IBM Notes

Module 1 – International Business

Definitions –

1. Hess & Cateora – IB - performance of business activities that

 direct the flow of goods and services,
 to consumers or users in more than one nation.
2. Keegan – IB - emergence of a borderless business world or a global market
 which makes the term ‘global marketing’ more relevant today than IB.
 Global business is the process of focusing resources and objectives of an
organization on global marketing opportunities and threats.

Scope of International Business/ Market - TIRED LMJ

 Turnkey Projects: These are projects where one party designs,

constructs, and commissions a facility, then hands it over to the client
fully ready for operation. For example, France's Alstom constructing a
power plant in Saudi Arabia and then handing over the completed,
operational plant.
 Import Trade: This involves the purchase of goods from foreign countries
because those goods are not available domestically in sufficient quantities
or they are cheaper abroad. For example, many countries import oil
because they either don't have it or cannot produce enough to meet their
needs.
 Re-Export Trade: This occurs when a country imports goods not for
domestic consumption but to export them again possibly after further
processing or repackaging. An example is when Hong Kong imports
electronics from China and then exports them to other countries.
 Export Trade: This refers to selling domestically produced goods to
foreign countries. For instance, Germany is renowned for exporting
automotive products and machinery to global markets.
 Direct Investment: This includes investments in foreign countries by
acquiring a company or establishing new operations. An example is when
a U.S. company opens a manufacturing plant in India.

 Licensing/Franchising: Companies allow others in foreign markets to
use their brand, products, or technology. McDonald's, for example,
franchises its brand globally, allowing local operators to use its business
model and branding.
 Management Contract: A company in one country controls the
operations of a business in another country, but does not own it. An
example is when a U.S. hotel brand manages a property in Dubai under a
management contract, without owning the building.
  Joint Venture: This is a cooperative enterprise between two or more
companies from different countries who share the project's risks and
rewards. For example, Sony-Ericsson was a joint venture between the
Japanese Sony Corporation and the Swedish company Ericsson.

Challenges & Problems in IB – HELP MC CD / (PESTLE + MD)

1. High Cost: Operating internationally can incur high costs due to tariffs,
shipping, and the need to adapt products and marketing to local markets. For
instance, companies might need to create different packaging or reformulate
products for different regions, adding to costs.

2. Economic Differences: Variations in economic conditions, such as inflation

rates, economic growth, and consumer purchasing power, can influence
market strategies. A luxury goods retailer may thrive in wealthy countries but
struggle in regions with less disposable income.

3. Language Differences: Misunderstandings and communication barriers can

arise when businesses operate in countries with different languages. For
example, a marketing slogan that works well in English might have a very
different meaning when translated into another language.

4. Political Differences & Instability: Changes in government policies,

political unrest, or instability can affect business operations. An example is a
company facing operational disruptions in a country experiencing a coup or
severe political protests. McD – withdraw operations during the Russia-
Ukraine war, issuing public statements etc., to curb reputation loss.

5. Marketing Infrastructure: Differences in marketing infrastructure, such as

the availability of reliable internet access or media outlets, can challenge
businesses trying to reach their target audience. For instance, an online
retailer might struggle in areas where internet penetration is low.

6. Cultural Differences: Variations in cultural norms and practices can impact

business interactions and negotiations. For example, negotiation styles in
Japan, which emphasize formality and consensus, differ significantly from
more direct and individualistic styles common in the U.S.

7. Corruption: Engaging in business in countries with high levels of corruption

can require navigating unethical practices and potentially engaging in bribery
to get things done. For example, a construction firm may face demands for
unofficial payments to secure necessary permits.

8. Differences in Currency Units: Fluctuations in exchange rates can affect

the profitability of international operations. A company that earns revenue in
 a weaker currency while incurring costs in a stronger currency might see
reduced profits.

Analysis of Marketing Opportunities – 12C’s

1. Country: Examining factors like political stability, economic conditions, and

market size. For instance, a tech company might find India attractive due to
its large, tech-savvy population and growing economy.

2. Culture and Consumer Behavior: Adapting products to local tastes and

cultural preferences. For example, McDonald's offers vegetarian burgers in
India and halal menus in Middle Eastern countries to align with local dietary
practices.

3. Concentration: Deciding whether to focus on urban or rural areas based on

market concentration. In China, many companies initially concentrate on
densely populated urban areas like Beijing and Shanghai before expanding to
less concentrated rural regions.

4. Communication: Choosing the right communication channels for advertising

based on local media consumption habits. For instance, in South Korea,
digital marketing might be more effective due to high internet penetration,
whereas in rural Africa, radio might still be the dominant medium.

5. Channels of Distribution: Selecting distribution methods that best reach

the target consumers. Amazon uses a sophisticated logistics network to serve
European markets, adapting to varied local regulations and consumer
expectations.

6. Capacity to Pay: Pricing products appropriately by considering local income

levels. Luxury brands like Rolex maintain high prices globally but may limit
distribution in regions with lower purchasing power.

7. Currency: Managing risks related to currency fluctuations. Companies like

Apple might hedge against currency risks to protect their earnings in
international markets.

8. Control and Coordination: Ensuring efficient operations across borders.

Toyota, for example, centralizes R&D in Japan but tailors car models to
regional markets, requiring strong coordination between central and local
offices.

9. Commitments: Assessing long-term investment needs and regulatory

commitments. Entering the Brazilian market might require substantial
investment in local manufacturing facilities due to import tariffs and local
content requirements.
 [Link]: Making strategic choices about which markets to enter and which
products to offer. Netflix, for example, tailors its content and subscription
models based on regional viewing preferences and competition.

[Link] Obligations: Navigating local laws and international

agreements. A company setting up a franchise in the UAE needs to comply
with local business laws and franchising agreements.

[Link]: Considering potential limitations or warnings specific to a market.

Companies operating in Russia, for instance, must navigate complex
regulatory environments and potential geopolitical risks.

Globalization of Market – UN

End of WWII – nations of the worold – start a monitoring orgn = UN Orgnz.

Advantages of UN =

i. Faster economic growth

ii. Higher standards of living
iii. New opportunities for international business

Since inception – tried to form political, commercial and socio-cultural bridges

between member nations.

Member bodies – UNDP, UNCTAD, ITC, UNIDO

Provide support to developing countries – India

There are also international banking and trade orgn- WB, IMF, IFC, WTO.

About WTO

UN – ensure free trade between member nations agreed on GATT 1948 – agreement
on trade merchandised goods (128 members)

GATT had “Rounds” – member nations would attend and agree on certain trade
regulations and/or policies

One such round – Uruguay Round in 1986-93 gave birth to WTO – in 1995 (1st jan,
1995)

WTO – includes goods, services, - international telephones and creative wors, IPR.

Formal structured orgn – 164 members states (36 more than GATT) – represent over
96% of global trade and global GDP

WTO – headquarters – Geneva, Switzerland.

Official language of WTO – English, Spanish, French

Highest Official = Director General

WTO – 3 major tasks – AOS

 Administer and police – the exisiting and new free trade zones in the world
 Oversee – world trade practices
 Settle disputes

Objectives of WTO - RERE

1. Raising Standard of Living: The primary goal is to enhance the standard of

living by promoting economic growth through international trade. For
example, trade liberalization can lead to lower prices and more varied
products for consumers, boosting overall quality of life.

2. Ensuring Full Employment: By fostering an environment that promotes

economic expansion and job creation, international trade can help achieve
full employment. For instance, as countries export more goods and services,
new jobs can be created in manufacturing and service sectors to meet
increased demand.

3. Realizing these aims consistently with sustainable development and

environmental protection: The WTO encourages its members to engage in
trade in a manner that is sustainable and protects the environment. An
example is the promotion of environmental goods and services agreements,
which reduce tariffs on products that benefit the environment, such as solar
panels and wind turbines.

4. Ensuring that developing nations especially the LDCs (Least

Developed Countries) secure a proper share in the growth of
international trade: The WTO aims to integrate LDCs into the global trading
system more effectively and ensure they benefit from global trade. This
includes duty-free and quota-free market access for goods from LDCs to
major markets, as well as technical assistance programs to build trade
capacity in these countries.

Each of these objectives is critical for fostering an equitable, sustainable, and

prosperous global trading system. The WTO’s policies and negotiations are designed
to create a level playing field, allowing all countries, especially developing and least
developed ones, to enjoy the benefits of expanded trade.

Functions of WTO -

1. Provide facilities for implementation, administration and operation of

multilateral and bilateral agreements of the world trade
2. Ensure optimum use of world trade
3. Administer rules and processes related to dispute settlement
 4. Provide platform to the member countries to decide future strategies related
to trade and tariff
5. Assist IMF and IBRD for establishing coherence in universal economic policy
determination

Principles of WTO –

1. Trade without Discrimination:

 Most Favored Nation (MFN): This principle ensures that any favor,
concession, or privilege granted by a WTO member to the products or
services of one country must be extended to all other WTO members.
For example, if Canada reduces tariffs on automotive parts from
Germany, it must reduce tariffs by the same amount on automotive
parts from all other WTO members.

 National Treatment: Under this principle, once goods have entered a

market, they must be treated no less favorably than domestically
produced goods in terms of regulations and taxes. For instance, if
France imposes a tax on cars, the tax rate applied to French-made cars
must be the same as that applied to Japanese-made cars sold in
France.

2. Free Trade Gradually Through Negotiation: This principle involves

reducing trade barriers through multilateral negotiations, often resulting in
agreements that commit countries to lowering tariffs and other trade barriers
over agreed periods. For example, the Agreement on Agriculture, which came
into effect in 1995, has led to significant reductions in tariff and non-tariff
barriers on agricultural products among WTO members.

3. Predictability: Through Binding and Transparency:

 Binding: Almost all concessions on trade in goods and services are

"bound" under the WTO, meaning they are legally enforceable
commitments not to raise a tariff or open a market less than agreed
upon. For instance, if the U.S. commits to a tariff of 4% on a particular
good, this rate is bound under the WTO, and the U.S. cannot increase
the tariff arbitrarily.

 Transparency: The WTO emphasizes openness through notification

requirements and regular monitoring of national trade policies,
ensuring all members understand trade measures implemented by
other countries. This is essential for a predictable trading environment
and allows businesses to make informed decisions based on
established policies.

4. Promoting Fair Competition: The WTO creates an environment for fair

competition in international trade. This includes rules aimed at preventing
 unfair practices such as dumping, subsidies, and various forms of
protectionism. For instance, the WTO’s Anti-Dumping Agreement provides
mechanisms through which a country can act against imports being sold at
below their normal value — which is often interpreted as the price at home —
and causing or threatening to cause injury to the domestic industry.

These principles are designed to create a stable and fair environment for
international trade, encouraging economic cooperation and development globally.

IMF – 1994, Bretton Woods.

World forum – international negotiations o government fiscal policies

Main aim – stabilize exchange rate and to lend money to countries needing foreign
currency

Played part in shaping the global economy since the end of WWII

Role of IMF –

1. The Regulatory Role:

 The IMF helps to regulate the international monetary system, ensuring

its stability through the oversight of the economic and financial policies
of its member countries. One way it does this is by establishing and
enforcing rules intended to prevent crises in the global financial
system.

 Example: The IMF monitors exchange rate policies among its member
nations. It discourages policies that would result in unfair competitive
advantages. For instance, the IMF may criticize a country for
manipulating its currency to gain an export advantage, urging them to
adopt more sustainable economic practices.

2. The Financial Role:

 The IMF provides financial assistance to member countries facing

balance of payments problems. This financial support helps countries
restore macroeconomic stability and return to growth without resortive
measures that could harm other countries’ economies.

 Example: During the 2008 global financial crisis, the IMF provided
loans and emergency funding to countries like Greece to stabilize its
economy, prevent default on international debts, and restore
conditions for economic growth.

3. The Consultative Role:

  The IMF acts as a consultant to its member countries by providing
policy advice and technical assistance. This role is critical in helping
countries to design economic policies that manage and mitigate crises.

 Example: The IMF offers technical assistance in areas such as tax

policy, expenditure management, monetary and exchange rate
policies, banking, and financial system supervision. For instance, it has
helped several African countries to modernize their monetary policy
frameworks and strengthen their financial regulatory systems.

These roles are designed to promote international monetary cooperation, secure

financial stability, facilitate international trade, foster sustainable economic growth,
and reduce poverty around the world.

Functions of IMF - SLT

1. Surveillance: (FATE)

 Surveillance over economic policies involves the IMF monitoring

economic and financial developments and offering advice on policy
adjustments to its member countries. This is tailored to each country’s
specific circumstances and includes several key areas:

 Exchange Rates: The IMF assesses the appropriateness of a

country's exchange rate policies to avoid manipulations that
could lead to unfair competitive advantages or economic
instability.

 Financial Sector Issues: The IMF monitors the stability and

soundness of a country's financial institutions and markets to
prevent financial crises.

 Assessments of Risks: This involves identifying potential

economic and financial vulnerabilities within a country.

 Institutional Issues: The IMF evaluates the strength and

effectiveness of a country's economic institutions (like central
banks) and their ability to implement and sustain economic
policies.

 Types of Surveillance:

 Country Surveillance: Typically carried out through the annual

Article IV consultations, where the IMF evaluates each member
country's economic health and advises on economic policy
improvements. For example, the IMF might advise a country
experiencing high inflation to tighten its monetary policy.
  Regional Surveillance: Monitoring and assessing economic
conditions that affect groups of countries, often within the same
geographic region, such as the Euro area.

 Global Surveillance: Assessing the global economic outlook,

risks, and policy challenges, often summarized in reports like the
World Economic Outlook, which provides analysis and forecasts
of economic developments.

2. Lending:

 The IMF provides financial assistance to countries facing balance of

payments problems, enabling them to rebuild international reserves,
stabilize their currencies, and pay for imports—all necessary for
restoring conditions for strong economic growth. For instance, during
the 2008 financial crisis, the IMF provided substantial loans to
countries like Iceland and Greece to stabilize their economies.

3. Technical Assistance and Training:

 The IMF helps countries strengthen their capacity to design and

implement effective policies. Technical assistance is provided in areas
such as tax policy and administration, expenditure management,
monetary and exchange rate policies, banking and financial system
supervision, and statistics.

 Example: The IMF might help a developing country improve its tax
collection processes to increase government revenue or train central
bank staff on monetary policy management techniques.

These functions are crucial as they help ensure the stability of the international
monetary and financial system, thereby facilitating healthy economic growth and
high levels of employment, which are central to the IMF’s broader mission to help
secure financial stability and reduce poverty.

Facilities provided by IMF –

different types of financial facilities offered by the International Monetary Fund (IMF)
to assist member countries. Each of these facilities serves a unique purpose,
catering to specific financial needs or crises. Here's a detailed explanation of each:

1. Regular Lending Facilities:

 Standby Arrangements (SBA): This is the most common form of

financial assistance provided by the IMF. It offers financial aid to
countries facing short-term balance of payments problems. The funds
 are typically available for 12-24 months and are contingent upon the
country implementing agreed-upon policy reforms.

 Extended Fund Facility (EFF): This facility provides longer-term

support, typically over a period of up to four years, to countries with
serious balance of payments difficulties stemming from structural
problems that require more time to address. The EFF supports
comprehensive programs including policies to improve public and
financial sector institutions.

2. Special Lending Facility:

 Supplemental Reserve Facility (SRF): Aimed at providing financial

assistance to countries experiencing exceptional balance of payments
difficulties due to a sudden and disruptive loss of market confidence
reflected in pressure on the country’s capital account and reserves.
This facility provides rapid financial support with higher interest rates
to discourage prolonged use.

3. Concessional Lending Facility:

 These facilities provide loans at low interest rates and are long-term in
nature, aimed specifically at the poorest member countries. The funds
support economic reform programs that strive to improve economic
management and alleviate poverty. The most known concessional
lending program is the Poverty Reduction and Growth Trust (PRGT).

4. Review of Facilities - Emergency Assistance:

 Emergency Assistance: This is used for countries facing sudden

shocks that are beyond their control, such as natural disasters or post-
conflict situations. This facility allows for rapid financial support to help
address immediate, urgent balance of payments needs without the
need for a full-fledged economic program.

 Emergency Financing Mechanism (EFM): Introduced to streamline

procedures and expedite financial support in emergency situations
needing rapid response, like global financial crises or major natural
disasters.

These facilities are designed to offer flexible financial solutions tailored to the
diverse economic circumstances and challenges faced by IMF member countries.
Through these mechanisms, the IMF helps stabilize economies, restore growth, and
manage or mitigate crises.

International Bank for Reconstruction and Development (IBRD)/ World

Bank
Or the World Bank – one of the Bretton Woods Twins – est. 1945

2 affiliates – IDA & IFC

Executive Directors – responsible for conduct of the general operations of the bank

Purpose of IBRD/ World Bank

Various purposes of the International Bank for Reconstruction and Development

(IBRD), commonly known as the World Bank:

1. Reconstruction and Development

 Purpose: To assist in the reconstruction and development of member

countries' territories by facilitating investment for productive purposes.

 Examples:

 Post-War Reconstruction: After World War II, the World Bank

provided loans for the reconstruction of Europe, including funding to
rebuild infrastructure like roads, bridges, and railways.

 Development in Less Developed Countries: Financing projects in

Africa to build dams, power plants, and water treatment facilities to
boost economic growth and improve living standards.

2. Restoration of Economies Affected by War

 Purpose: To help restore economies that have been destroyed or disrupted

by war, and to reconvert productive facilities to peacetime needs.

 Example:

 Post-Conflict Reconstruction: In post-war Iraq, the World Bank

funded projects to restore and improve basic infrastructure, such as
electricity and public health systems, that were damaged or destroyed
during the conflict.

3. Encouragement of Development in Less Developed Regions

 Purpose: To promote the development of productive facilities and resources

in less developed countries.

 Example:

 Agricultural Development: Providing low-interest loans and grants

to sub-Saharan African countries to improve agricultural techniques
and irrigation systems, thus enhancing food security and rural income.

4. Promotion of Private Foreign Investment

  Purpose: To promote private foreign investment by means of guarantees or
participation in loans and other investments made by private investors.

 Example:

 Private Sector Investment: Offering guarantees to private investors

for the construction of a solar power plant in India, reducing risk and
encouraging investment in renewable energy sources.

5. Promotion of International Trade

 Purpose: To promote long-range balanced growth of international trade and

the maintenance of equilibrium in the balance of payments by encouraging
international investment.

 Example:

 Trade Facilitation: Financing the construction of port facilities in

Brazil, enhancing the country's export capabilities in coffee and soy,
which contributes to balancing the nation’s trade and payments.

6. Raising Productivity, Standards of Living, and Labor Conditions

 Purpose: By encouraging investment in productive resources, the IBRD aims

to assist in raising productivity, standards of living, and improving labor
conditions in member countries.

 Example:

 Education and Training Projects: Funding education infrastructure

and training programs in Southeast Asia to improve skills and
productivity of the workforce, thereby raising the standard of living and
improving labor conditions.

These objectives highlight the World Bank’s role in promoting economic

development and welfare worldwide, focusing particularly on poverty reduction and
sustainable growth.

World Bank – 5 Key Factors – necessary for growth (VVIP)

World Bank’s view on the five key factors necessary for fostering economic growth
in countries around the world. Here's a more structured breakdown and explanation
of each factor:

1. Build Capacity

 Objective: To strengthen the abilities of governments and educate

government officials to better formulate and implement policies.

 Example: Providing training programs for government officials in fiscal policy

and management, helping improve government efficiency and transparency.
2. Infrastructure Creation

 Objective: To support the development of legal and judicial systems that

encourage business operations, protect individual and property rights, and
ensure the honoring of contracts.

 Example: Funding projects that help countries improve their legal

frameworks, which can include court systems, laws related to property rights,
and contract enforcement mechanisms, thus creating a more favorable
business environment.

3. Development of Financial Status

 Objective: To establish and strengthen financial systems that can support a

range of economic activities, from providing microcredit in rural areas to
financing large corporate ventures.

 Example: Supporting the establishment or expansion of local banks that can

provide loans to small businesses, or facilitating financial markets that offer
diverse financial products and services.

4. Combating Corruption

 Objective: To assist countries in their efforts to reduce and eradicate

corruption, which can stifle economic growth and development.

 Example: Implementing programs that enhance transparency in government

procurement processes, or providing support to anti-corruption agencies to
strengthen their operational capabilities.

5. Research, Consultancy, and Training

 Objective: To offer a platform for research on development issues and

provide consultancy and training programs, leveraging modern technologies
like online courses and video conferencing. This aims to spread knowledge
and best practices across borders.

 Example: Hosting webinars and virtual conferences that bring together

experts from academia, government, and non-governmental organizations to
discuss and disseminate successful development strategies and innovations.

These five factors represent critical areas where the World Bank focuses its efforts
to promote sustainable economic growth and development across its member
countries. By addressing these key areas, the World Bank aims to create
environments that are conducive to investment, business development, and
equitable growth.

VALUES
set of core values that are vital for fostering a positive organizational culture,
potentially in the context of an institution like the World Bank or similar. These
values support the organization’s mission and operational effectiveness. Here's an
elaboration on each value, contextualized for a global institution like the World
Bank:

1. Personal Honesty:

 Description: Upholding a high standard of honesty in all dealings,

which is essential for maintaining credibility and trustworthiness.

 Example: Ensuring transparency in the allocation of funds and the

reporting of financial outcomes, thereby maintaining trust with
member countries and other stakeholders.

2. Integrity:

 Description: Acting consistently with ethical principles, even when it

is difficult.

 Example: Adhering to ethical guidelines when offering loans or grants

to ensure that all member states are treated fairly and equitably.

3. Commitment:

 Description: Dedication to the organization’s goals and perseverance

to achieve positive developmental impacts.

 Example: Committing to long-term projects that aim to reduce poverty

and enhance sustainable economic growth, regardless of the political
or economic challenges that may arise.

4. Working Together in Team with Openness and Trust:

 Description: Collaborating effectively across cultures and

geographies, fostering a teamwork environment where open
communication and trust are paramount.

 Example: Facilitating cross-departmental teams for projects that

address global challenges like climate change, ensuring that all team
members can contribute to and trust in the collective process.

5. Empowering Others & Respecting Differences:

 Description: Encouraging diversity and inclusivity, and empowering

people by respecting cultural and individual differences.

 Example: Supporting capacity-building initiatives in diverse member

countries that are tailored to local needs and contexts, thus
empowering local populations and respecting their unique challenges
and contributions.
 6. Encouraging Risk-Taking and Responsibility:

 Description: Promoting innovation by taking calculated risks, while

being accountable for outcomes.

 Example: Investing in new technological solutions for development

challenges, such as renewable energy projects in regions with unstable
power supplies, while rigorously assessing and managing the
associated risks.

7. Enjoying Our Work and Our Families:

 Description: Balancing professional obligations with personal life,

recognizing that satisfaction in both realms enhances overall
productivity and well-being.

 Example: Providing flexible work arrangements and support systems

that allow employees to excel at work while also thriving in their
personal lives.

The Bank emphasizes on the following needs –

1. Investing in people – basic health and education

2. Focusing on social development, inclusion of govt., and institution building –
key element to alleviate poverty + educate
3. Strengthening the ability of govts to deliver quality services efficiently and
transparently
4. Protecting the environment
5. Supprting, encouraging private business development
6. Promoting reforms to create a stable macroeco environment – investment
friendly, long-term planning

World Bank – Organizational Structure

1. Board of governors
2. President of WB
3. Exec. Directors.
 Module 2 – Country Differences, Business Practice and Ethics

1. Business Ethics - applied ethics, professional ethics, corporate ethics

a. examines ethical principles, moral/ethical problems – arise in a business env.
b. Applies to all aspects of business conduct
c. Relevant to conduct of ind’s and entire orgns.
1.1. Importance – moral judgements – right/wrong
d. Decisions taken within an orgn – ind/groups – influenced by the culture of the
company.
e. Decision to behave ethically – moral
f. May involve rejecting the route that would lead to immediate profits
1.2. Code of Conduct – overall corporate code of ethics + separate code for
each dept.
g. Driven by top mgmt.
1.3. Ethics Training – staff members need to be trained to follow policy –
understand roles
h. legal system – interpret employee behavior as de facto policy
2. Social responsibility  Ethics

International Marketing Environment

a. Factors and forces which influence a company

b. Understand and manage these differences through country specific
strategies for success
 c. Marketing environment scanning – continuous process – gathering info
regarding co.’s internal & external env, analyzing, forecasting trends and
impact on operations and performance of the company.

2 categories:

i. External : 1. Macro – demography, PESTEL + competition and cultural

factors
d. 2. Micro – Market, suppliers and intermediaries

Economic –

 Stage of the business cycle

 Interest rates
 Inflation

Cultural –

 Language
 Education
 Religion – beliefs, attitude

Social – factors and trends – groups of people, number, characteristics, behavior

and growth projections

Diagram –

Cultural – how people live and behave

Diagram –
Environmental Scanning – identify important trends and determine whether they
represent present or future market opp/threats

Political Environment

International law and interantional relations

Sovereignty – self determination and independence from external

interference, authority over all nationals

International trade limits sovereignty

Govt – invokes sovereignty – jeopardizes firm operations

Political Risk – Risks related to govt trade policies -

1. Tariffs:

 Description:

 Example: If the U.S. imposes a high tariff on imported steel, this

could increase the production costs for foreign steel
manufacturers, affecting their competitiveness in the U.S.
market.

2. Exchange-Rate Controls:

 Description: Government limitations on the ability to exchange

its national currency for foreign currencies at market rates. This
 can affect the ability of businesses to repatriate profits or import
goods.

 Example: A country like Venezuela may implement strict

exchange-rate controls that prevent foreign companies from
converting their earnings into their home currency, affecting
their operations and financial planning.

3. Quotas:

 Description: Limits set by governments on the quantity of a

certain good that can be imported or exported during a specified
time period.

 Example: An importing country may set a quota on the amount

of a particular agricultural product, such as sugar, to protect its
domestic industry, impacting foreign sugar producers by limiting
their market access.

4. Export/Import License Requirements:

 Description: Government mandates that require a license to

import or export certain products. This can restrict market entry
and complicate trade.

 Example: A country may require import licenses for drugs and

pharmaceuticals as a way to control the quality and quantity of
goods entering the market, posing barriers to foreign
pharmaceutical companies.

5. Other Trade Barriers (Embargoes, Sanctions):

 Embargoes: A prohibition by one country against trading with

another country or a specific entity within that country. This is
often used for political reasons.

 Sanctions: Penalties or restrictions imposed by one country on

another, which can include various forms of trade restrictions.

 Example: The U.S. has imposed various sanctions and an

embargo against Iran, affecting not only bilateral trade but also
impacting international companies that do business with Iran
through secondary sanctions.
Other political risks include –

1. Risks realted to govt economic policy –

a. Controlling foreign investment through taxes
b. Transfer of assets from company to local ownership –
- Confiscation without compensation
- Expropriation – some reimbursement
- Creeping expropriation – paperwork, judicial systems, regualtions
- Nationalization – local govt take over
- Domestication – transfer to local entities
2. Risks related to labor and action groups
3. Risks related to terrorism

Minimizing Political Risk –

1. Understand both ruling and opposition parties:

 Description: Businesses should stay informed about the political

landscape of the countries in which they operate, including the
policies and perspectives of both current government officials
and their opposition.

 Example: A multinational company operating in a politically

volatile country might monitor local elections, policy changes,
and public statements from all major political groups to
anticipate shifts that could affect their operations.

2. Remain politically neutral:

 Description: Companies should avoid taking sides in political

disputes to prevent alienating current and potential stakeholders.

 Example: A foreign investor might refrain from making public

comments about local political issues to avoid conflicts that could
lead to backlash against their business operations.

3. Be exemplary corporate citizens:

 Description: Acting responsibly and contributing positively to

the community can help build goodwill and mitigate risks
associated with government and public backlash.

 Example: Engaging in community development projects or

environmental conservation efforts can improve a company's
 image and foster good relationships with local communities and
governments.

4. Sell a quality product or service that is essential for local

development:

 Description: Offering products or services that significantly

benefit the local economy or meet critical needs can reduce the
likelihood of negative governmental interference.

 Example: Providing renewable energy solutions in areas with

electricity shortages can make a company a valuable partner in
national development.

5. Partner with local companies and create local expertise:

 Description: Forming joint ventures or partnerships with local

firms can facilitate smoother operations by aligning business
goals with local interests and enhancing the firm’s understanding
of the local market.

 Example: A foreign technology firm might partner with a local

company to benefit from the latter’s market insights and
established distribution networks, which can also help navigate
local regulations more effectively.

6. Use local suppliers:

 Description: Sourcing materials and labor locally can help

international businesses integrate into the local economy and
reduce dependency on imports, which might be subject to tariffs
and other trade barriers.

 Example: A manufacturing plant might source raw materials

from local suppliers to support the local economy and reduce
costs associated with importing goods.

7. Obtain insurance coverage against expropriation, confiscation,

and terrorism:

 Description: Political risk insurance can protect businesses from

losses resulting from various political actions including
 expropriation (government takeover of property), confiscation, or
acts of terrorism.

 Example: A mining company operating in a country with a

history of nationalizing foreign-held assets might purchase
insurance to safeguard against potential expropriation by the
government.

Legal Frameworks – National & International

National Legal system – substantive law, court structure – most directly

affects business

MNC’s – operating in different countries – subject to national law in each

Legal systems – democratic societies – rule of law prevails – more

transparent than those in authoritarian countries

Regional framework and international law – overlap with national law –

environmental protection
The diagram illustrates various aspects of the legal environment that
businesses must navigate, categorized under national, regional, and
international levels:

1. Intellectual Property: Protects the creation of minds, such as

inventions, literary works, and designs.

2. Competition and Trading Practices: Regulates business conduct to

ensure fair competition and prevent monopolistic practices.

3. Consumer Protection: Ensures that consumer rights are safeguarded

and that products meet safety standards.

4. Environmental Protection: Imposes regulations to protect the

environment from industrial impacts.

5. Company Formation and Governance: Governs how companies are

legally established and managed.

6. Employment Protection: Provides regulations to protect the rights

and welfare of workers.

7. Health and Safety: Ensures the workplace is safe and health risks are
minimized.

8. Human Rights: Protects individuals' fundamental rights and freedoms

within and outside the workplace.

9. National Legal Systems: The body of laws each country enacts to

govern its citizens and organizations.

10. Regional Legal Frameworks: Laws that govern specific

geographic regions and are agreed upon by multiple countries.

11. International Law: Rules and norms accepted globally to

govern relations between states and international entities.

International Legal Environment

1. International laws
2. Host country
3. Home country

Legal systems – common law, civil law, islamic shari’ah – most strict
 Balance of Payments

Record of value of all transactions between residents of a country with

outsiders

X-M during a financial year – BOP surplus

M-X = BOP deficit

BOP Features

Balance of Payment (BOP) tracks all the money that comes into and goes
out of a country. Here are simple explanations of its components with
examples:

1. Movement of goods in the form of exports and imports: This

records how much money a country makes by selling goods to other
countries (exports) and how much it spends on buying goods from
other countries (imports).

 Example: If the U.S. sells airplanes to Canada, that's an export

for the U.S. If the U.S. buys coffee from Brazil, that's an import.

2. Rendering of services abroad and using foreign services: This

includes money earned or spent on services provided or received from
abroad.

 Example: When a British band performs concerts in Japan, the

UK earns money from Japan. Conversely, when a company in
India provides IT services to a firm in France, India earns money
from France.

3. Gifts/grants from one country to another country: This is when

money is sent between countries without expecting anything in return.
This includes aid, donations, and money sent home by people working
abroad.

 Example: When an Indian worker in the UAE sends money back

to their family in India, or when the UK provides development aid
to Ghana.

4. Investments made abroad and received from abroad: This tracks

money invested by a country in other countries and vice versa. It
includes buying properties, businesses, or stocks in another country.
  Example: If a Chinese company buys an office building in New
York, it’s a Chinese investment in the U.S. If an American
company starts a factory in Mexico, it’s an American investment
in Mexico.

5. Increase or decrease in the international reserves of the

country: This shows changes in how much foreign currency and gold a
country holds. These reserves can help support the country’s own
currency.

 Example: If Brazil buys more U.S. dollars to hold in its reserves,

it’s increasing its reserves. If it sells some of its dollars to pay for
oil imports, it’s decreasing its reserves.

6. Income on investments received from abroad and remitted

abroad: This includes profits, interest, and dividends earned on foreign
investments and how much money is sent out as these earnings to
foreign investors.

 Example: If a French investor owns shares in an Indian company

and receives dividends, those payments are India sending
investment income to France. Conversely, if an Indian company
earns dividends from its investments in European stocks, it’s
receiving investment income from Europe.

7. Residents with Non-Residents:

 Explanation: This refers to the economic transactions that occur

between people, businesses, and government bodies within a
country (residents) and those outside the country (non-
residents).

 Example: If a company in Germany sells machinery to a

business in India, this transaction between a resident (the
German company) and a non-resident (the Indian business) is
recorded in the BOP.

8. A Flow Statement:

 Explanation: The Balance of Payments is a flow statement,

meaning it records transactions over a period of time rather than
at a specific point in time.
  Example: It will capture all transactions like exports, imports,
and financial transfers that happened within a fiscal year, rather
than showing the status at the end of the year.

9. Periodicity:

 Explanation: This refers to the regular interval at which the BOP

is compiled and reported. It is typically recorded annually,
quarterly, or monthly.

 Example: A quarterly BOP report will provide data on all the

transactions between residents and non-residents for each
quarter of the year, helping analyze economic trends and make
adjustments in policies.

Components of BOP

major components of the Balance of Payments (BOP), which records all

monetary transactions between a country's residents and the rest of the
world. Here’s a simple explanation of each component along with examples:

1) Current Account:

 Merchandise Trade: This includes all exports and imports of physical

goods.

 Example: If the USA exports cars to Germany and imports

chocolates from Belgium.

 Invisibles: These are services like travel, transportation, and

insurance that do not result in the transfer of physical goods.

 Example: An American tourist spending money in Italy (travel),

a shipping company from Korea transporting goods to Brazil
(transportation), and a British firm providing insurance services
to a Canadian company (insurance).

 Transfers: Money movements without a quid pro quo. This can be

official (government grants) or private (remittances).

 Example: A government aid given by Japan to Indonesia for

disaster relief (official) or money sent by an Indian working in the
USA to their family back home (private).
  Investment Income: Earnings from foreign investments, such as
dividends on shares or interest on loans.

 Example: Dividends received by a French investor from an

Indian company.

2) Capital Account:

 Foreign Investments: Investments in foreign countries in the form of

buying property or business stakes.

 Example: A Chinese company purchasing a factory in South

Africa.

 Short term loans/Credit: Money lent or borrowed for a short period,

generally less than a year.

 Example: A Brazilian bank taking a six-month loan from a

Spanish bank.

 External Commercial Borrowings: Loans taken by a country from

foreign lenders, usually for a longer term.

 Example: An Indian corporation borrowing money from US banks

to fund its operations.

These components together provide a comprehensive overview of a

country's financial interactions with the rest of the world, reflecting all
economic transactions in a specific period, typically a year.

3) Errors & Omissions:

 Explanation: This component accounts for discrepancies that occur

because not all international transactions are recorded perfectly.
Sometimes, there are mistakes or missing data.

 Example: If $100 million worth of exports from Germany are

accidentally not recorded, this error would be adjusted under "Errors &
Omissions" to ensure the total BOP balances.

4) Overall Balance:

 Explanation: This shows the sum total of the current account, capital
account, and financial account, adjusted for errors and omissions. It
 indicates whether a country is spending more money abroad than it is
earning or vice versa.

 Example: If a country has more incoming funds from exports, foreign

investments, and loans than it sends out for imports and overseas
investments, its overall balance would be positive, suggesting it is
earning more than spending internationally.

5) Monetary Movements - IMF and Foreign Exchange Reserve:

 Explanation: This component records transactions involving

international reserve assets, including monetary gold, special drawing
rights (SDRs) with the International Monetary Fund (IMF), and the use
of foreign currency reserves.

 Example:

 IMF Transactions: If a country borrows funds from the IMF to

stabilize its economy, these transactions are recorded here.

 Foreign Exchange Reserves: If Brazil uses US dollars from its

foreign exchange reserves to buy imported goods or pay off
foreign debt, this reduction in reserves is noted in this category.

Module 3 – International Trade Theory

 I. Ricardian Theory – Comparative Cost advantage
theory –

By political economist – David Ricardo

1817 – Book – Principles of political economy and taxation

Explains how trade can benefit countries, nations and world at a large – as
long as countries produce goods at relative costs

DR – suggests that countries will speicalize and trade in goods and services
in which they have a comparative advantage

- Produce and exports goods – they enjoy a comparative advantage

- Or less comparative disadvantage
- Import goods – less comparative advantage – more comparative
disadvantage

Definition

 Comparative Advantage Theory: Suggests that countries should

specialize in producing and exporting goods where they have the
lowest opportunity cost, and import goods where their
opportunity cost is higher.

Key Assumptions –TEACH PIN PF

1. Two Countries, Two Goods: Simplifies the analysis by limiting

interactions to bilateral trade involving two goods. – England and
Portugal – only 2 goods – wine and cloth.

2. Equal size economies: Assumed 2 countries that are trading –

economies of equal size

3. Absence of Trade Barriers/Tariffs: Trade flows freely without

governmental or logistical restrictions affecting costs.

4. Constant Opportunity Cost: There are no variations between

nations in terms of opportunity cost.

5. Homogeneity: Traded goods are homogeneous in nature.

6. Perfect Mobility of FOP between countries: FOP – labor, capital –

perfectly mobile within the boundaries of the nation.
 7. Immobility of FOP between countries: assumed – FOP perfectly
immobile between 2 countries.

8. Negligible Transport Cost: Cost – not a cause of concern – countries

– trade. Ignored, not factored in.

9. Perfect Competition: All buyers and sellers can find goods at

cheapest internationally

10. Full Employment: of FOP – to remove differences of FOP

between 2 countries

Point 6 and 7 are conflicting - their explanations -

David Ricardo's theory uses two key assumptions about the movement
of labor and capital to keep things simple and focus on trade:

1. Perfect mobility within a Country: Labor and capital can move

freely anywhere they're needed inside a country. This helps a country
make the most of what it's good at producing.

2. Immobility Between Countries: Labor and capital cannot move

between countries. This keeps the focus on trading goods rather than
moving resources around, which helps show how countries benefit
from trading with each other based on their strengths.

The assumption of negligible transport costs in David Ricardo's

comparative advantage theory is used to simplify the model and focus solely
on the economic principles of production and trade. Here's why this
assumption is made:

1. Focus on Production Costs: By assuming transport costs are

negligible, the theory can concentrate purely on the differences in
production costs between countries. This helps to isolate and highlight
how differences in these costs drive international trade.

2. Clarity in Theoretical Insights: Removing the complexity of

transport costs allows the theory to clearly demonstrate that even if
one country is less efficient in producing all goods, there can still be
mutual benefits from trade based on comparative advantages.

3. Simplification of Economic Models: In theoretical economics,

simplifying assumptions are often made to build foundational models.
 These models can then be adjusted in more detailed studies that might
include transport costs and other real-world factors.

By not factoring in transport costs, Ricardo’s model emphasizes that the key
driver for trade is the relative efficiency of production, showing that countries
benefit from specializing in products where they have a comparative
advantage, regardless of other potential costs.

Implications

1. Efficient Resource Allocation: Countries allocate resources more

efficiently, producing what they are relatively best at.

2. Increase in Global Output: Total world production increases due to

specialization, leading to more goods available than if every country
produced every good.

3. Mutual Benefit: All participating countries can benefit from trade, as

each can consume more than it could produce alone.

Practical Application

 Trade Policy: Countries can use the theory to form trade policies that
capitalize on their strengths and improve national economic welfare.

II. Factor Proportion/Endowment/Abundance Theory

By economists – Heckscher and Ohlin

Expands on the CA model

FOP = something not manufactured, used in a variety of industries, not

internationally mobile

FOP examples = skilled and unskilled labor, capital, specific resources – gold,
forests, fisheries, oil etc.

Factor Proportion or Heckscher Olin theory = two countries trade goods with
each other and achieve greater economic welfare if following assumptions
hold –

1. Same tech used - both nations – production

2. Commodity X – labor intensive , commodity Y – capital intensive in both
nations
 3. Constant return of scale in production – both goods
4. Equal tastes – both nations
5. Perfect competition – both nations
6. All resources fully employed
7. Perfect labor monility within each nation, no international mobility

Criticisms –

1. Supplement of Ricardo Theory: Ricardo's theory has been extended

or modified by subsequent theories to address its limitations.

2. Unrealistic Idea of Identical Factor in Both the Countries: FOP

such as labor and capital, are identical in quality and productivity
across different countries. This criticism points out that such an
assumption is unrealistic because factors of production can vary
significantly between countries.

3. Importance of Factor’s Demand Was Ignored: Ricardo's model

does not account for variations in demand for FOP across
countries, which can affect trade patterns and economic outcomes.

4. The Assumption of Constant Returns to Scale is Unrealistic:

assumes constant returns to scale, meaning the output will increase
in direct proportion to an increase in inputs. This criticism argues
that such an assumption does not hold in real-world scenarios
where increasing or decreasing returns to scale might be more
common.

5. No Transportation Costs Assumption is Unrealistic: Ricardo's

model ignores transportation costs, which can significantly affect the
feasibility and profitability of international trade. Including
transportation costs might alter the conclusions about which countries
have comparative advantages.

Protection

Any actions by national governments – give an artifical competitive

advantage to domestic producers over foreign

Restrictions of imports – by govt. measures - to support domestic producers

A certain national policy – levying of duties upon imported commodities –
protect home producers from competition

Methods of Protectionism – Tariffs, Quotas, Subsidies, Intervention

1. Tariffs – raise price of import, therefore reduce demand for imports ---
more demand for local goods/substitutes – more revenue for govt
1.1. Different types of tariffs
a. Ad valorem tariff - levied as a percentage of the value of the
goods imported. It fluctuates with changes in import prices and is
commonly used because it's relatively easy to implement and
automatically adjusts to the price of goods.
 Eg: If a country imposes a 20% ad valorem tariff on imported
shoes, and the cost of the shoes is $100, the importer will have
to pay an additional $20 as tariff, making the total cost $120.

b. Specific Tariff - charged as a fixed fee based on the quantity of

the imported goods (e.g., $10 per ton). This type of tariff does not
vary with the price of the goods, predictable for revenue
 If a country charges a specific tariff of $50 per ton on imported
sugar, and an importer brings in 10 tons of sugar, the total
tariff due would be $500, regardless of the price per ton of
sugar.

c. Revenue Tariff - primarily used to generate income for the

government rather than to protect domestic industries. These tariffs
are usually applied to imports that do not compete significantly with
domestic products.
 An example would be a small tariff on imported coffee in a
country that does not produce coffee. This tariff is mainly to
raise revenue since there is no local industry to protect.

d. Protective Tariff - This tariff is specifically designed to protect

domestic industries by making imported goods more expensive than
locally produced ones. The goal is to encourage consumers to buy
domestic products, thus supporting local businesses and industries.
 Suppose a country produces cars and wants to protect this
industry from cheaper foreign imports. It might impose a 25%
tariff on all imported cars, making these imports more
 expensive compared to locally produced cars, which
encourages consumers to buy domestic vehicles.
e. Prohibitive Tariff: Very high – to effectively stop the import of
certain products into a country. This type of tariff is usually so high
that it makes the cost of the imported goods unaffordable, thus
preventing their importation.
 If a country decides it needs to protect its farmers from cheap
imported corn, it might set a tariff rate of 100% or more on
corn imports. This could make the price of imported corn
double what it would normally be, thus discouraging its import
entirely and protecting domestic farmers.

2. Quotas - Quotas are restrictions set by a government on the quantity of

a specific good that can be imported or exported during a specific time
period.
- used to control the amount of foreign goods entering a market, thereby
protecting domestic industries from foreign competition.
- Raises the price of imports
- Reduces volume of imports
- Encourages demand for locally produced substitutes

- 2 types of import quotas –

1. Bilateral Quotas - These are established between two countries,
where they agree on the quantity of goods that can be traded
between them.
 U.S. - Japan Automotive Agreement: In the past, the United
States and Japan agreed on bilateral quotas concerning the
number of cars that Japan could export to the U.S. This quota
was intended to protect the U.S. auto industry from being
overwhelmed by less expensive, often more fuel-efficient
Japanese cars during a time when American companies were
struggling to compete.

2. Unilateral Quotas - These are imposed by one country without any

reciprocal agreement from other countries. It is a one-sided
imposition to restrict imports to protect domestic industries.
 European Union Bananas Quota: The European Union (EU)
has historically imposed unilateral quotas on the importation of
bananas. These quotas were specifically aimed at controlling
 the volume of bananas entering the EU from Latin American
countries while giving preferential treatment to bananas
coming from former European colonies in Africa, the Caribbean,
and the Pacific regions. This was done to protect banana
growers in these regions from competition with larger, more
efficient Latin American producers.

3. Subsidies – Subvention DILIP

a. Direct subsidy - Financial assistance given directly to an entity
(such as cash grants) to support its business activities.
b. Indirect subsidy - Benefits that indirectly support an entity,
such as tax breaks or loans at below-market rates.
c. Labor subsidy - Financial aid given to businesses to reduce the
cost of labor. This can include grants to hire more staff or
subsidies for training employees.
d. Production subsidies - Financial support aimed at reducing the
production costs, encouraging greater output. This might involve
subsidies for purchasing equipment or raw materials.

4. Intervention – economic interventionism –

- feature of governments run by social democratic and progressive
parties, which believe that certain market outcomes are
undesirable.
- Economic interventionism - government actively steps in to regulate
and manage market activities to achieve desired outcomes such as
improving social welfare, reducing inequality, or protecting industries.
- commonly done by governments – leaning - social democracy or
progressive ideals, aiming to correct what they see as failings or
undesired results of a purely free market system.

Example of Economic Intervention:

Food Safety Regulations: The government might impose strict food safety
standards to ensure that all food sold in the market is safe to consume. This
can involve setting guidelines for the production, processing, and packaging
of food products. If a particular type of food is found to be consistently
harmful (for instance, containing toxic substances), the government might
ban its sale completely to protect public health. This is a form of
intervention aimed at preventing the sale of inferior or dangerous
products that could pose health risks.

- Trade Restriction – protect consumers from inferior, harmful, dangerous

goods

Two primary economic arguments used to justify protectionist policies

against free trade:

1. Protection of Infant Industry: Often referred to as the "sunrise

industry,"

- new and emerging industries may require protection from international

competition until they become mature and competitive enough to
withstand foreign market pressures.
- without such protection, these fledgling industries might not survive long
enough to develop efficiencies and innovate.

2. Prevention of Dumping:

- Dumping occurs when foreign producers sell their products in a domestic

market at prices lower than their domestic market or below their cost of
production. This can be strategically used by foreign companies to:
 Dispose off surplus stocks - unable to sell in their home market.
 Establish and increase market share in a foreign market by
undercutting local businesses, potentially driving them out of
business.

- Both of these strategies are deployed to protect the domestic

economy and foster growth in sectors that are seen as crucial for
national development or
- vulnerable to aggressive international competition.

Additional Arguments

 Protection of Domestic Employment: - safeguarding jobs for local

workers. By imposing trade barriers on imports - ensure that domestic
 industries are not undermined by cheaper imports - preserving jobs for its
citizens.
 Defense and Self-Sufficiency: - maintaining or achieving self-reliance in
critical sectors, such as defense, food security, or energy
- nation must be capable of producing essential goods domestically
- avoid dependence on potentially unreliable foreign sources, especially
during geopolitical tensions or crises.
 Diversification: foster economic diversification, especially in countries
heavily dependent on a narrow range of exports.
- By protecting and supporting emerging sectors, a country can
reduce its economic vulnerability to global market fluctuations.
 Cheap Foreign Labor: concern that industries in countries with higher
labor costs cannot compete with those in countries where wages are
significantly lower.
- Protectionist measures like tariffs or quotas can help level the playing
field for domestic producers who pay higher wages, thereby preventing a
race to the bottom in labor standards and wages.

Regional Trade Agreements

An RTA, or Regional Trade Agreement, is an accord between two or more

countries that aims to facilitate trade among them through the
reduction or elimination of trade barriers. Here are the key points:

1. Participants: Involves two or more countries, generally from the same

geographic region.

2. Trade Barriers: Reduces or eliminates tariffs, quotas, and other

barriers to trade.

3. Economic Integration: Aims to promote economic integration

among member countries.

4. Types: Can include free trade agreements, customs unions, and

common markets.

5. Purpose: Enhances trade and investment opportunities among the

member countries.

6. Benefits: Increases economic growth and market access for member

countries' goods and services.
Regional Trade Agreements (RTAs) as tracked by the World Trade
Organization (WTO) up to February 1, 2016.

1. Increase in RTAs: Regional trade agreements have become more

common since the early 1990s. This indicates a trend towards
countries forming economic blocks to facilitate trade amongst
themselves.

2. Notifications and Status: By February 2016, the WTO had received

625 notifications of RTAs, which include goods, services, and
accessions. This shows active engagement by member countries in
forming regional trade partnerships.

3. Active Agreements: Out of the notified RTAs, 419 were in force, while
the total number of physical RTAs was 454. However, only 267 of these
were currently active. This indicates that while many agreements
are proposed or formed, not all are sustained or remain active
over time.

4. Nature of RTAs: All RTAs in the WTO are reciprocal, meaning they
involve mutual concessions between two or more partners. This
reciprocal nature is a defining characteristic of these agreements.

5. Information Accessibility: Information about these RTAs is available

in the WTO's RTA Database, which serves as a resource for
understanding the specifics of each agreement.

6. Preferential Trade Arrangements (PTAs): Besides RTAs, the WTO

also tracks Preferential Trade Arrangements, which are unilateral
trade preferences. This means one country offers favorable
terms to another without reciprocation. Information on PTAs can be
found in the PTA Database.

Trading Blocs – group of nations in an international organization

3 largest –

1. NAFTA – North American Free Trade Agreement

2. Asia-Pacific Economic Cooperation
3. EU
 Module 4 – International Monetary System

ECONOMIC ENVIRONMENT - several key components that define the

economic landscape within which businesses operate. Components – EPS
CPC

1. Economic system: This describes the structure and method of

economic organization in the country—whether it’s capitalist, socialist,
mixed, etc. This influences business operations, regulatory
environment, and the degree of government intervention in the
economy.

2. Per capita income and size of population: average income per

person in a country and the total population size.

These factors influence the overall market size and purchasing power,
which are crucial for businesses when planning their market entry or
expansion.

3. Stages of economic development: This refers to the phase of

economic growth that a country is experiencing, such as developing,
emerging, or developed stages.

Each stage has different economic characteristics and opportunities for

businesses.
 4. Consumption pattern: This details the spending behavior of
consumers in an economy, including what, how, and where they prefer
to spend their money. Understanding this helps businesses tailor their
products and marketing strategies.

5. Product demand analysis: This involves examining the demand for

specific products or services within a market. It helps businesses
understand potential sales volumes and the competitive landscape.

6. Competition analysis: This is the assessment of the competitive

environment within which a business operates. It includes analyzing
competitors’ strengths, weaknesses, market share, and business
strategies.

Overall, these elements are crucial for businesses to consider when

assessing the economic environment of a market. They provide insight into
potential challenges and opportunities, guiding strategic decision-making.

The international monetary system – institutional arrangement that governs

exchange rates

foreign exchange market – primary instn – determining exchange rates

 Floating exchange rate – forex market determines the relative value of a

currency – USD, Euro, Yen, Pound
 Pegged – value of a currency is fixed to a reference country

And exchange rates between that currency and other currencies is

determined by the reference currency exchange rate

 Dirty Float: Also known as a managed float, this system allows the
value of a currency to be determined mainly by market forces (supply and
demand).
However, the central bank intervenes, usually by buying or selling its
currency, to stabilize or control the currency's value if it fluctuates too
aggressively against a major currency, like the USD or the Euro.
For example, China adopted this policy in 2005 to prevent excessive
volatility against the US dollar.
 Fixed Exchange Rate System: In this system, a country fixes the value
of its currency relative to another currency or a basket of currencies.
The central bank commits to buying and selling its own currency at this
fixed rate to maintain its value.
This was common among some European Union countries before the
introduction of the Euro, where they maintained fixed exchange rates
 within the European Monetary System (EMS). For instance, the French
Franc was pegged to the German Deutsche Mark to ensure stability before
the Euro was introduced.

Gold Standard

Origin – ancient times – gold coins were a medium of exchange, unit of

account, and store of value

To facilitate trade - system developed – payments in paper currency –

converted to gold at a fixed exchange rate

Practice of pegging currencies to gold and guaranteeing convertibility

1 USD = 23.22 grains of fine, pure gold.

Exchange rate between currencies – based on the gold par value – amount
of currency needed to purchase one ounce of gold.

1918 – 1939

Gold standard – fairly well – 1870s – beginning of WW1

Post war – countries – regularly devaluing currencies – encourage exports

Confidence in the system fell – people began to demand gold for their
currency = pressure on countries’ gold reserves

Therefore, forcing them to suspend gold convertibility - 1939

Bretton Woods System

New international monetary system – 1944 – Bretton Woods, New Hampshire

Goal – build an enduring economic order – would facilitate post-war economic

growth

Bretton Woods Agreement – 2 multinational instn’s established:

i. IMF – maintain order in the intnl monetary system

ii. World Bank – promote general econ. development.

Under the BWA,

 USD – only currency convertible to gold, other currencies would set their
exchange rates relative to the $
 Devaluations – not be used for competitive purposes
 No devaluations more than 10% of any currency by any country w/o IMF’s
approval
 Role of the IMF

Responsible for avoiding repetition of chaos occurred during the war by –

1. Flexibility – rigid policy of fixed exch. rate – too inflexible.

IMF – ready to lend foreign currencies to members – aid during short
periods of BOP deficits.
Country could devalue its currency by more than 10% ONLY w/ IMF’s
approval.
2. Discipline – fixed exchange rate – no more competitive devaluations –
therefore, stability in the world trade env.
Fixed exchange rate – imposes monetary discipline on countries –
curtails price inflation.

The case for fixed rates

 Monetary Discipline: Fixed exchange rates compel countries to

control their monetary expansion to maintain the set exchange rate,
preventing high inflation.
For instance, countries under the European Exchange Rate
Mechanism were required to maintain stable exchange rates relative
to the Deutsche Mark.

 Speculation: A fixed exchange rate system discourages

speculative trading that can destabilize economies, as exchange
rates are less likely to experience sudden shifts.
An example is the Bretton Woods system, which stabilized currencies
relative to the U.S. dollar.

 Uncertainty: Fixed exchange rates reduce the uncertainty in

international transactions by preventing wide fluctuations in
exchange rates, making it easier for businesses to plan long-term.
For example, China’s control over the yuan against the dollar reduces
transaction risk.

 Trade Balance Adjustments and Economic Recovery: Fixed rates

can aid in stabilizing an economy post-crisis by providing a
predictable environment for trade and investment,
as seen in Argentina during the 1990s when it pegged its currency to
the U.S. dollar to stabilize after hyperinflation.
 Currency Management

Current exchange rate system - managed float

Govt intervention, speculative activity influence currency values

Firms – protect themselves – exchange rate volatility – forward markets,

swaps

Business Strategy

Forward market – offer some protection – volatile exchange rates – short

term

Long term protection – building strategic flexibility – operations – minimizes

economic exposure

Eg – disperse production to different locations

- Outsource manufacturing

Module 5 – Foreign Market Entry Modes

A. Modes of global market entry

Diagram –
Various strategies that businesses can use to enter global markets, along
with the factors that influence these decisions:
I. Decision Factors
These are considerations a firm might assess before choosing a particular
market entry strategy:
1. Firm-specific Advantage: Attributes unique to the firm that may give
it a competitive edge internationally, such as superior technology,
brand reputation, or product innovation.
2. Location Advantage: Benefits derived from operating in a specific
location, including access to resources, proximity to customers, or
favorable regulatory environments.
3. Other Factors:
o Resource Availability: Availability of necessary resources, such
as raw materials or skilled labor.
o Global Strategy: The overall strategy of the firm regarding how
it approaches international markets.
o Core Competence: The primary strengths or capabilities that
give the firm a competitive advantage.

II. Modes of Global Market Entry

These are the methods through which businesses can expand their
operations into new international markets:
1. Exporting:
o Direct Exports: Selling directly to customers in another country
without intermediaries.
o Eg - Apple selling its products directly to consumers in foreign
markets via its international websites.

o Indirect Export: Using a third party, like a domestic company

that specializes in exporting, to handle the process of selling
overseas.
o A small craft brewery using a third-party export management
company to distribute its beer in Europe.
 o Intra-corporate Transaction: Selling products to one’s own
subsidiary or affiliated company in another country.
o Ford shipping components from its U.S. plants to its assembly
facilities in Mexico.

2. International Licensing: Granting a foreign firm the rights to

produce and sell goods under your brand name in exchange for
royalties or a fee.
 Eg. A U.S.-based software company licensing its software to a German
company to sell within Europe.

3. International Franchising: Similar to licensing, but involves a deeper

relationship where the franchisor provides a full business model,
branding, and support in exchange for a fee and ongoing royalties.
MCD, KFC….

4. Specialized Modes:
o Contract Manufacturing: Outsourcing production to overseas
companies while retaining control over marketing and product
design. [Nike using manufacturers in Vietnam to produce its
footwear.]
o Management Contract: An arrangement where the firm
provides operational management to a foreign company in
exchange for a fee. [A U.S. hotel brand managing a luxury
property in Dubai, owned by a local real estate company.]

o Turnkey Projects: Projects where the firm agrees to fully

design, construct, and equip a manufacturing/business facility
and turn the project over to the purchaser when it is ready for
operation. [Siemens setting up an entire power plant in Egypt
and then handing it over to the local government.]

5. Foreign Direct Investment (FDI):

o Greenfield Strategy: Starting a new venture from scratch in a
foreign country. [Toyota building a new manufacturing plant from
scratch in Texas.]
o Acquisition Strategy: Buying an existing company in the
foreign market.
 [ Amazon acquiring [Link], a Middle Eastern online retailer, to
expand its market presence in the Arab world.]
o Joint Venture: Partnering with a local firm to share resources
and knowledge to create a new entity, sharing the risks and
rewards. [Spotify partnering with Tencent Music in China to tap
into the local market by sharing resources and industry
knowledge.]

Each of these entry modes has different implications for:

- the level of investment required
- the degree of control over operations,
- risks involved, and
- potential returns.
- The choice of strategy depends heavily on the firm’s specific situation,
goals, and the external economic environment of the target market.

Exporting – simplest and most common mode of entering global markets

- Initial entry – gradually evolves towards more developed modes.

Advantages of Exporting Disadvantages of Exporting

- Trade barriers – tariffs, non-tariff
- Permit gradual market entry
barriers
- Avoid restrictions on foreign
- Logistical complexities
investment
- Acquire knowledge and - Potential conflicts with
information about local market distributors.

- Relatively low financial exposure.

Advantages of Exporting

1. Permit Gradual Market Entry: Companies can test international

waters gradually, increasing export volumes as market response and
demand grow.

- A craft beer producer from Canada might start by exporting small

quantities to boutique bars in the U.S. before expanding distribution.
 2. Avoid Restrictions on Foreign Investment: Some countries have
restrictions on foreign direct investment, but exporting can circumvent
these limitations.

- A software company from India can sell products in China, a country

known for its tight control over foreign businesses, without needing a
physical presence.

3. Acquire Knowledge and Information About Local Market:

Exporting first can help a company learn about consumer preferences,
market dynamics, and local competition, which is invaluable for long-
term strategy.

- A South Korean cosmetics company can use its initial exports to the U.S.
to understand consumer preferences and adjust product formulations
accordingly.

4. Relatively Low Financial Exposure: Exporting allows a company to

enter international markets without the heavy investments required for
setting up local operations, such as manufacturing facilities.

- For example, a U.S. based jewelry maker can sell products in Europe
without opening a local store.

Disadvantages of Exporting

1. Trade Barriers: Exporting companies often face tariffs and non-tariff

barriers that can make their products more expensive and less
competitive.

- For instance, agricultural products exported from Brazil to the European

Union may face high tariffs and strict regulatory requirements.

2. Logistical Complexities: Exporting involves managing complex

logistics, potentially across multiple countries, which can increase
costs and require significant management effort.

- A furniture manufacturer in Vietnam exporting to the U.S. must handle

shipping, customs, and storage issues.

3. Potential Conflicts with Distributors: Exporters often rely on local

distributors, which can lead to conflicts regarding pricing, marketing
strategies, and distribution priorities.

- An Australian wine producer might face issues if the local distributor in

Germany prioritizes competing products over theirs.
 International Licensing

Contract/agreement between Licensor and licensee

Licensor: firm – has its own intellectual property – tech, work methods,
patents, copyrights, brand names, trade marks etc.

Licensee – firm – uses the licensor’s intellectual property, pays compensation

fees to the licensor

Compensation fees – royalty

Role Advantages Disadvantages

Licenso - Carry relatively low - Carry opportunity costs (e.g.,

r financial risk PepsiCo and Heineken in the
Netherlands)
- Don't need to invest much
financial and managerial - Potential conflict with the Licensee
resources
- Risk of creating a future competitor
- Obtain knowledge and
- Risk of misusing intellectual
information about local
property by the Licensee
market

License - Take the opportunity to - Carry opportunity costs (e.g.,

e make and sell products and PepsiCo and Heineken in the
services with relatively little Netherlands)
R&D costs
- Potential conflict with the Licensor

Advantages

Licensor: CDO

 Carry Relatively Low Financial Risk: do not have to make large

investments in foreign operations, which minimizes financial risk.

- For example, a U.S. software company can license its software in Brazil
without investing in local operations.

 Don't Need to Invest Much Financial and Managerial Resources:

The licensor avoids the cost of setting up and managing overseas
operations.
 - For instance, Disney licenses its characters and merchandise abroad
without managing the production facilities.

 Obtain Knowledge and Information About Local Market: Through

the relationship with the licensee, the licensor can gain valuable
insights into the local market.

- For example, a European car manufacturer licensing technology to a

Chinese firm can learn about consumer preferences in China.

Licensee:

 Take the Opportunity to Make and Sell Products and Services

With Relatively Little R&D Costs: Licensees can leverage the
licensor's technology or brand, reducing their R&D expenses.

- A beverage company in India might license a popular energy drink

formula from a European company to produce and sell locally.

Disadvantages

Licensor: CPR R

 Carry Opportunity Costs: Licensing might limit the licensor’s ability

to enter the market directly and potentially gain higher profits.

- For example, PepsiCo licensing its brand to a local bottler in the

Netherlands may miss out on full control and higher margins.

 Potential Conflict With the Licensee: Differences in objectives or

business practices can lead to disputes.

 Risk of Creating a Future Competitor: The licensee might become

proficient enough to become a competitor.

- For instance, technology transfer through licensing can enable the

licensee to eventually develop competing products.

 Risk of Misusing Intellectual Property by the Licensee: The

licensee might misuse the intellectual property or not adhere strictly to
the terms of the license agreement, like exceeding agreed production
quotas or selling in unauthorized territories.

Licensee:

 Carry Opportunity Costs: The licensee might miss out on developing

their own technology or products.
 - For example, if a company licenses fast-food branding, it may neglect
developing its own brand.

 Potential Conflict With the Licensor: Similar to the licensor’s risk,

the licensee might find the licensing terms restrictive or unfair,
leading to disputes.

International Franchising

Allows an independent entrepreneur or organization (franchisee) to operate a

business under the name of another – Franchisor

Franchisor provides its franchisee with name, trademarks, operating system,

and well-known product reputation

Franchisor also provides continuous support services – advertising, training,

quality assurance programs.

MNEs – rely on franchising – expand their products – global markets – McD,

Dunkin Donuts, BR, Pizza Hut, KFC etc.

Role Advantages Disadvantages

Franchiso - Can expand market to global - Carry opportunity costs

r markets with relatively low risk
- Share profit with the
& cost
CDO franchisee
- Don’t need to invest much
CPR S - Potential conflict with the
financial & managerial
franchisee
resources
- Risk of creating a future
- Obtain knowledge and
competitor
information about local market

Franchise - Can enter a business that has - Carry opportunity costs

e an established and proven
- Share profit with the
product and operating system
CP S franchisor

- Potential conflict with the

franchisor
Franchisor

Advantages:

 Can Expand Market to Global Markets with Relatively Low Risk

& Cost: Franchisors can grow their brand internationally without the
substantial capital risks associated with setting up and running
overseas operations.

For instance, McDonald’s uses franchising to spread globally,

leveraging local franchisees to manage day-to-day operations.

 Don’t Need to Invest Much Financial & Managerial Resources:

By franchising, the company saves on the investment typically
required for overseas expansion,

like Starbucks opening new stores in Europe through local franchise

partners.

 Obtain Knowledge and Information About Local Market:

Franchisors gain local market insights from their franchisees, who
understand regional tastes and consumer behavior,

like KFC adapting its menu in Asia to suit local tastes.

Disadvantages: CPR S

 Carry Opportunity Costs: By choosing franchising, a franchisor

might miss out on potential higher profits from direct operations,
especially if the market proves highly successful.

 Potential Conflict with the Franchisee: Misalignments in business

operations or financial expectations can lead to disputes.

 Risk of Creating a Future Competitor: Franchisees might use the

business knowledge and skills gained to eventually launch competing
ventures.

 Share Profit with the Franchisee: A portion of the profits generated

by the franchise must be shared as royalties, reducing the total returns
to the franchisor.

Franchisee

Advantages:
 Can Enter a Business that has an Established and Proven
Product and Operating System: Franchisees benefit from the
established brand recognition and operational playbook, reducing
startup risks.

For example, a Dunkin’ franchisee can leverage the brand’s

established reputation and customer base rather than building a new
coffee shop brand from scratch.

Disadvantages:

 Carry Opportunity Costs: Franchisees invest in a system where they

might have limited ability to innovate or adapt the business, possibly
foregoing other potentially lucrative opportunities.

 Share Profit with the Franchisor: Franchisees must pay ongoing

royalties and fees, which can be significant, reducing their overall profit
margins.

 Potential Conflict with the Franchisor: Franchisees may find

themselves in disagreements with the franchisor over the terms of the
franchise agreement, operations, or strategic decisions.