold money inflow is more
--- Content provided by FirstRanker.com ---
likely to persist. Short-term capital inflows are like cars sitting in the parking lot
with the engine running.
--- Content provided by FirstRanker.com ---
The nation that one can make inferences about the characteristics of financialflows by just observing their label is not new in economic. There is much
convention wisdom that show capital flows reflect speculative, unstable
--- Content provided by FirstRanker.com ---
behaviour while flows reflect evaluations of long run profitability and are based
on fundamental economic condition. The flows of funds approach used by many
--- Content provided by FirstRanker.com ---
central banks and others for a analysis of the domestic economy developments isbased on labels which are deemed meaningful.
This view has also been an important part of the traditional analysis of
--- Content provided by FirstRanker.com ---
international finance for many years. In fact, the structure of balance of
payments accounts reflects an implicit theory that different types of capital
--- Content provided by FirstRanker.com ---
flows have different economic implications. For example, the distinctionbetween short-term hot money and long-term capital flows undoubtedly
reflects the view that short-term capital movements are speculative and
--- Content provided by FirstRanker.com ---
reversible while long-term capital flows are based on fundamentals and are
reversed only when the fundamentals change. The fact that capital control
programmes in many countries distinguish between short-and long-term
--- Content provided by FirstRanker.com ---
positions also points to the importance attached to this distinction.
Another important distinction found in balance of payments accounts is between
--- Content provided by FirstRanker.com ---
official capital flows, including changes in international reserves, and privatecapital flows. A common view in the context of current capital inflows into
developing countries which is based on labels is that such flows are
--- Content provided by FirstRanker.com ---
fundamentally different form inflows to these same countries in the 1970s
because the current inflows are private-to-private transactions not guaranteed by
--- Content provided by FirstRanker.com ---
the government of any country.Finally, it is often argued that direct investment has different implications for the
host and recipient countries as compared to other capital flows. For example,
--- Content provided by FirstRanker.com ---
direct investment capital flows are often associated with technology transfers
and a range of costs and benefits for both countries. An implicit assumption
--- Content provided by FirstRanker.com ---
behind these ideas is that the transactions reported in the balance accounts areclosely related to the behaviour of interest in the real economy.
This reasoning based on the label of the flow at times underlies substantive
--- Content provided by FirstRanker.com ---
policy measures. Once a flow is identified as hot money, it is then seen as
requiring some policy response. At various times countries (especially
--- Content provided by FirstRanker.com ---
developing countries) have responded with exchange rate management,(sterilised) intervention, fiscal contraction, borrowing taxes, absolute foreign
borrowing constraints, and reserve requirements.
--- Content provided by FirstRanker.com ---
There are a number of good reasons to doubt, however, that the micro nature of
international capital flows reveals much about the economic importance of such
--- Content provided by FirstRanker.com ---
flows. Since many assets are (increasingly becoming) tradable, a distinctionbetween flows based on their terms (for example, short versus long) is
(increasingly becoming) less meaningful. A treasury bond with a 30-year
--- Content provided by FirstRanker.com ---
maturity can easily be more liquid, and thus lead to a higher volatility of short-
term flows than a 30-day time deposit at a commercial bank. And, a short-term
--- Content provided by FirstRanker.com ---
asset, which is, rolled over can in many ways he identical to a long-term asset.Furthermore, the explicit label given to a flow may not cover its implicit nature.
For instance the inflows to developing countries in the 1970s were private
--- Content provided by FirstRanker.com ---
capital flows in name, the universal government guarantees of both lenders andborrowers considerably subdued the discipline of the market. In effect the
capital flows that helped generate the debt crisis of 1982 should have been
--- Content provided by FirstRanker.com ---
considered official capital flows since the private parties undertaking the
transactions relied on a government guarantee (and ex post, private claims
--- Content provided by FirstRanker.com ---
indeed became the liability of the government). This presumably made privateinvestors less careful than they would have been in the absence of guarantees.
This experience should act as a warning against evaluating capital flows
--- Content provided by FirstRanker.com ---
according to their label (for example, the instrument traded or the transactor
recorded in the balance of payments statistics). In the past few years inflows to
--- Content provided by FirstRanker.com ---
developing countries have taken the form of non-guaranteed portfolioinvestments and direct investments. If the behaviour behind such investments is
different in some important way, it follows that we may not be inviting another
--- Content provided by FirstRanker.com ---
debt crisis even if conditions change as they did in 1982. But if the flows are to a
significant extent guaranteed by the government, their label private may be
--- Content provided by FirstRanker.com ---
meaningless. Clearly, in thinking about stability, an important attribute is thusthe contingent liability of the government.
The starting point should then also be a clear methodology on how the
--- Content provided by FirstRanker.com ---
hypothetical economic implications of different types of capital flows can be
identified empirically. If credit markets were perfect and complete, the form of
--- Content provided by FirstRanker.com ---
capital flows would not be important. A useful analog here is the Miller-Modigliani theorem from corporate finance. Under a set of strong assumptions,
the structure of assets and liabilities among various types of debt and equity
--- Content provided by FirstRanker.com ---
have no effect on the value of the firm because investors can offset the structure
chosen by the firm in credit markets. If we think of the balance of payments
--- Content provided by FirstRanker.com ---
accounts as records of how a country finances its international capital Position itfollows that under the Miller-Modigliani assumptions, the structure of capital
flows and the structure of the gross international asset and liability positions
--- Content provided by FirstRanker.com ---
would be unrelated to the country`s net indebtedness.It might be useful here to look at an analogous issue that has recently been
carefully explored in a closed economy context. That issue is whether a credit
--- Content provided by FirstRanker.com ---
crunch contributed to a downturn in economic activity. This is an interesting
hypothesis because it explicitly rests on the view that one type of financial
--- Content provided by FirstRanker.com ---
transaction, in this case loans by domestic banks to domestic non-financialfirms, had important economic effects.
This view is an important part of the (new literature on business cycles, which
--- Content provided by FirstRanker.com ---
links financial structures and real activity. This literature provides a useful
analytical framework that can be adapted to a discussion of international
--- Content provided by FirstRanker.com ---
financial flows. It points out that the importance of changes in bank credit foreconomic activity, as opposed to bank liabi1ities or money, is an empirical
issue. If good substitutes for bank credit exist in an economy, it follows that a
--- Content provided by FirstRanker.com ---
decline in bank credit that is not matched by a decline in money will have no
effect on economic activity. Firms would easily substitute other forms of credit,
--- Content provided by FirstRanker.com ---
for example commercial paper, to offset the reduction in bank credit. In contrast,if banks have special information about their customers that is not easily
transferred to other lenders, a reduction of bank credit will not be easily offset
--- Content provided by FirstRanker.com ---
by borrowing from other institutions or markets. In this case an interruption in
bank credit could have a depressing effect on expenditures and output.
--- Content provided by FirstRanker.com ---
There are two important lessons from this,. First, meaningful tests of theimportance of capital account transactions require a specification of the
economic behaviour of interest. Second, a financial transaction is likely to have
--- Content provided by FirstRanker.com ---
measurable effects on the specified economic behaviour in cases where the
institutional environment, information structures, or other departures from
--- Content provided by FirstRanker.com ---
complete markets limit the ability of investors to substitute one type oftransaction for another in response to changing incentives.
The view that labels matter can take comfort from the fact that international
--- Content provided by FirstRanker.com ---
financial markets are not complete and transactions are subject to a large numberof distortions. Many of these are imposed by governments in the form of
controls on types of transactions that are considered undesirable. Moreover,
--- Content provided by FirstRanker.com ---
subsidies often take the form of a government guarantee of private liabilities,
favourable tax treatment on earnings (direct investment), or access to special
--- Content provided by FirstRanker.com ---
government facilities (debt equity swaps). Each of these distortions is designedto encourage or discourage a given type of capital transaction.
Furthermore, governments also intervene directly in international capital
--- Content provided by FirstRanker.com ---
markets. Developing country governments borrow for long-term objectives and,
increasingly, in middle-income countries, to offset short-run pressures on
--- Content provided by FirstRanker.com ---
exchange rates and domestic interest rates. A difficulty thus arises in interpretingprivate capital flows that are sterilised by intervention transactions by the central
bank as, to some extent, the composition of private capital flows is conditioned
--- Content provided by FirstRanker.com ---
by governments` capital transactions. Clearly a country trying to maintain
interest rates above its trading partners in some sense generates the private
--- Content provided by FirstRanker.com ---
capital inflow by standing ready to match private inflows with official outflowsin the form of increases in reserve assets. Such private inflows are sustainable
as long as the official capital outflows are sustainable.
--- Content provided by FirstRanker.com ---
In general, if international capital transactions are effectively distorted by taxes,
subsidies and direct intervention, the structure of private capital flows might
--- Content provided by FirstRanker.com ---
follow predictable patterns as long as the structure of distortions itself is stable.Over a period the financial transactions are motivated by a variety of economic
forces. Over time the institutional framework changes, the behaviour of the
--- Content provided by FirstRanker.com ---
official sector probably changes, the exchange rate regime changes, capital
control programmes come and go, and banking markets (both on and offshore)
--- Content provided by FirstRanker.com ---
develop, fail, and are recapitalised.The final economic behaviour that seems to provide the most appropriate test for
the importance of various capital flows is the net inter trade among countries,
--- Content provided by FirstRanker.com ---
conventionally measured by the current account. While there are otherinteresting candidates, for example, the exchange rate, questions about the
sustainability of certain type of capital flows are motivated by concern about the
--- Content provided by FirstRanker.com ---
sustainability of a path for changes in net indebtedness to the rest of the world,
that is, the mirror image of the cumulative current account balance.
--- Content provided by FirstRanker.com ---
Policymakers wish to assess the likelihood of sudden and destabilising changesin the total capital account not just its components.
On a macro level, national accounts identities state that the sum of all capital
--- Content provided by FirstRanker.com ---
flows is equal to the difference between savings and investment. For a given
savings investment imbalance, capital flows have to satisfy an adding-up
--- Content provided by FirstRanker.com ---
constraint. Unless flows influence domestic investment or domestic savings (ora combination of the two), some substitution between the various flows has to
occur, for a given current account, the volatility of one flow will on aggregate be
--- Content provided by FirstRanker.com ---
canceled out. The extent of interaction between the various components and the
possibility of systematic interactions between components thus needs to be
--- Content provided by FirstRanker.com ---
addressed before making inferences from the parts to the whole.A fundamental difficulty this is that the linkage between current account and any
of the capital flows data series might be very weak. For one thing we know that
--- Content provided by FirstRanker.com ---
gross capital inflows and outflows are several times larger than net capital flows.
Yet it is the net flow that we are interested in when considering sustainability of
--- Content provided by FirstRanker.com ---
current account position. It seems clear that the motivation for two-way flows ofinternational capital are very different from the genera! view that developing
countries should be net capital importers and that each type of transaction should
--- Content provided by FirstRanker.com ---
show a net inflow.
For example, residents of a small open economy might hold most of their
--- Content provided by FirstRanker.com ---
financial wealth in the form of foreign clans since this allows them to diversifytheir income streams and protect themselves from domestic taxation and income
shocks. Offsetting this preference would be the tendency for foreign investors to
--- Content provided by FirstRanker.com ---
purchase claims on the country again in order to diversify their risk. This
diversification motive for international capital movements might account for
much of the recorded flows in balance of payments data.
--- Content provided by FirstRanker.com ---
Moreover, it might be the case that residents of wealthy countries prefer long-
term investments such as bonds or loans while residents of developing countries
--- Content provided by FirstRanker.com ---
prefer short-term investments such as bank deposits. In this case, we wouldexpect to see short-term capital outflow from developing countries matched by
long-term loans to residents of developing countries. These preferences imply
--- Content provided by FirstRanker.com ---
nothing about the desired imbalance in the capital or current account.
In fact, the short-term positions of residents might be quite stable if there are
--- Content provided by FirstRanker.com ---
relatively few alternative investments. In contrast, the long-term capital inflowto the developing country might take several alternative forms. In one year
foreign investors might prefer equities, in another bank loans, and in another
--- Content provided by FirstRanker.com ---
bonds, These preferences might in tutu reflect subtle changes in tax rules (in the
industrial countries) that the analyst would find difficult to identify. The point is
--- Content provided by FirstRanker.com ---
that the pattern of financial intermediation might be quite stable for a while butthat small differences in the institutional framework, due to either regulation or
innovation in credit markets, might alter the form that the intermediation taken
--- Content provided by FirstRanker.com ---
in balance of payments statistics.
In general, direct investment is a difficult capital flow to interpret. Balance of
--- Content provided by FirstRanker.com ---
payments data on direct investment include short-and long-term capitaltransactions of a loosely defined set of reporters who own more than a given
percent of the equity in a domestic or foreign chartered firm. Because direct
--- Content provided by FirstRanker.com ---
investors hold factories and other assets that are impossible to move, it is
sometimes assumed that a direct investment inflow is more stable than other
--- Content provided by FirstRanker.com ---
forms of capital flows.This need not be the case. While a direct investor usually has some immovable
assets, there is no reason in principle why these cannot be fully offset by
--- Content provided by FirstRanker.com ---
domestic liabilities. Clearly, a direct investor can borrow in order to export
capital, and thereby generate rapid capital outflows. In most developing
countries, there are Laws against
--- Content provided by FirstRanker.com ---
This, so it would be surprising to see negative flows for foreign domestic
investment in developing country. There could, however, be offsetting
--- Content provided by FirstRanker.com ---
movements in other balance payments accounts or in errors and omissions.On a micro level, there is also much (anecdotal) evidence that, from the point of
view of foreign direct investors, flows with very different classifications are
--- Content provided by FirstRanker.com ---
actually close substitutes. Multinationals often substitute between and among the
various forms of intercompany transfers (retained earnings, provision of and
--- Content provided by FirstRanker.com ---
repatriation of capital, and intercompany loans) and loans from local or foreignbanks for example, to achieve higher profits net of overall taxes. In other cases,
flows may be complementary, that is foreign investment may take place through
--- Content provided by FirstRanker.com ---
a combination of FDI and portfolio equity investment.
THE POTENTIAL IMPACT OF A POSSIBLE MULTILATERAL
--- Content provided by FirstRanker.com ---
FRAMEWORK (MFI)The development of an MFI if such a framework were to be negotiated, would
represent a change in the policy-framework cluster of determinants. Although
--- Content provided by FirstRanker.com ---
such a framework might also affect some elements of business facilitation (such
as investment incentives), it would not involve significant and direct changes in
--- Content provided by FirstRanker.com ---
the principal economic determinants. Indeed, by making FDI policies potentiallymore similar, an MFI would underline the importance of economic (and
business facilitation) factors in determining FDI flows.
--- Content provided by FirstRanker.com ---
The precise effect of an MFI on the policy-framework cluster of determinants
would depend on its content, including definitions, scope and safeguards.
--- Content provided by FirstRanker.com ---
Because an MFI is only a hypothesis, three scenarios, based on differingassumptions, are discussed below for purely analytical purposes. The specific
implications of each scenario would vary from country to country in accordance
--- Content provided by FirstRanker.com ---
with specific economic and developmental conditions and specific national
stances vis-a ?vis FDI.
If there were an MFI, how would it affect the volume and pattern of FDI flows?
--- Content provided by FirstRanker.com ---
One conceivable outcome of an MET is that -it would help to increase FDI
flows and perhaps affect other features of such flows as well. Such an outcome
--- Content provided by FirstRanker.com ---
is based in part on the assumption that a multilateral agreement would not onlyconsolidate recent changes towards more liberal policies by many countries but
would incorporate rollback provisions requiring countries to commit
--- Content provided by FirstRanker.com ---
themselves to reducing or eliminating existing barriers to PDI and strengthening
investment protection and the proper functioning of markets. Even in the
--- Content provided by FirstRanker.com ---
absence of further liberalisation, a multilateral framework could facilitateinvestment by providing stronger assurances as compared with unilateral or even
bilateral measures when it comes to the protection of FDI and the stability of
--- Content provided by FirstRanker.com ---
domestic FDI regimes. The presumably greater stability, predictability and
transparency resulting from an MFI would create a generally more favourable
--- Content provided by FirstRanker.com ---
climate for investors. The impact on inflows might be greatest for thosecountries that we not already signatories to bilateral, regional, multilateral or
multilateral investment agreements, and countries whose current policies, even
--- Content provided by FirstRanker.com ---
if favourable to FDI are not considered sufficiently predictable by investors. At
the same time, whether or not FDI flows would actually increase and whether
--- Content provided by FirstRanker.com ---
there would be a change in the quality and patterns of flows would depend onthe precise content of an agreement, the nature of national commitments and
exceptions to the generalised multilateral rules and, of course, the other EDT
--- Content provided by FirstRanker.com ---
determinants that would come into play at that point.
A second conceivable outcome of an MFI is that it could actually reduce the
--- Content provided by FirstRanker.com ---
quantity and quality of FDI flows, because the negotiation of an MFI would takeseveral years creating uncertainties about the investment climate worldwide and
thereby discouraging foreign investors. Further, even if negotiations did produce
--- Content provided by FirstRanker.com ---
an agreement, the MFI that would result could conceivably enshrine a less
liberal multilateral environment than has already evolved unilaterally or
--- Content provided by FirstRanker.com ---
regionally. Such an MFI could also alter the patterns of PDI flows acrossgeographic regions and industries In particular, an MFI might reduce FDI flows
to countries that gain from the currently restrictive policies of their competitors
--- Content provided by FirstRanker.com ---
for such investment and increase flows to otherwise desirable locations that arereceiving little inward FDI because of uncertainties about policies.
A third conceivable outcome of a possible MFI is that it would have little or no,
--- Content provided by FirstRanker.com ---
impact on the quantity and quality of FDI flows, as it would not materially alter
the policy framework for FDI. One reason why this might be the result is that
--- Content provided by FirstRanker.com ---
there has already been significant liberalisation in many countries, in particularin many developing countries and countries in transition, during the 1980s and
1990s; and this liberalization has contributed to surge of FDI flows that reached
--- Content provided by FirstRanker.com ---
a new record in 1997. Therefore, an MET that contains, for example, standstill
provisions requiring countries to commit themselves not to introduce new
--- Content provided by FirstRanker.com ---
barriers to FDI, lower standards of investment treatment or measures likely toimpair the proper functioning of markets would essentially maintain the status
quo, as far as the openness of economies to FDI, their treatment of foreign
--- Content provided by FirstRanker.com ---
affiliates and the functioning of their markets are concerned. Moreover the:
extensive network of bilateral investment treaties, which numbered over 1,500
--- Content provided by FirstRanker.com ---
by the end of 1997 would provide protection for investors and could be easilyextended to additional countries, Finally, on this view, there would be no
significant effects on the geographic patterns of FDI flows, as they are largely
--- Content provided by FirstRanker.com ---
influenced by other FDI determinants.
On balance, these considerations suggest that an MFI would improve the
--- Content provided by FirstRanker.com ---
enabling environment for FDI, to the extent that t would contribute to greatersecurity for investors and greater stability, predictability and transparency in
investment policies an rules. This, in turn, could encourage higher FDI flows
--- Content provided by FirstRanker.com ---
and potentially some redistribution of those flows particularly to countries
whose investment climates would newly reflect the multilateral framework.
--- Content provided by FirstRanker.com ---
How much difference an MFI would make, however, in terms of the quantity,quality anti patterns of actual FDI flows difficult to predict because as in the
case of BITs, it is precisely the function of enabling framework to allow other
--- Content provided by FirstRanker.com ---
determinants, and especially economic determinants to assert their influence.Expectations about the impact of an MFI on FDI flows (if it were indeed to be
negotiated) in comparison to the current regulatory framework and the direction
--- Content provided by FirstRanker.com ---
in which it is developing should, therefore, not be exaggerated. There are, of
course, other issues that need to be considered in connection with a possible
--- Content provided by FirstRanker.com ---
MFI especially the possible role of such an agreement in providing a frameworkfor intergovernmental cooperation in the area of investment.
Although the most profound shifts among FDI determinants result from
--- Content provided by FirstRanker.com ---
integrated international strategies, especially complex strategies, the traditional
economic determinants related to large markets, trade barriers and non-tradable
--- Content provided by FirstRanker.com ---
services are still at work, and account for a large share of worldwide FDI flows.Data on the distribution of sales of foreign affiliates of United States TNCs in
host countries are indicative in this regard: two-thirds of TNC activity is still of
--- Content provided by FirstRanker.com ---
this type. These figures are higher in the services sector, including trading
affiliates, and lower in manufacturing bat they do not change the overall
--- Content provided by FirstRanker.com ---
outcome.Some of the largest national markets remain unmatched in size by the largest
regional markets or even by entire continents. For example, the market the
--- Content provided by FirstRanker.com ---
European Union during most of its existence has been smaller than the United
States market; the market of the African continent (without South Africa) is
--- Content provided by FirstRanker.com ---
smaller than that of the Republic of Korea; and the combined markets of the 14Central and Eastern European countries are smaller than the market of Brazil.
As regards trade barriers, even though the general trend h been towards the
--- Content provided by FirstRanker.com ---
reduction or even abolition of tariffs and quotas, they continue to remain in force
in several (especially developing) countries and in some industries in a much
--- Content provided by FirstRanker.com ---
wider group of countries, These continue to generate import FDI and discourageefficiency-seeking FDI. In non-tradable services, as well as goods that are
perishable or need to be adapted to consumer preferences or local standards, the
--- Content provided by FirstRanker.com ---
market-seeking motivation, and the corresponding locational attractiveness ofhost countries, remain as strong as ever. In fact, there has been an explosion of
FDI in the services sector as a result of the general trend towards the
--- Content provided by FirstRanker.com ---
liberalisation of FDI frameworks for services.
Still, although FDI remains strongly driven by its traditional determinants, the
--- Content provided by FirstRanker.com ---
relative importance of different locational determinants for competitiveness-enhancing FDI is shifting. For example, again using United States data for
foreign affiliates in manufacturing though it is still true that these affiliates are
--- Content provided by FirstRanker.com ---
predominantly oriented towards domestic markets: their domestic sales have
dropped from 64 per cent in 1982 to 60 per cent in 1993. A similar trend can be
--- Content provided by FirstRanker.com ---
observed in tradable services (e.g. computer and data-processing services) inwhich domestic sales declined from 85 to 81 per cent over the same period.
Perhaps more telling are data for United States foreign affiliates in the European
--- Content provided by FirstRanker.com ---
Union, as the evolving policy framework there is more indicative of the EDI
policy framework emerging globally: sales to local markets in that region
--- Content provided by FirstRanker.com ---
declined from 76 per cent to 64 per cent between 1966 and 1993, while exportsincreased from 24 per cent to 36 per cent.
In their quest for competitiveness, TNCs assign a particularly important role to
--- Content provided by FirstRanker.com ---
obtaining access to created (or strategic) assets: the principal wealth-creating
assets and a key source of competitiveness for firms. Created assets can be
--- Content provided by FirstRanker.com ---
tangible like the stock of financial and physical assets such as thecommunication infrastructure or marketing networks, or intangible. The list of
intangible assets is long, but they have a common denominator: knowledge.
--- Content provided by FirstRanker.com ---
They include skills, attitudes (e.g. attitudes to wealth creation and business
culture), capabilities (technological, innovatory, managerial and leading
--- Content provided by FirstRanker.com ---
capabilities), competencies (e.g. to organise income-generating assetsproductively), relationships (such as interpersonal relationships forged by
individuals or contacts -with governments), as well as the stock of information,
--- Content provided by FirstRanker.com ---
trade marks, goodwill and brainpower. These assets can be embodied in both
individuals and firms and the can sometimes be enhanced by clusters of firms
and economic activities.
--- Content provided by FirstRanker.com ---
The importance of created intangible assets in production and other economic
activities has increased considerably. A large proportion of the costs of many
--- Content provided by FirstRanker.com ---
final goods and services, ranging from simple products such as cereals throughbooks computers to automobiles, consists of the costs of such created assets as
R&D, design, advertising, distribution and legal work. Less than 10 per cent of
--- Content provided by FirstRanker.com ---
the production of automobiles now consists of labour costs; the rest relates to the
contributions various created assets. Moreover, international competition
--- Content provided by FirstRanker.com ---
increasingly takes place through new products and processes and these are oftenknowledge based. R&D activities leading to new products and processes are
costly and risky. At the same time, markets for knowledge-based resources and
--- Content provided by FirstRanker.com ---
assets are becoming more open and enterprises embodying these assets can be
bought and sold. The result is that TNCs have taken advantage of these
--- Content provided by FirstRanker.com ---
opportunities and used FDI as a major means of acquiring created assets andenhancing corporate competitiveness.
CAPITAL INFLOWS AND OVERHEATING
--- Content provided by FirstRanker.com ---
The key short-run macroeconomic concern associated with a surge in capital
inflows that of an excessive expansion of aggregate demand that is,
--- Content provided by FirstRanker.com ---
macroeconomic overheating. This outcome can be produced through thefollowing transmission mechanism :
i) If a country maintains an officially determined exchange rate, the commitment
--- Content provided by FirstRanker.com ---
to defend the parity causes the central bank to intervene in the foreign exchange
market to purchase the foreign exchange generated by the capital inflow. To do
--- Content provided by FirstRanker.com ---
so, the central bank creates high-powered domestic money.ii) This expansion of the monetary base creates a corresponding expansion in
broader measures of the money supply, lowering domestic interest rates and
--- Content provided by FirstRanker.com ---
raising domestic asset prices.
iii) This action in turn triggers an expansion of aggregate demand. If the
economy possesses excess capacity, the short-run implications maybe to
--- Content provided by FirstRanker.com ---
increase domestic economic activity and cause the current account of the
balance of payments to deteriorate. Eventually, however (and perhaps rather
--- Content provided by FirstRanker.com ---
quickly if domestic excess capacity is limited), excess capacity will be absorbedand the expansion in demand will trigger acceleration in domestic inflation.
iv) If the exchange rate peg is maintained, rising domestic prices will cause real
--- Content provided by FirstRanker.com ---
exchange rate to appreciate, abetting the current account deterioration associated
with the expansion in aggregate demand.
--- Content provided by FirstRanker.com ---
POLICIES TO CONTROL OVERHEATINGTo avoid potential overheating, developing countries can and have intervened
every step in this transmission process. Policy can attempt to reduce the required
--- Content provided by FirstRanker.com ---
scale of intervention in the foreign exchange market, restrict the monetary
expansion associated with a given magnitude of intervention, and offset through
--- Content provided by FirstRanker.com ---
other means the effects on aggregate demand of a given magnitude of monetaryexpansion. These policies are not exclusive, and most countries have brought a
wide variety of these instruments into play.
--- Content provided by FirstRanker.com ---
Some policies have restricted the required scale of intervention in the foreign
exchange market, either through reducing the capital account surplus of the
--- Content provided by FirstRanker.com ---
balance of payments or through an offsetting increase in the current accountdeficit. The main instruments available to the authorities are the following:
--- Content provided by FirstRanker.com ---
The magnitude of gross capital inflows can be reduced by imposing a variety of
direct or indirect controls on inflows.
--- Content provided by FirstRanker.com ---
Even if gross inflows are freely allowed, the liberalisation of capital outflows orthe accelerated repayment of public debt can be undertaken to attempt to reduce
net inflows.
--- Content provided by FirstRanker.com ---
The implications of a net capital account surplus on the foreign exchange marketcan he counteracted by accelerating trade liberalisation to increase the current
account deficit.
--- Content provided by FirstRanker.com ---
The most extreme option in this category would be to eliminate all foreign
exchange market intervention by floating the exchange rate. The resulting
--- Content provided by FirstRanker.com ---
appreciation of the domestic currency would both reduce net inflows through thecapital account and create a current account offset.
There are two policies that restrict the magnitude of the monetary expansion
--- Content provided by FirstRanker.com ---
associated with a given amount of intervention in the foreign exchange market:
i) Expansion of base money associated with a given amount of intervention car
--- Content provided by FirstRanker.com ---
be restricted by sterilising the effects of intervention on the monetary base--that is, by contracting domestic credit to offset the expansion of the net foreign
assets of the central bank, through mechanisms such as open market operations
--- Content provided by FirstRanker.com ---
or transferring public sector deposits from commercial banks to the central bank.
ii) Increasing reserve requirements on domestic financial institutions reduces the
--- Content provided by FirstRanker.com ---
impact of the expansion of the monetary base on the growth of broadermonetary aggregates
Sterilised intervention was the most widely and intensively used policy response
--- Content provided by FirstRanker.com ---
to the arrival of capital inflows among the countries. But can sterilisation be
effective? This essentially depends on relative substitutability among assets,
--- Content provided by FirstRanker.com ---
both between domestic and foreign interest-bearing assets and among` differenttypes of domestic assets. If domestic interest-bearing assets are perfect
substitutes among themselves, then the issue of whether sterilisation can work
--- Content provided by FirstRanker.com ---
amounts to whether it is possible to prevent a change in demand for domestic
interest-bearing assets from causing a change in their price through a suitable
--- Content provided by FirstRanker.com ---
quantity response. Clearly, this will depend on the degree of substitutabilitybetween domestic and foreign interest-bearing assets. If they are close to perfect
substitutes, then the quantity response would have to approach infinity to
--- Content provided by FirstRanker.com ---
prevent a price response. This is what is typically meant by the impossibility ofsterilisation.
However, it is also possible for sterilisation to be ineffective in preventing a
--- Content provided by FirstRanker.com ---
change in the price of domestic assets even if foreign and domestic interest-
bearing assets are imperfect substitutes. This is the case when domestic assets
--- Content provided by FirstRanker.com ---
are imperfect substitutes among themselves and a capital inflow represents anincreased demand for a particular type of domestic asset that the central bank
cannot provide, either directly or indirectly. In this case, sterilised intervention
--- Content provided by FirstRanker.com ---
that keeps the monetary base constant, by issuing an asset other than that
demanded by the agents generating the capital inflow, could not prevent relative
--- Content provided by FirstRanker.com ---
price adjustments among domestic assets as portfolio equilibrium is restored. Ifsuch price adjustments cannot be avoided, then it may not feasible to insulate
aggregate demand. For example aggressive sterilisation in Mexico did not
--- Content provided by FirstRanker.com ---
prevent the arrival of capital inflows from being associated with a stock market
boom. One interpretation of this experience is that external creditors wished to
--- Content provided by FirstRanker.com ---
acquire equity in Mexican firms, while the sterilisation instrument issued by thecentral bank consists of claims on the Mexican government. In this case the
maintenance of portfolio equilibrium in the wake of increased external demand
--- Content provided by FirstRanker.com ---
for Mexican equity would ha required higher equity prices in Mexico even if the
sterilisation of capital inflows had been complete.
--- Content provided by FirstRanker.com ---
Because sterilisation involves the issuance of additional domestic debt, andbecause its effectiveness depends on substitutability among domestic assets the
form that it takes may matter for both its effectiveness and its desirability.
--- Content provided by FirstRanker.com ---
Capital-importing countries have used three alternative sterilisation techniques:
i) transferring public sector deposits out of the commercial banking system and
--- Content provided by FirstRanker.com ---
into the central bank.ii) selling public sector bonds in secondary bond markets.
iii) increasing the reserve requirements on domestic banks.
--- Content provided by FirstRanker.com ---
While these techniques share the common objective of stabilising the domesticmoney supply, the analysis below suggests that their macroeconomic effects
may be quite different.
--- Content provided by FirstRanker.com ---
STERILISATIONS THROUGH TRANSFERS OF PUBLIC SECTOR
DEPOSIT
--- Content provided by FirstRanker.com ---
Consider the effects of a capital inflow triggered by a shift in private sector(domestic or foreign) preferences from foreign to domestic interest-bearing
assets. To effect this portfolio reallocation, the private sector has to sell foreign
--- Content provided by FirstRanker.com ---
exchange to the domestic central bank. When the public sector offsets a
purchase of foreign exchange by transferring public sector deposits from
--- Content provided by FirstRanker.com ---
commercial banks to the central bank, it leaves the stock base money unchangedbut exchanges a claim on the domestic banking system for an external claim. At
the same time the private sector changes its portfolio in the opposite direction.
--- Content provided by FirstRanker.com ---
There are two ways that the macroeconomic equilibrium can be affected by
transaction, even if the monetary base is unchanged. First, if interest-bearing
--- Content provided by FirstRanker.com ---
deposits in the domestic banking system are imperfect substitutes in privateportfolios for other domestic interest-baring assets, then private portfolio
equilibrium will be disturbed unless the domestic asset for which there is
--- Content provided by FirstRanker.com ---
increased demand happens to be deposits in the domestic banking system. If that
is the case, then the private sector and government simply exchange claims on
--- Content provided by FirstRanker.com ---
the banking system and there are no price implications the transaction. But if itis not the case, then relative domestic asset prices will have change to maintain
portfolio equilibrium. If the initial asset shift was toward dome securities, for
--- Content provided by FirstRanker.com ---
instance, the yield on such securities would presumably have to fall a interest
rates on bank assets and liabilities would have to rise.
--- Content provided by FirstRanker.com ---
The second effect is a fiscal one. To the extent that the yield on domesticdeposits differs from the yield on foreign exchange reserves, the solvency of the
domes public sector will be affected by the transaction. In the particular case of
--- Content provided by FirstRanker.com ---
sterilisation through shifts in public sector deposits, the liquidity services
provided by such deposits suggest that the public sector`s net interest receipts
could rise or fall as a result of sterilisation operation.
--- Content provided by FirstRanker.com ---
STERILISATION THROUGH OPEN MARKET OPERATIONS
Open market sterilised intervention requires the central bank to sell enough
--- Content provided by FirstRanker.com ---
domes bonds to purchase the foreign exchange associated with the inflow,thereby leaving the monetary base unchanged but increasing the stock of
outstanding domestic pub sector debt. The amount of new debt is therefore equal
--- Content provided by FirstRanker.com ---
to the increase in demand interest- bearing claims on the domestic economy.
The effect of the transaction on central bank`s balance sheet is to leave its
--- Content provided by FirstRanker.com ---
liabilities (the base) unchanged, but change the composition of its assets,reducing its claims on the domestic government and increasing its international
reserves. From the standpoint of the nonfinancial public sector as a whole,
--- Content provided by FirstRanker.com ---
sterilised intervention amounts to a portfolio transaction in which the domestic
nonfinancial public sector issues interest debts denominated domestic currency
--- Content provided by FirstRanker.com ---
in order to acquire a foreign interest-bearing claim.Sterilised intervention through open market operations is not likely to be
costless, however. The portfolio reallocation implied for the public sector
--- Content provided by FirstRanker.com ---
involves issuing a high yielding liability (domestic currency debt) in exchange
for a lower-yielding asset (international reserves). This interest differential
--- Content provided by FirstRanker.com ---
leaves the public sector in a weakened financial position. The net adverse effectof such transactions on the public sector`s solvency is overstated by the interest
differential, however, because this differential exists in part to compensate
--- Content provided by FirstRanker.com ---
creditors for the currency and country risk associated with holding domestic
public debt. By issuing such debt in exchange for reserves, the public sector is
--- Content provided by FirstRanker.com ---
receiving a benefit that partly offsets the interest penalty that is, the option toreduce the real value of its obligations by devaluing or defaulting. Nonetheless,
these benefits may be worthless to a government that never intends to , exercise
--- Content provided by FirstRanker.com ---
these options (but is unable to convince its creditors of this fact). In this case,
sterilised intervention carries a fiscal burden, the cost of which depends on the
ease with which an offsetting fiscal adjustment can he effected.
--- Content provided by FirstRanker.com ---
As in the previous case, the conditions required for sterilisation through open
market operations to be effective in insulating the domestic economy are that
--- Content provided by FirstRanker.com ---
domestic interest-bearing assets must be perfect substitutes among themselvesor, if they are not, that sterilisation operations must be capable of supplying
precisely those assets that are in increased demand.
--- Content provided by FirstRanker.com ---
STERILISATION THROUGH RESTRICTIONS ON DOMESTIC
CREDIT GROWTH
--- Content provided by FirstRanker.com ---
Sterilised intervention through transfers of public sector deposits and openmarket bond sales operates by fixing the size of the monetary base. An
alternative is to allow the base to expand as a result of central bank intervention
--- Content provided by FirstRanker.com ---
in the foreign exchange market, but to restrict expansion of the money sup ply
by raising reserve requirements on banks, thus causing the money multiplier to
--- Content provided by FirstRanker.com ---
contract.Again, the objective is to fix the price of domestic interest-hearing assets in the
face of an increase in the demand for such assets. From a portfolio allocation
--- Content provided by FirstRanker.com ---
perspective, this policy works, in principle, by having the private sector rather
than the central bank issue the domestic interest assets that are in increased
--- Content provided by FirstRanker.com ---
demand. When commercial banks face higher reserve requirements, they areforced to absorb the additional monetary base emitted by the central bank in the
course of its foreign. exchange operations, rather than acquire domestic interest
--- Content provided by FirstRanker.com ---
assets in the form of credit extended to domestic agents. The contraction of
credit on the part of commercial banks causes domestic agents who would
--- Content provided by FirstRanker.com ---
otherwise have borrowed from these banks to instead issue securities. Sincethese securities are precisely the assets that are in increased demand by the non
bank public, the supply of domestic interest-bearing assets expands to meet
--- Content provided by FirstRanker.com ---
demand, so there is no change in the price of such assets.
However, bank borrowers squeezed out of credit markets by higher reserve
requirements may not have access to securities markets and thus may he unable
--- Content provided by FirstRanker.com ---
to supply the assets that are in higher demand. Borrowers with low net worth
who lack other forms of collateral are able to obtain credit only from institutions
--- Content provided by FirstRanker.com ---
that are highly specialised in evaluating and monitoring loans (banks). Suchborrowers cannot securitise their liabilities. If this is the case, then there is a
prima facie case for m substitutability among the relevant domestic assets when
--- Content provided by FirstRanker.com ---
sterilisation is pursued a policy of altering reserve requirements, suggesting that
insulation of the economy is less likely to be achieved under this policy than
--- Content provided by FirstRanker.com ---
through open market operations.An additional difference between sterilisation through restrictions on domestic
credit and through open market operations is fiscal cost. In the case of domestic
--- Content provided by FirstRanker.com ---
credit restriction, the public sector still acquires interest foreign assets but does
so by emitting non interest-bearing liabilities (that is, the monetary base). Thus,
--- Content provided by FirstRanker.com ---
the public sector`s fiscal situation actually improves when sterilisation iseffected by increasing reserve requirements. This approach, however, implicitly
taxes private agents. The requirement that banks hold a larger stock of non-
--- Content provided by FirstRanker.com ---
interest hearing reserves imposes an explicit tax on them, which must be
apportioned in some way among bank depositors, borrowers, and shareholders.
--- Content provided by FirstRanker.com ---
The incidence of the tax will depend on the elasticity supply of bank deposits,as well as on the demand for bank loans.
--- Content provided by FirstRanker.com ---
OFFSETTING THE IMPACT OF MONETARY EXPANSION ON
AGGREGATE DEMAND
--- Content provided by FirstRanker.com ---
If the arrival of capital inflows is permitted to result in the expansion of broad
monetary aggregates, the expansionary effects on aggregate demand can be
--- Content provided by FirstRanker.com ---
neutralised through fiscal contraction.
Fiscal adjustment was a key component of the stabilization and market-oriented
refer programmes that many countries undertook prior to receiving capital
--- Content provided by FirstRanker.com ---
inflow Consequently, it is difficult to interpret a tight fiscal stance, or a further
tightening of that stance, as a policy response to capital inflows rather than as a
--- Content provided by FirstRanker.com ---
continuation of an ongoing adjustment process. Whatever the reason, a tighterfiscal stance during the inflow episode does help reduce aggregate demand
pressures.
--- Content provided by FirstRanker.com ---
How successful are these policies in preventing the overheating associated with
a surge in capital inflows? Once again, macroeconomic performance can be
--- Content provided by FirstRanker.com ---
understood in terms of the transmission mechanism, that operates during theinflow episodes According to this mechanism two conditions are necessary for
capital inflows to have a expansionary impact on aggregate demand. First, a
--- Content provided by FirstRanker.com ---
change in the net private capital inflow must represent an addition to the
country`s capital account surplus, rather than merely a change in the identity,
--- Content provided by FirstRanker.com ---
whether private or public, of the country`s external creditors. Second, the centralbank must intervene actively in the foreign exchange market, purchasing the
additional foreign exchange generated by the capital inflows.
--- Content provided by FirstRanker.com ---
POLICY REGIMES AND VULNERABILITY
In the context of financial integration, vulnerability refers to the possibility that
--- Content provided by FirstRanker.com ---
a country may find itself confronted with a sudden, large, and relatively loreduction in net capital inflows. The challenge to policymakers is to identify and
implement policies that can minimise (or at least do rot magnify) vulnerability to
--- Content provided by FirstRanker.com ---
external financial shocks. The creditors (both domestic and foreign) can be
expected to take their capital out of a country when they think that a policy
--- Content provided by FirstRanker.com ---
change could impair the value of their investment, then vulnerability will arisewhen the perception is created that a devaluation, nonpayment of public sector
debt, or the imposition of restrictions on capital outflows is about io occur. Such
--- Content provided by FirstRanker.com ---
expectations are likely to arise when the real exchange rate is perceived to be out
of line, the government`s debt obligations are large, fiscal adjustment is
perceived as politically or administratively infeasible, or the country`s growth
--- Content provided by FirstRanker.com ---
prospects are bleak. From the perspective of creditors, therefore, a high share of
investment in absorption and a strong record of growth, a low stock of
--- Content provided by FirstRanker.com ---
government obligations coupled with demonstrated fiscal flexibility (in the formof small deficits and low inflation), and a real exchange rate broadly perceived
to be in line with fundamentals all augur well for future debt service. These
--- Content provided by FirstRanker.com ---
characteristics are most directly associated with a country`s ability to avoid
vulnerability. From a policy perspective, countries need to have an active
--- Content provided by FirstRanker.com ---
exchange rate policy that avoids substantial appreciation of the real exchangerate and responsible fiscal policies.
MACROECONOMIC MANAGEMENT WITH GROWING
--- Content provided by FirstRanker.com ---
INTEGRATION
Short of the crisis situation associated with vulnerability, cross-border capital
--- Content provided by FirstRanker.com ---
flows may exhibit substantial volatility that is temporary shocks to either capitalinflows or out flows caused by changes in world economic conditions or by less
extreme changes in portfolio managers` perceptions of domestic
--- Content provided by FirstRanker.com ---
creditworthiness. This increased volatility may well be a fact of life for
developing countries as they become more integrated with international
--- Content provided by FirstRanker.com ---
financial markets, even after stock adjustment inflows associated with thetransition have tapered oft, and even if severe crises are avoided.
The most direct response to external financial volatility is to contain its impact
--- Content provided by FirstRanker.com ---
by restricting the movement of capital that is, imposing capital controls.
However, economists have long questioned both the effectiveness and the
--- Content provided by FirstRanker.com ---
desirability of such restrictions. We take up each of these issues in turn.CAPITAL CONTROLS ARE OF QUESTIONABLE EFFECTIVENESS
Although economists tend to have strong views about the effectiveness or
--- Content provided by FirstRanker.com ---
ineffectiveness of capital controls, empirical evidence on the issue is ambiguous.
Assessing the effectiveness of controls is complicated by a host of factors,
--- Content provided by FirstRanker.com ---
including the definition of effectiveness itself (that is, what is the objective to beachieved) and the conditions that determine the effectiveness of different types
of controls. It may b argued that the effectiveness of capital controls can only be
--- Content provided by FirstRanker.com ---
measured relative to the objective they are designed to achieve. There are threebasic types of objectives: to preserve some degree of domestic monetary
autonomy over a period of time, to restrict the magnitude of net capital flows
--- Content provided by FirstRanker.com ---
into or out of the country, and to affect the composition of capital flows.
However, because monetary autonomy cannot be achieved unless the magnitude
--- Content provided by FirstRanker.com ---
of net flows is restricted, these three objectives boil down to two: restricting thesize of net capital flows and affecting their composition.
CONDITIONS FOR EFFECTIVENESS OF DIFFERENT TYPES OF
--- Content provided by FirstRanker.com ---
CONTROLS
The effectiveness of controls may depend on a variety of factors that not only
--- Content provided by FirstRanker.com ---
differ across countries but also change over time as the process of financialintegration proceeds. These factors includes:
The state of technology. This affects transaction costs in conducting
--- Content provided by FirstRanker.com ---
arbitrage among different financial centers. The lower the costs, the more
difficult it will be to implement effective controls.
--- Content provided by FirstRanker.com ---
The extent of international cooperation in reporting cross-borderclaims. In the case of controls on outflows, for example, host countries
may be unwilling to declare the assets of residents from capital-exporting
--- Content provided by FirstRanker.com ---
countries, whether or not these residents try to circumvent foreign
exchange regulations.
--- Content provided by FirstRanker.com ---
The size of the misalignment motivating inflows or outflows. If effectinga capital inflow or outflow for an arbitrage operation involves a fixed
cost imposed by the control regime, then the deterrent effect of this cost
--- Content provided by FirstRanker.com ---
may be nullified if the arbitrage gains promise to exceed the cost.
The design of the controls themselves, in particular their
--- Content provided by FirstRanker.com ---
comprehensiveness. Controls that are not comprehensive for example,those that apply to only certain types of flows can be evaded by changing
the composition of flows. While such controls would be ineffective in
--- Content provided by FirstRanker.com ---
preserving monetary autonomy (or limiting the total magnitude offlows), they may, however, still be able to alter the composition of flows.
The structure of the domestic financial system. This may determine
--- Content provided by FirstRanker.com ---
the effectiveness of partial controls that leave room for evasion by
channeling flows through alternative domestic intermediaries.
--- Content provided by FirstRanker.com ---
The size of trade flows. This would determine the scope for under andover invoicing, as well as for altering leads and for lags on trade credit.
The type of cross flows targeted by the controls that is, controls on
--- Content provided by FirstRanker.com ---
capital outflows may differ in effectiveness from controls on inflows, all
other things (that is, potential arbitrage margins) being equal. One
--- Content provided by FirstRanker.com ---
argument is that the residence of the capital-importing or exporting agentmay matter. Domestic residents may be more prepared than foreign
agents to evade restrictions, making controls on outflows less effective
--- Content provided by FirstRanker.com ---
than controls on inflows.
The efficiency of the controlling bureaucracy. In practice, restrictions
--- Content provided by FirstRanker.com ---
on capital movements have taken many forms, ranging from the outrightprohibition of a wide array of capital account trans-actions (such as those
that have given rise to parallel foreign exchange markets in both
--- Content provided by FirstRanker.com ---
industrial and developing countries) to prudential restrictions on the
acquisition of foreign assets by domestic pension funds or of foreign
--- Content provided by FirstRanker.com ---
liabilities by domestic banks. Different restrictions designed to achievedifferent objectives can be expected to vary in effectiveness, both in
achieving their stated purposes and in the wider sense of financially
--- Content provided by FirstRanker.com ---
insulating the domestic economy from external shocks .Some analysts
have argued that controls of any type can be effective under any arbitrary
--- Content provided by FirstRanker.com ---
set of circumstances, while others have argued that controls of any typecan never be effective. Neither argument is valid. This means, in
particular, that the size of capital flows in the presence of controls is not
--- Content provided by FirstRanker.com ---
a reliable indicator of the effectiveness of controls, since large flows maysimply indicate large arbitrage opportunities.
ARE CAPITAL CONTROLS DESIRABLE?
--- Content provided by FirstRanker.com ---
Even if capital controls can be effective, that does not mean they should be used.
Since effective controls distort private economic decisions, the benefits of
--- Content provided by FirstRanker.com ---
imposing them should outweigh the costs. Arguments for restricting capitalmovements as a way to control volatility and achieve macroeconomic
stabilisation under a high degree of financial integration are:
--- Content provided by FirstRanker.com ---
Incredible reforms. The first argument is that controls may be effective in
coping with distortions that arise when the government implements an incredible
--- Content provided by FirstRanker.com ---
stabilisation or trade liberalisation (one that observers do not believe it can carryout). Lack of confidence in the government`s ability to sustain its announced
exchange rate or tariff policies may make external borrowing appear temporarily
--- Content provided by FirstRanker.com ---
cheap, with potentially destabilising effects on the domestic economy. The best
solution to this problem is for the government to take steps to achieve
--- Content provided by FirstRanker.com ---
credibility--most commonly, by getting its fiscal accounts into order--sincefiscal problems are often the cause of policy reversal. If this is not feasible,
controls on capital movements may be a second-best policy.
--- Content provided by FirstRanker.com ---
Insulation from shocks arising in the international financial market. The second
argument for capital controls on both inflows and out- flows is that they can
--- Content provided by FirstRanker.com ---
insulate the domestic economy from identifiable external financial shocks--thatis, they can limit the incidence of volatility by preserving some degree of
financial autarky. Since controls directly address the source of the shock they
--- Content provided by FirstRanker.com ---
may, it is argued, succeed in stabilizing the economy without introducing new
distortions. This argument for quantitative controls however, is less persuasive
--- Content provided by FirstRanker.com ---
than the first. From the country perspective, fluctuations in world interest ratesare just an inter temporal dimension of what terms of trade fluctuations are intra
temporally. If intra temporal price fluctuations do not require insulation, it is not
--- Content provided by FirstRanker.com ---
cleat why inter temporal fluctuations should do so.
Preservation of short-run monetary auto under perfect capital mobility, the
effectiveness of monetary policy can be preserved only if exchange rate policy is
--- Content provided by FirstRanker.com ---
flexible. In this case, however, unpleasant tradeoffs may arise between internal
(inflation) and external (current account) balance targets. Tight monetary policy
--- Content provided by FirstRanker.com ---
adopted to combat inflation, for example, would increase the domestic realinterest rate while causing the real exchange rate to appreciate, possibly
resulting in a deterioration of the trade balance. Capital controls would enable
--- Content provided by FirstRanker.com ---
the monetary authorities to avoid this tradeoff between targets by making it
possible to preserve monetary autonomy with an officially determined exchange
--- Content provided by FirstRanker.com ---
rate. Thus controls would, in effect, provide a second independentmacroeconomic instrument either monetary policy or the exchange rate-to
simultaneously address the two targets of inflation and the external balance of
--- Content provided by FirstRanker.com ---
payments. The benefits for macroeconomic management are large, however,
only if other stabilisation instruments are not available. If fiscal policy is
--- Content provided by FirstRanker.com ---
sufficiently flexible to be used for stabilisation purposes, for example, then pricestability and satisfactory current account performance can be pursued through
the combined use of fiscal and exchange rate policy.
--- Content provided by FirstRanker.com ---
Changing the composition of inflows. Finally, there is the argument that controls
can be used to alter the composition of capital inflows. Even if controls can be
--- Content provided by FirstRanker.com ---
used for this purpose, whether or not they should be depends on whether thecomposition of inflows matters. Unfortunately, there is currently no consensus
on this issue.
--- Content provided by FirstRanker.com ---
A separate argument for being concerned with the composition of flows is that
certain types of inflows maybe driven by implicit government guarantees (for
--- Content provided by FirstRanker.com ---
example, external borrowing by domestic financial institutions) and thus maynot be welfare enhancing. But even if such flows could be discouraged by
capital controls, it is riot clear that the same implicit guarantees do not also
--- Content provided by FirstRanker.com ---
apply to other types of flows (such as direct lending to domestic firms) through
less direct means. If they do, then the case for altering the composition of flows
would have to rely on the differential welfare effects of direct government
--- Content provided by FirstRanker.com ---
guarantees extended to financial institutions for different types of flows. This
case seems plausible a priori.
--- Content provided by FirstRanker.com ---
Although many developing countries that maintained controls during the initialperiod of financial integration seem to have preserved a meaningful degree of
monetary autonomy, i-he effectiveness of controls is likely to decrease as these
--- Content provided by FirstRanker.com ---
countries become more integrated. As condition change in these countries, the
evidence from industrial countries may become more relevant for them, and
--- Content provided by FirstRanker.com ---
controls will be able to preserve a degree of monetary autonomy for only alimited period of time. In addition, controls have not been able to prevent large
capital outflows and inflows in response to large prospective arbitrage profits.
--- Content provided by FirstRanker.com ---
Finally, the controls can be effective in altering the composition of flows.
--- Content provided by FirstRanker.com ---
With regard to the desirability of implementing controls, it can be concludedthat,
Prudential restrictions on external borrowing and lending by domestic financial
--- Content provided by FirstRanker.com ---
institutions may plausibly be warranted. These restrictions on capital movements
have a clear second-best rationale, since they are directed at a specific distortion:
--- Content provided by FirstRanker.com ---
the inability of the government to credibly commit to removing certain implicitguarantees.
Temporary restrictions on capital movements designed to address incredible
--- Content provided by FirstRanker.com ---
liberalisation or incredible stabilisation problems are also warranted if
credibility is not achievable, again on second-best grounds. Such restrictions
--- Content provided by FirstRanker.com ---
may be of limited effectiveness, however, if the size of the perceived arbitragemargin is large.
Restrictions on capital inflows for more general macroeconomic stabilisation
--- Content provided by FirstRanker.com ---
purposes may he motivated by the desire to insulate the domestic economy from
pure external financial shocks or to preserve monetary autonomy in an effort
--- Content provided by FirstRanker.com ---
to free up an additional policy instrument. The first goal is questionable, since itis based on the premise that the government is better informed about the
duration of shocks than the private sector. With regard to the second objective,
--- Content provided by FirstRanker.com ---
the best solution to this problem may be to increase the flexibility of fiscalpolicy rather than adopt capital controls. At best, this objective provides an
argument for retaining restrictions as a transitory device, until the fiscal system
--- Content provided by FirstRanker.com ---
can be reformed to make fiscal policy an effective stabilisation tool.
EXCHANGE RATE POLICY
--- Content provided by FirstRanker.com ---
Different exchange rate systems can be and have been used by countries whilebecoming integrated with (he rest of the world in particular, pure floating;
managed, or dirty, floating; fixed exchange rate; or a currency (or quasi-
--- Content provided by FirstRanker.com ---
currency) board. Each system has consequences for the effectiveness of
monetary and fiscal policy. Thus, while in a pure floating system fiscal policy is
--- Content provided by FirstRanker.com ---
less effective and monetary policy more effective, in a fixed exchange ratesystem the opposite results. Therefore, the advantages or disadvantages of each
system vary from country to country depending on the nature nominal versus
--- Content provided by FirstRanker.com ---
real of the shocks affecting each country and the ability of the authorities to have
a flexible fiscal policy. Countries in which fiscal policy cannot be modified
--- Content provided by FirstRanker.com ---
effectively in the short run should not relinquish monetary policy completely byadopting a fixed exchange rate system.
In the recent years an increasing number of economies have adopted flexibly
--- Content provided by FirstRanker.com ---
managed exchange rate systems, which give them the option of effectively
using monetary policy at the cost of eroding their credibility regarding inflation
--- Content provided by FirstRanker.com ---
targets. The few exceptions have been economies where the credibility of thegovernment was extremely low Hong Kong during the 1980s and Argentina and
Estonia during the 1990s of whom adopted currency boards because of the need
--- Content provided by FirstRanker.com ---
to regain market confidence. The major difficulty facing these economies,
however, is to maintain a flexible enough fiscal policy and build cushion such as
--- Content provided by FirstRanker.com ---
a large stock of international reserves to improve the resilience of the economyto shocks.
In the aftermath of the Mexican crisis, many thought that the days of managed
--- Content provided by FirstRanker.com ---
exchange rate systems were over. However, most countries were able to gothrough the Mexican crisis without modifying their exchange rate systems. The
evidence to date shows that in capital markets have been selective since the
--- Content provided by FirstRanker.com ---
Mexican episode and that fundamentals matter. Thus, there are indications that
officially determined exchange rates can be managed successfully within a
--- Content provided by FirstRanker.com ---
consistent macroeconomic policy framework.Since managing the exchange rate indeed seems to be the preference of most
developing countries, the issue of how to manage the rate in a financially
--- Content provided by FirstRanker.com ---
integrated world become an important one. One way to approach this problem is
to consider the exchange rate regime as consisting of a band around a moving
--- Content provided by FirstRanker.com ---
central parity. The decisions that need to be made then consist of how to adjustthe parity, how wide to make the band, and how to intervene within the band.
The objective of central parity should be to maintain the competitiveness. This
--- Content provided by FirstRanker.com ---
means adjusting the parity not only in accordance with the domestic foreign
inflation differential but also in accordance with changes in underlying
--- Content provided by FirstRanker.com ---
equilbrium real exchange rates, which are given by permanent changes infundamental factors such as terms of trade, commercial policy, fiscal policy, and
condition in external financial market. Since the central parity seeks to track the
--- Content provided by FirstRanker.com ---
long-run equilibrium real exchange rate, the desirable width of the band depends
on the value to the domestic economy of an independent domestic monetary
--- Content provided by FirstRanker.com ---
policy. The larger the scope for the exchange rate to deviate from its centralparity that is, the wider the band-the greater the scope for an independent
domestic monetary policy, In turn, the usefulness of an independent monetary
--- Content provided by FirstRanker.com ---
policy for reducing volatility depends on the availability of alternative
stabilisation instruments (a flexible fiscal policy) and on the sources of shocks to
--- Content provided by FirstRanker.com ---
the economy. The traditional analysis of this issue focuses on the implications ofshocks in the domestic money (nominal) and goods (real) markets, the standard
prescription being that, holding fiscal policy constant, domestic real shocks call
--- Content provided by FirstRanker.com ---
for exchange rate flexibility, while domestic nominal shocks call for fixedexchange rates. This suggests that if fiscal policy is not available (or is costly to
use) as a stabilisation instrument, countries in which domestic real shocks
--- Content provided by FirstRanker.com ---
predominate should adopt fairly wide bands, while those in which domestic
nominal shocks are dominant should keep the exchange rate close to its central
--- Content provided by FirstRanker.com ---
parity. With a flexible fiscal policy, however, domestic real shocks can becountered through fiscal adjustments, thereby diminishing the value of
independent monetary policy as a stabilisation instrument. Thus the adoption of
--- Content provided by FirstRanker.com ---
a fairly narrow band is more likely to be consistent with the stabilisation
objective if fiscal policy is available as a stabilisation instrument.
--- Content provided by FirstRanker.com ---
Regarding intervention within the band, the logic of this analysis suggests thatfor a given band width, active intervention should accompany nominal shocks,
whereas real shocks instead call for some combination of exchange rate and
--- Content provided by FirstRanker.com ---
fiscal adjustment. Consider, however, an alternative source of shock that is,
pure external financial shocks, say in the form of fluctuations in world interest
--- Content provided by FirstRanker.com ---
rates. In this case, exchange market intervention policy determines the form inwhich the shock is transmitted to the domestic economy. If world interest rates
fall, for example, and active (unsterilised) intervention keeps the exchange rate
--- Content provided by FirstRanker.com ---
fixed at its central parity, domestic monetary expansion and lower domestic
interest rates will ensure an expansionary shock. If, on the other hand, the
--- Content provided by FirstRanker.com ---
central bank refrains form intervention, the domestic currency will appreciate inreal terms and the domestic real interest rate will rise a contractionary shock.
Purely from the perspective of stabilising domestic aggregate demand, the
--- Content provided by FirstRanker.com ---
appropriate intervention policy within the band in this case depends on the
direction in which it is feasible or desirable to move fiscal policy. If fiscal policy
--- Content provided by FirstRanker.com ---
is literally inflexible, then the choice confronting monetary authorities isbetween real appreciation (under no intervention) or overheating (under full
unsterilised intervention). To avoid both overheating and real appreciation
--- Content provided by FirstRanker.com ---
requires a mix of fiscal contraction and intervention to keep the nominalexchange rate close to its central parity.
Though crawling pegs remain a viable exchange rate option for developing
--- Content provided by FirstRanker.com ---
countries that become integrated into world capital markets. However, this
reduces the scope for deviating from fundamentals, as well as form commitment
--- Content provided by FirstRanker.com ---
to the announced regime. Managed rates are certainly capable of generatingmacroeconomic volatility in this environment, but they have not generally done
so.
--- Content provided by FirstRanker.com ---
The following conclusions can be drawn with regard to exchange rate
management:
--- Content provided by FirstRanker.com ---
The central parity should be managed so as to track, to the extent possible, theunderlying long equilibrium real exchange rate, This means not just offsetting
inflation differentials but also adjusting the real exchange rate target to reflect
--- Content provided by FirstRanker.com ---
permanent changes in fundamentals. Large and persistent temporary
misalignments should be avoided, primarily because they threaten the
--- Content provided by FirstRanker.com ---
sustainability of the regime and make speculative attacks more likely.Small temporary deviations from the central parity can play a useful stabilising
role when fiscal policy is inflexible and either real domestic shocks dominate or
--- Content provided by FirstRanker.com ---
exchange rate flexibility is required to ensure that external shocks affect
domestic demand in the right direction. In general, fiscal flexibility can
--- Content provided by FirstRanker.com ---
substitute for exchange rate flexibility as a stabilising device.MONETARY POLICY
Fixing an exchange rate target in the face of capital movements implies central
--- Content provided by FirstRanker.com ---
bank intervention in the foreign exchange market, which has the effect of
altering the stock of base money. Sterilised intervention is the indicated policy
--- Content provided by FirstRanker.com ---
for a government attempting to simultaneously run an independent monetarypolicy (targeting either some monetary aggregate or some domestic interest rate)
and fix the nominal exchange rate. However, if capital mobility is high, such an
--- Content provided by FirstRanker.com ---
attempt may not be successful in the absence of capital controls.
The purpose of sterilised (as opposed to unsterilised) intervention is to prevent a
change in the demand for domestic interest-bearing assets from causing too
--- Content provided by FirstRanker.com ---
large a change in the price of those assets, essentially by meeting the demand
shift with a supply response. Thus, sterilisation in response to capital inflows
--- Content provided by FirstRanker.com ---
involves an increase in the supply of domestic debt in one form or another. As inthe case of capital controls, the general issues that arise in this context are not
only whether sterilised intervention can work to stabilise domestic aggregate
--- Content provided by FirstRanker.com ---
demand but also, if it can, whether it is desirable. Even if sterilisation remains
possible for financially integrating developing countries, its effectiveness in
--- Content provided by FirstRanker.com ---
insulating domestic demand from external financial shocks is questionable.Sterilisation is most effective when domestic interest-bearing assets are close
substitutes among themselves but are poor substitutes for foreign interest
--- Content provided by FirstRanker.com ---
bearing assets. Under these circumstances, sterilised intervention can insulate
domestic aggregate demand from transitory portfolio shocks. However, the
--- Content provided by FirstRanker.com ---
conditions necessary for sterilised intervention to be effective imply that itseffectiveness may depend on how it is attempted. Because bank borrowers may
not have access to securities markets, for example, sterilising by raising re3erve
--- Content provided by FirstRanker.com ---
requirements on banks is likely to be less effective in insulating the domestic
economy from portfolio disturbances than is sterilising through open market
--- Content provided by FirstRanker.com ---
bond sales.If sterilisation is possible, when is it beneficial? The answer is that sterilisation
is beneficial whenever the prices of domestic assets need to be insulated from
--- Content provided by FirstRanker.com ---
shocks; that is, whenever the economy experiences transitory shocks to portfolio
preferences-- domestic nominal shocks or external financial shocks--or when
--- Content provided by FirstRanker.com ---
the authorities seek to accommodate a permanent change in portfoliopreferences in a gradual fashion. When this happens, domestic aggregate
demand can be stabilised by preventing changes in -4 portfolio preferences from
--- Content provided by FirstRanker.com ---
being transmitted to the real sector through changes in exchange rates and asset
prices. On the other hand, domestic real shocks do riot call for sterilised
intervention, since in this case the asset price adjustments triggered by the shock
--- Content provided by FirstRanker.com ---
are likely to prove stabilising.
The point for policymakers is that sterilised intervention may be indicated when
--- Content provided by FirstRanker.com ---
an economy experiences shocks to portfolio preferences. Even when it isdesirable for stabilisation purposes, however, sterilisation may carry a fiscal
cost, particularly for governments whose claimed intentions not to devalue or
--- Content provided by FirstRanker.com ---
default on debt are not fully credible, resulting in high domestic interest rates.
Thus, the use of this tool without impairing the government`s solvency requires
--- Content provided by FirstRanker.com ---
fiscal flexibility. Countries that lack such flexibility may be tempted to sterilisethrough changes in reserve requirements, despite the likelihood that the use of
this tool will result in imperfect insulation, because the fiscal implications of
--- Content provided by FirstRanker.com ---
doing so are less adverse than those of open market operations. This advantage,
however, is at the cost of implicit taxation of banks and their customers.
--- Content provided by FirstRanker.com ---
FISCAL POLICYFrom the standpoint of reducing volatility, the key characteristics of fiscal policy
are short-run flexibility, the perceived solvency of the public sector, and its
--- Content provided by FirstRanker.com ---
vulnerability to liquidity crises.
Short-run fiscal flexibility plays an important role in neutralising shocks
--- Content provided by FirstRanker.com ---
The importance of short-run fiscal flexibility can be observed from the referencecase of a pure external financial shock for a country with well-integrated
financial markets. In this case, sterilised intervention is not an option, and thus
--- Content provided by FirstRanker.com ---
the country has only one independent monetary policy instrument. Faced with an
external financial shock, the domestic monetary authorities can choose a value
--- Content provided by FirstRanker.com ---
for either the exchange rate or the domestic money supply (and thus thedomestic interest rate), but not for both. Therefore, when both the level and the
composition of aggregate demand are important, the authorities will find
--- Content provided by FirstRanker.com ---
themselves one instrument short and may face an unpleasant choice between,
say, stabilising domestic demand and safeguarding the competitiveness of
--- Content provided by FirstRanker.com ---
exports. This tradeoff suggests an important role for short-run fiscal flexibility.If fiscal policy can be counted upon to sustain the level of aggregate demand at
its pre-shock value (by adopting a more or less expansionary stance as needed),
--- Content provided by FirstRanker.com ---
then the choice of monetary response can be based on the desired compositionof aggregate demand. In the absence of short-run fiscal flexibility, however, the
nature of the monetary response may depend on tradeoffs between the level and
--- Content provided by FirstRanker.com ---
composition of demand.
How can fiscal flexibility he achieved? There are at least two important
--- Content provided by FirstRanker.com ---
constraints tending to limit the flexibility of fiscal policy. The first concernsinflexibility of fiscal instruments arising from inefficient tax systems that
associate large excess burdens with policy-induced changes in tax revenues, as
--- Content provided by FirstRanker.com ---
well as from political imperatives that tend to drive up the level of public
expenditures. Structural measures that remove rigidities on either the
--- Content provided by FirstRanker.com ---
expenditure or revenue side of the government`s budget-such as privatisation ofstate enterprises and tax reform designed to widen the tax base and remove
egregious distortions in marginal tax rates, as welt as to improve the efficiency
--- Content provided by FirstRanker.com ---
of tax administration--can thus make an important contribution to enhancing
fiscal flexibility. The second restriction on fiscal flexibility arises from the
--- Content provided by FirstRanker.com ---
behaviour of creditors. If fiscal profligacy during good times causes creditors toquestion fiscal solvency during bad times, then countercyclical fiscal measures
will be ruled out by an inability to finance deficits during downturns. The upshot
--- Content provided by FirstRanker.com ---
is that overly expansionary fiscal policy in response to positive shocks is likely
to make fiscal policy procyclical in both directions by constraining fiscal
--- Content provided by FirstRanker.com ---
flexibility when the economy is hit by adverse shocks. Thus a key step inachieving symmetric fiscal flexibility is the implementation of mechanisms that
permit the fiscal authorities to restrain spending when times appear to be good.
--- Content provided by FirstRanker.com ---
Beyond the role of short-run stabilisation in response to external financial
shocks, fiscal policy plays a more fundamental role in the context of increased
--- Content provided by FirstRanker.com ---
financial integration, when both the direction and the magnitude of capital flowsare likely to become very sensitive to perceptions of domestic public sector
solvency. Potential Solvency can generate large capital outflows and large
--- Content provided by FirstRanker.com ---
interest rate premiums, as creditors try to avoid taxation of domestic assets whiledemanding compensation for exposing themselves to the risk of taxation they
face by continuing to lend in the domestic economy. This situation is aggravated
--- Content provided by FirstRanker.com ---
when the government makes explicit guarantees to creditors, however, since the
value at the guarantees will fluctuate with the governments perceived financial
--- Content provided by FirstRanker.com ---
ability to back them. The key point is that in the context of high financialintegration, the stock dimension of fiscal policy, in the form of changes in the
government`s perceived net worth, may itself represent an important source of
--- Content provided by FirstRanker.com ---
shocks to the domestic economy, transmitted through the terms on which both
domestic and foreign creditors are willing to hold claims on the domestic
--- Content provided by FirstRanker.com ---
economy.The stock and flow dimensions of fiscal policy are not independent. A critical
link between them is created by the fact that what matters for creditors is the
--- Content provided by FirstRanker.com ---
perceived solvency of the public sector. For a government whose long-run fiscal
stance is uncertain, short-run policy changes will be scrutinised for information
--- Content provided by FirstRanker.com ---
about the government`s longer-run intentions. Knowing this, governments maybe reluctant to act in ways (may be perceived as sending the wrong signal to
creditors, and this reluctance may limit the government`s abort-run policy
--- Content provided by FirstRanker.com ---
flexibility. Thus, achieving a reputation for fiscal responsibility may maximise
the government`s short-run policy flexibility.
--- Content provided by FirstRanker.com ---
Debt management policies will determine the likelihood of debt run. Publicsector solvency requires that the public sectors comprehensive net worth be
positive. However, the need to preserve macroeconomic stability in a financially
--- Content provided by FirstRanker.com ---
integrated environment may impose stricter conditions on the public sector`s
balance sheet than simply maintaining a positive value of comprehensive net
--- Content provided by FirstRanker.com ---
worth. The composition of assets and liabilities may matter as well. Inparticular, a public sector that is solvent (that is, one that can credibly honour its
obligation over a sufficiently long horizon) may nevertheless he vulnerable to
--- Content provided by FirstRanker.com ---
short-run liquidity crises. If the public sector is - perceived a unlikely to honourits short-term obligations, then creditors will he reluctant to take on the
government`s short-term liabilities, and in a vicious cycle, the government may
--- Content provided by FirstRanker.com ---
then be unable to meet its short-run obligations. The likelihood of such a debt
run depends on the maturity and currency composition of the public sector`s
--- Content provided by FirstRanker.com ---
liabilities relative to that of its assets that is, on the government`s debtmanagement policies.
In managing the composition of its debt, the government faces a difficult
--- Content provided by FirstRanker.com ---
tradeoff between enhancing its credibility, on the one hand, and exposing itself
to liquidity crises, on the other. The existence of long-term (fixed-interest)
--- Content provided by FirstRanker.com ---
domestic-currency- denominated (nominal) debt provides the government withsome financing options that it does not have if its debt is short-term and
denominated in foreign currency that is it can effectively repudiate the long-
--- Content provided by FirstRanker.com ---
term debt by inflating or devaluing, thereby reducing the debt`s real value.
Given the nominal interest rate on this debt, it may indeed be sensible for a
--- Content provided by FirstRanker.com ---
welfare-maximising government to do so, since by acting in this way it wouldhave the option of sustaining productive expenditures or reducing distortionary
taxes. However, the prospect of the government exercising this option would
--- Content provided by FirstRanker.com ---
raise domestic nominal interest rates, making it expensive for the government to
borrow long-term in nominal terms. And even it the government never intends
--- Content provided by FirstRanker.com ---
to behave in this fashion, the time inconsistency problem involved may make itvery difficult for the government to convince its creditors of its intentions. To
reduce its borrowing costs, the government may therefore be induced to borrow
--- Content provided by FirstRanker.com ---
short-term and in foreign currency. By doing so, it eschews the option of gaining
for devaluation or inflation at the expense of its creditors, and thus enhances the
--- Content provided by FirstRanker.com ---
credibility of its promise to do neither. The problem is, of course, that in doingso it incurs liquid foreign currency-denominated liabilities, thereby making itself
vulnerable to debt runs, as happened in the Mexican crisis.
--- Content provided by FirstRanker.com ---
The way out of this dilemma is to note when -it arises in acute form that is,when the government actually retains the discretion to act as creditors fear,
when it lacks credibility on other grounds (for example, when it has a reputation
--- Content provided by FirstRanker.com ---
for acting in a discretionary fashion), and when the government`s revenue needs
are high and conventional taxation is highly distortionary. In other words, the
--- Content provided by FirstRanker.com ---
existence of long term nominal debt is only one factor in the government`sdecision to, devalue or inflate, and creditors can rationally expect the
government to forgo the option of inflating away the real value of their assets if
--- Content provided by FirstRanker.com ---
it is institutionally unable to do so, if it is perceived as placing a high value on
the credibility of its policy announcements, or if inflating creates few net
--- Content provided by FirstRanker.com ---
benefits from the government`s perspective. Thus, the government can avoidmaking its borrowing costs overly sensitive to the composition of its debt by
creating institutions that limit its discretion (for example, by increasing the
--- Content provided by FirstRanker.com ---
independence of the central bank), by establishing a reputation for
nondiscretionary behaviour, and by choosing levels of expenditure and
--- Content provided by FirstRanker.com ---
mobilising sources of taxation that minimise distortions. Under thesecircumstances, the option to borrow long-term in domestic currency terms may
be retained, and the likelihood that macro economic stability will be impaired by
--- Content provided by FirstRanker.com ---
runs on government debt would be minimised.
In sum, when financial integration is high, short-run fiscal flexibility is very
--- Content provided by FirstRanker.com ---
important, since it provides an additional instrument for stabilising domesticaggregate demand in response to external financial shocks, thereby freeing
monetary or exchange rate policy to address other macroeconomic objectives.
--- Content provided by FirstRanker.com ---
Moreover, a stable perception of fiscal solvency becomes crucial for preventing
the domestic public sector itself from becoming an important source of
--- Content provided by FirstRanker.com ---
macroeconomic shocks, transmitted through the terms on which creditors arewilling to hold claims on the domestic economy. Indeed, the perception of
public sector solvency may itself be the most important component in freeing up
--- Content provided by FirstRanker.com ---
fiscal policy to play a short-run stabilising role. Finally, under high financial
integration, institutional arrangements that limit the government`s ability to act
in a discretionary fashion, or that enhance its incentives to avoid doing so, may
--- Content provided by FirstRanker.com ---
preserve the government`s access to low-cost long-term finance, thereby
preventing the emergence of debt runs that could introduce an important source
--- Content provided by FirstRanker.com ---
of macroeconomic instability even when the public sector is solvent.SUMMARY
Today`s multinational enterprises must deal with an international monetary
--- Content provided by FirstRanker.com ---
system full of complexities, challenges and risks. Finance managers and
treasurers in particular play a key role in managing worldwide money matters.
--- Content provided by FirstRanker.com ---
It is important for international marketers to possess insight into multinationalfinance and accounting functions, because these functions usually have a
significant impact business. Eventually, all business decisions that involve
--- Content provided by FirstRanker.com ---
capital investment or other types of long-term financial commitment on the part
of the parent corporation must be reviewed in the context of international
--- Content provided by FirstRanker.com ---
finance and monetary policies. The financial strength of the company is deeplyaffected by the foreign investment that it decides to make when it starts going
global. This chapter is an attempt to analyse the foreign investment decisions by
--- Content provided by FirstRanker.com ---
the multinational corporations. This would lead many companies to look for
foreign portfolio investment. These decisions would strengthen the company`s
--- Content provided by FirstRanker.com ---
financial investment globally. Also, the foreign direct investment by manycompanies largely affects the operations of the local businesses. The deeper
insight in to the concepts of capital flows and overheating would help us to
--- Content provided by FirstRanker.com ---
understand the financial operations of multinational corporations.
REVIEW QUESTIONS
--- Content provided by FirstRanker.com ---
1. Discuss the role of foreign investment2. How will you determine whether the portfolio inflows are hot or cold?
3. Explain the concept of incentives in foreign investment.
--- Content provided by FirstRanker.com ---
4. What is Foreign Direct Investment? Discuss the foreign direct
investment scenario in India.
5. Explain the role of exchange rate policy, monetary policy and fiscal
--- Content provided by FirstRanker.com ---
policy in foreign investment.
6. What is foreign portfolio investment? Explain with examples
--- Content provided by FirstRanker.com ---
7. What is overheating of capital flows? Explain in detail.8. Macro economic management is the fundamental for integration ?
Comment.
--- Content provided by FirstRanker.com ---
REFERENCES
--- Content provided by FirstRanker.com ---
1. Subhash C Jain, International Marketing, Thompson Learning, Singapore
2. K. Aswathappa, Business Environment for Strategic Management,
--- Content provided by FirstRanker.com ---
Himalaya Publishing House, Mumbai3. Francis Cherunilam, Business Environment, Himalaya Publishing
House, Mumbai
--- Content provided by FirstRanker.com ---
4. Adhikhary, World Economic Institutions, Asian Books
5. Adhikary, Manab: Global Business Management, Macmillan, New
--- Content provided by FirstRanker.com ---
Delhi.6. Bhattacharya.B: Going International Response Strategies for Indian
Sector, Wheeler Publishing Co, New Delhi.
--- Content provided by FirstRanker.com ---
7. Black and Sundaram: International Business Environment, Prentice Hall
of India, New Delhi.
--- Content provided by FirstRanker.com ---
8. Gosh, Biswanath: Economic Environment of Business, South Asia Book,New Delhi.
9. V.K. Bhalla & S. Shiva Ramu: International Business Environment &
--- Content provided by FirstRanker.com ---
Management, Anmol Publication Pvt.Ltd, New Delhi.
10. web references.
--- Content provided by FirstRanker.com ---