01- MM Notes KadsDatabank

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MANAGING MULTINATIONALS

SYLLABUS/ TOPICS COVERED

S. No. Remarks

1

Ch-2, RM Joshi International Trade Theory and Application - Handout give by Prof. Chawla

2 Ch-5, RM Joshi (Pg 175-185,211-217)

3 Ch-6, RM Joshi (221-229, 249-252) Sec 6.6 Important

3a Ch 7 International Cultural Environment 4 Ch-12, RM Joshi (Pg 506-522) 5 Ch-13, RM Joshi ;Sections Focus on 13.5 and 13.6

6

Ch-14, RM Joshi ; Focus on Sec 14.5 and 14.6 and Presentations shared in Wiggio-Path is Group Folders > MBA(E) FMS North Campus Folder > MANAGING MULTINATIONALS > eBook-PPT Read PPTs for Ch1, Ch8-16

What to Export and Where

Chapter 16 SCM

Chapter 17 – HRM

Title of Material shared by Dr Sumeet Jerath 7 Dynamics of RTAs Already covered by Ch-6, Optional to read

8 Lecture 1- International Trade Theory and Application

Already covered by S.No.1 above, Optional to read

9 Managing MultiNationals Mostly common with S.No.1 above, Go through

this for topics not covered in S.No.1 10 Overview of GATT WTO key principles Slide 33 onwards 11 Risk Management Not to do 12 WTO Read, Focus on Slide 21 onwards

Topics as per Syllabus Given in Prospectus for FMS International Business Theories; Liberalisation: Tariff and Non-tariff barriers; Institutional setting of global businesses; Recent Trends and main Drivers of International Trade-Real Merchandise Trade and Trade in services; Regional Blocks: Regional Integration Agreement (RIAs) and Trade - Economic Effects of RIAs; Trade Creation and Diversion and the Types of RIA; The Proliferation of Regional Preference

__________________________________ Managing Multinationals - Executive MBA - Semester IV

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Systems; India’s Regional Integration Agreements; Regional Integration Agreements and Foreign Investment; Making Regionalism Complementary to Multilateralism: Building Blocks versus Stumbling Blocks; International Production: An Interdisciplinary Appr3333333333oach; Global Trends in International Production; Trade in Services: Opportunities and Constraints; Internationalization of Service Firms; Operation Management in International Companies; Global Competitiveness; Internationalisation of Technological Innovations; Designing Global Organizational Structure and Control; Global Knowledge Management; Globalisation and Human Resource Developments; Multicultural Management; International Marketing; Export Management; India’s Foreign Trade; Policy and Trends; Financing on International Trade; Licensing; Joint Ventures; International Capital Flows: Foreign Direct Investment- Global FDI Patterns; FDI Distribution by Regions; Sectoral Analysis of FDI; Cross-border Mergers and Acquisitions; Strategic Issues in International Management; Global e-business. International Monetary Systems; Forex Markets and Risk Management; Corporate Governance; Business Ethics; Corporate Social Responsibility; World Economic Growth and the Environmental Issues; Country Risk Analysis; Taxation in an International Economy.


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Ch-2, RM Joshi

International Trade Theory and Application - Handout given by Prof. Chawla

International Trade Theories • International trade is the exchange of goods and services across borders. Export

structures vary across countries. A number of international trade theories can explain these different structures.

The Mercantilist Doctrine • Mercantilism is a 16th Century doctrine stating that a nation should export more goods

that it imports. • Government’s job is to create policy that promotes heavy exportation, collection of

revenue, and industrial development internally. • In practice, it serves to make the State the stockholder, financier, customer, marketer,

collector, and enforcer of contracts with other nations.

Absolute Advantage Theory • In 1776, Adam Smith proposed that market forces rather than government desires were

a better predictor of trade. • Laissez-Faire policy where government has no influence should promote trade better. • Nations will export to pay for goods they import. • Nations could specialize in producing and exporting goods where they have a natural

or acquired Absolute Advantage and import those goods they don’t produce as well. • Comparative Advantage Theory • David Ricardo indicated in 1817 there may be a better explanation since few States

actually specialize like that. • Ricardo indicated that nations that are comparatively more efficient at production will

make those goods even though they may not have an absolute advantage.

Comparative Advantage Theory

• Comparative Advantage explains and predicts trade of goods where absolute advantages may not exist.

• Opportunity Cost – the amount of other goods which have to be given up to product one unit of a good.

• Comparative Advantage must be explained by: – Comparative Production Cost – depends on the commodity’s production

process. – Production Factors – such as labor, land, capital, and natural resources.


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Heckscher-Ohlin Theorem

• Countries export goods that make intensive use of the country’s abundant factor. • Countries import goods that make intensive use of the country’s scarce factor. • Differences in comparative advantage are attributed to differences in the structure of

the economy. • Assumptions:

– Countries vary in the availability of various factors of production. – The Production Function is identical anywhere in the world.

• The amount of output produced by using any given amount of capital and labor.

– Technology is constant in all trading countries. – Conditions of demand for production factors are the same in all countries.

• Implications – Trade should be greatest between countries with the greatest differences in

economic structure. – Trade should cause countries to specialize more. – Trade policy should take the form of trade restrictions. – Countries should export goods that make use of the abundant factors. – Free trade should equalize factor prices between countries with similar relative

factor endowments. – Factor prices should be nearly equal between countries with more liberal mutual

trade. – International investment should be stimulated by difference in factor

endowments. Factor endowment theory A trade theory which holds that nations will produce and export products that use large amounts of production factors that they have in abundance and will import products requiring a large amount of production factors that they lack. This theory is also known as the Heckscher–Ohlin theory (after the two economists who first developed it).

The Leontief Paradox • Leontief challenges Heckscher-Ohlin on a number of grounds.

– The U.S (a capital intensive nation) exports labor-intensive goods. – The U.S also exports technically sophisticated goods that require skilled labor. – The U.S imports capital intensive goods made with unskilled labor.

• Stimulated a search for explanations. – Demand bias for capital-investment goods. – Existence of trade barriers. – Importance of natural resources – Prevalence of factor-intensity reversals.


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Human Skills and Technology-Based View • Keesing indicated that trade direction and flow is predicted by gaps in human skills and

technology. • Nations with higher levels of humans skills and technology will produce and export

goods to nations with lower levels. • Human Skills and Technology-Based View • Human Skills are predicted by

– Level of development in the scientific, technical, managerial, and skilled labor sectors.

• Technology level is predicted by: – capital-intensive technology development – imitation lag that exists as technology innovations diffuse to developing areas.

The Product Life-Cycle Model • Product innovation and initial use occurs first in higher income countries • Diffuses to middle and lower income countries as technology and skills gaps overcome

and consumer preferences switch to the newer products. • Several trends emerge in PLC:

– The export performance of the mature innovating country is better than others. – Technology is better in the mature countries – as products diffuse production

tends to move from technology-intensive to labor-intensive. – Countries that were innovators can fall from that place. – Trade may increase in later stages of product maturity as costs and prices

decline and production economies rise. Exhibit 2-5: Product cycle model of international trade – innovating country


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Exhibit 2-6: Product cycle model of international trade – imitating country

Linder’s Income-Preference Similarity Theory • Developed countries trade more than less developed countries (assumption) • Trade should take place between developed nations producing manufactured products

and less developed nations producing primary products (e.g. natural resources) and labor-intensive goods.

• According to Linder, the range of production is determined by internal demand. • Countries with similar internal demand conditions should therefore trade. This is called

Preference Similarity. The New Trade Theory • Countries do not specialize and trade solely to take advantages of differences. • They also trade because of increasing returns. • Because of economies of scale, there are increasing returns to specialization. • Economies of scale – reduction of manufacturing cost per unit as a result of increased

production quantity during a given period. • Inter-industry trade determined by Heckscher-Ohlin. • Intra-industry trade driven by increasing returns resulting from specialization within

the industry. • Externality – when the actions of one agent directly affect the environment of another. Theory Assessment • These theories provide insights in international trade. • No theorem can fully explain the range of motives for international trade.


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Ch-5, RM Joshi (Pg 175-185) What is GATT? The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international trade. According to its preamble, its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." What is WTO? • Successor to GATT • International Organisation embodied in the results of the Uruguay Round • Established: 1 January 1995 • Member driven (159 +1 Members) • Serviced by WTO Secretariat - 650+ staff • Based in Geneva

• Classification of Members

Developing Countries Least-Developed Countries (LDCs) Developed Transition Economies

How does the WTO differ from the GATT? The WTO is not simply a continuation of the GATT; it has a completely different character. The main differences are as follows: • The GATT was a series of rules, a multilateral agreement without an institutional foundation

and with just an ad hoc secretariat, originating from the attempt to establish an International Trade Organization in the 1940s. The WTO is a permanent institution with its own secretariat.

• The GATT was applied on a “provisional basis” even if, after more than 40 years of existence, governments came to regard it as a permanent commitment. Commitments entered into under the aegis of the WTO exist in their own right and are permanent.

• The GATT rules applied to trade in goods. The WTO covers not just goods, but also trade in services and trade-related aspects of intellectual property rights.

• The GATT was originally a multilateral instrument but, towards the 1980s, several new agreements of a plurilateral and hence optional nature were added to it. The agreements* on which the WTO is founded are almost all multilateral and therefore carry with them commitments to which all Members have subscribed.

• The WTO system for the settlement* of disputes is faster and more automatic, and thus less susceptible to blockages than the former GATT system. The implementation of the decisions resulting from the WTO settlement of disputes will be better assured.


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GATT WTO

Full form General Agreement on Tariffs and Trade

World Trade Organization

Year of creation 1948 1995 Purpose To strengthen international

trade. To govern GATT and international trade practices.

Framework No permanent structure or framework.

Has a permanent structure with a permanent framework.

Scope Trade in goods. Trade in goods; trade in services and trade-related aspects of intellectual property rights.

Dispute resolution Has a permanent appellate body to review findings and settle disputes.

Disputes are resolved faster as settlement system has a select time frame.

Why should countries join WTO 1. The system helps promote peace 2. Disputes are handled constructively 3. Rules make life easier for all 4. Freer trade cuts the costs of living 5. It provides more choice of products and qualities 6. Trade raises incomes 7. Trade stimulates economic growth 8. The basic principles make life more efficient 9. Governments are shielded from lobbying 10. The system encourages good government Functions of the WTO Among the various functions of the WTO, these are regarded by analysts as the most important: • It oversees the implementation, administration and operation of the covered agreements. • It provides a forum for negotiations and for settling disputes. • Review and propagate the national trade policies, and to ensure the coherence and

transparency of trade policies through surveillance in global economic policy-making. • Assistance of developing, least-developed and low-income countries in transition to adjust

to WTO rules and disciplines through technical cooperation and training. • Facilitate the implementation, administration and operation and further the objectives of this

Agreement and of the Multilateral Trade Agreements


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• Provide the frame work for the implementation, administration and operation of the

multilateral Trade Agreements. • Provide the forum for negotiations among its members concerning their multilateral trade

relations in matters dealt with under the Agreement in the Annexes to this Agreement. • Administer the Understanding on Rules and Procedures Governing the Settlement of

Disputes. • Administer Trade Policy Review Mechanism. • Cooperate, as appropriate, with the international Monetary Fund (IMF) and with the

International Bank for Reconstruction and Development (IBRD) and its affiliated agencies.

WTO: Basic Principles • Non-Discrimination - The essence of the non-discrimination obligations is that: “…like

products should be treated equally, irrespective of their origin” (AB Report, EC – Bananas III) Most Favoured Nation (MFN) - Under the WTO agreements, countries cannot

normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.This principle is known as most-favoured-nation (MFN) treatment

National Treatment - Treating foreigners and locals equally Imported and locally-

produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of “national treatment” (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements

• Predictability and Transparency - through binding and transparency - Sometimes,

promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable.

• Liberalization: Freer trade through negotiations Freer trade: gradually, through negotiation back to top - Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed. Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through “progressive liberalization”.

Goods (tariffs, NTMs), services, rules


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• Trade remedies (“fair” trade) - The rules on non-discrimination — MFN and national

treatment — are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual property, services, for example. The agreement on government procurement (a “plurilateral” agreement because it is signed by only a few WTO members) extends competition rules to purchases by thousands of government entities in many countries.

• Trade and development Special and differential treatment Mainstreaming trade into national development policies (A4T)

WTO : Organisational Structure


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Ch-5, RM Joshi (Pg 211-217) Ministerial Conference The Ministerial Conference is the top decision making body of the World Trade Organization (WTO). There have been nine conferences from 1996 to 2013, usually every two years. # Date Host City 1st 9–13 December 1996 Singapore 2nd 18–20 May 1998 Geneva, Switzerland 3rd 30 November – 3 December 1999 Seattle, United States 4th 9–14 November 2001 Doha, Qatar 5th 10–14 September 2003 Cancún, Mexico 6th 13–18 December 2005 Hong Kong 7th 30 November – 2 December 2009 Geneva, Switzerland 8th 15–17 December 2011 Geneva, Switzerland 9th 3–6 December 2013 Bali, Indonesia

First ministerial conference: World Trade Organization Ministerial Conference of 1996 The inaugural ministerial conference was held in Singapore in 1996. Its primary purpose was to initiate an international effort among global trading nations to overhaul the structure and mechanisms of the General Agreement on Tariffs and Trade (GATT) while preserving the considerable progress and success achieved by that system since its inception in 1948. Second ministerial conference: WTO Ministerial Conference of 1998 Was held in Geneva in Switzerland. Third ministerial conference: World Trade Organization Ministerial Conference of 1999 The third conference in Seattle, United States ended in failure, with massive demonstrations and police and National Guard crowd control efforts drawing worldwide attention. Fourth ministerial conference: WTO Ministerial Conference of 2001 Was held in Doha in Persian Gulf nation of Qatar. The Doha Development Round was launched at the conference. The conference also approved the joining of China, which became the 143rd member to join. Fifth ministerial conference: World Trade Organization Ministerial Conference of 2003 The ministerial conference was held in Cancún, Mexico, aiming at forging agreement on the Doha round. An alliance of 22 southern states, the G20 (led by India, China and Brazil), resisted demands from the North for agreements on the so-called "Singapore issues"


http://en.wikipedia.org/wiki/World_Trade_Organization_Ministerial_Conference_of_1996

http://en.wikipedia.org/wiki/Singapore


http://en.wikipedia.org/wiki/Geneva

http://en.wikipedia.org/wiki/Switzerland


http://en.wikipedia.org/wiki/Seattle

http://en.wikipedia.org/wiki/United_States


http://en.wikipedia.org/wiki/Doha

http://en.wikipedia.org/wiki/Qatar


http://en.wikipedia.org/wiki/Canc%C3%BAn

http://en.wikipedia.org/wiki/Mexico


http://en.wikipedia.org/wiki/Hong_Kong








http://en.wikipedia.org/wiki/Bali,_Indonesia


http://en.wikipedia.org/wiki/United_States

http://en.wikipedia.org/wiki/Qatar

http://en.wikipedia.org/wiki/Mexico



http://en.wikipedia.org/wiki/Indonesia

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and called for an end to agricultural subsidies within the EU and the US. The talks broke down without progress. Sixth ministerial conference: World Trade Organization Ministerial Conference of 2005 Held in Hong Kong from 13 December – 18 December 2005. In this meeting, countries agreed to phase out all their agricultural export subsidies by the end of 2013, and terminate any cotton export subsidies by the end of 2006. Further concessions to developing countries included an agreement to introduce duty-free, tariff-free access for goods from the Least Developed Countries, following the Everything But Arms initiative of the European Union — but with up to 3% of tariff lines exempted. Seventh ministerial conference: WTO Ministerial Conference of 2009 Was held 30 November – 2 December 2009 in Geneva, Switzerland. The general theme for discussion was "The WTO, the Multilateral Trading System and the Current Global Economic Environment". Eighth ministerial conference: World Trade Organization Ministerial Conference of 2011 Was held 15–17 December 2011 in Geneva, Switzerland. Membership agreement where made for Russia, Samoa, and Montenegro. Ninth ministerial conference: World Trade Organization Ministerial Conference of 2013 Was held 3–6 December 2013 in Bali, Indonesia. 159 members of World Trade Organization agreed to the Bali Package which eases barriers to international trade.


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Ch-6, RM Joshi (221-229, 249-252) Sec 6.6 Important

INTERNATIONAL ECONOMIC INTEGRATION

Regional Economic Integration - agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other Levels of Regional Economic Integration / Regional or Preferential Trade Agreement 1. A free trade area eliminates all barriers to the trade of goods and services among member countries

European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, and Switzerland North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico

2. A customs union eliminates trade barriers between member countries and adopts a common external trade policy

Andean Community (Bolivia, Columbia, Ecuador, and Peru) 3. A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production

MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay) 4. An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy

European Union (EU) 5. A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states

the EU is headed toward at least partial political union, and the U.S. is an example of even closer political union


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Difference between FTA and PTA What is PTA? PTA stands for Preferential Trade Agreement, and is an economic pact between participating countries to help improve quantity of trade by gradually reducing tariffs between participating countries. The barriers to trade are not altogether removed, but a preference is shown towards participating countries in comparison to other countries of the world. There are departures from WTO in the sense that duties and tariffs are reduced significantly. WTO aims to have same tariffs and duties in international trade between countries but in the case of PTA, these tariffs are reduced much more than what GATT allows. What is FTA? FTA stands for Free Trade Agreement, and is considered to be an advanced stage in trade between participating countries of a trade block. These are countries that agree to eliminate altogether artificial barriers and tariffs in trade between participating countries. Countries that share cultural links and geographical links are much more likely to have a trade block of this magnitude. One such block is European Union where free trade is practiced between the countries of the union. What is the difference between FTA and PTA? The aim of PTA and FTA being similar, thin line dividing these agreements gets blurred at times but it is a fact that PTA is always a starting point and FTA is the final goal of participating countries in a trade block. Whereas PTA aims at reducing tariffs, FTA aims at elimination of tariffs altogether. Tariff Barriers vs Non Tariff Barriers Importing goods from foreign countries at cheap prices hits domestic producers badly. As such, countries impose taxes on goods coming from abroad to make their cost comparable with domestic goods. These are called tariff barriers. Tariff Barriers Tariffs are taxes that are put in place not only to protect infant industries at home, but also to prevent unemployment because of shut down of domestic industries. There are Ad Valorem tariffs that are a ploy to keep imported goods pricier. This is done to protect domestic producers of similar products. Non Tariff Barriers Placing tariff barriers are not enough to protect domestic industries, countries resort to non tariff barriers that prevent foreign goods from coming inside the country.

• One of these non tariff barriers is the creation of licenses. Companies are granted licenses so that they can import goods and services. But enough restrictions are imposed on new entrants so that there is less competition and very few companies actually are able


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to import goods in certain categories. This keeps the amount of goods imported under check

and thus protects domestic producers. • Import Quotas is another trick used by countries to place a barrier to the entry of foreign goods in certain categories. This allows a government to set a limit on the amount of goods imported in a particular category. As soon as this limit is crossed, no importer can import further quantities of the goods.

Non tariff barriers are sometimes retaliatory in nature as when a country is antagonistic to a particular country and does not wish to allow goods from that country to be imported. There are instances where restrictions are placed on flimsy grounds such as when western countries cite reasons of human rights or child labor on goods imported from third world countries. They also place barriers to trade citing environmental reasons. What is the difference between Tariff Barriers and non Tariff Barriers • The purpose of both tariff and non tariff barriers is same that is to impose restriction on

import but they differ in approach and manner. • Tariff barriers ensure revenue for a government but non tariff barriers do not bring any

revenue. Import Licenses and Import quotas are some of the non tariff barriers. • Non tariff barriers are country specific and often based upon flimsy grounds that can serve

to sour relations between countries whereas tariff barriers are more transparent in nature. Trade Creation and Trade Diversion • Regional economic integration is only beneficial if the amount of trade it creates exceeds

the amount it diverts trade creation occurs when low cost producers within the free trade area replace high

cost domestic producers trade diversion occurs when higher cost suppliers within the free trade area replace

lower cost external suppliers

• Trade Creation

This involves a shift in domestic consumer spending from a higher cost domestic source to a lower cost partner source within the EU, as a result of the abolition tariffs on intra-union trade. So for example UK households may switch their spending on car and home insurance away from a higher-priced UK supplier towards a French insurance company operating in the UK market.

Trade creation should stimulate an increase in trade within the customs union and should, in theory, lead to an improvement in the efficient allocation of scarce resources and gains in consumer and producer welfare.


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• Trade Diversion

Trade diversion is best described as a shift in domestic consumer spending from a lower

cost world source to a higher cost partner source (e.g. from another country within the EU-27) as a result of the elimination of tariffs on imports from the partner. The common external tariff on many goods and services coming into the EU makes imports more expensive. This can lead to higher costs for producers and higher prices for consumers if previously they had access to a lower cost / lower price supply from a non-EU country.

The overall effect of a customs union on the economic welfare of citizens in a country depends on whether the customs union creates effects that are mainly trade creating or trade diverting.


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Regional Trade Agreements vs WTO India’s Participation in Preferential Trade Agreements Indo-Sri Lanka Free Trade Agreement (ISLAFTA) South Asia Free Trade Area (SAFTA) Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) India-Thailand FTA India-Singapore Comprehensive Economic Cooperation Agreement (CECA) India-Nepal Treaty of Trade India-Sri Lanka FTA • Asymmetric structure: Indian negative list was smaller and preferential list was larger • Very high growth rate of Indian exports as well as imports • Synergy generated between exports in goods, FDI and services • Preferential treatment by India has been distorted by differential incidence of state taxes on domestically produced goods and Sri Lankan goods __________________________________ Managing Multinationals - Executive MBA - Semester IV

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Major Features of SAFTA • Was preceded by SAPTA among the same nations which was a failure due to limited product coverage • Asymmetric structure again similar to that in ISFTA • Is hampered by long negative lists, long time frames for tariff liberalisation and coverage only being extended to goods • Future RTAs by India can lock the other SAARC countries out of India’s market Salient Features of BIMSTEC • Bridging link between ASEAN and SAARC • Important element of India’s “Look East” strategy • No agreement even at deadline dates Salient Features of India-Thailand FTA • EHS: tariff liberalisation achieved within a short time frame (three-four years) • Above feature led to inverted duty structure (tariffs on intermediate goods becoming much higher than that for the produced good in the export market) India-Singapore CECA • Not much change in Singapore’s treatment of Indian goods as duties were already close to or at zero and Indian gains from trade were not very significant • Singapore service sector made major inroads into India (construction, communication, business services, insurance, banking) • Not much progress in facilitation of movement of Indian nationals into Singapore Indo-Nepal Treaty of Trade • Free trade in primary products • Free non-reciprocal access by India to Nepalese manufacture without quantity restrictions • Huge increase in India’s exports to Nepal during 2001-06 • No matching increase in India’s imports • Huge increase in trade balance with Nepal

INDIA’S CURRENT ENGAGEMENTS IN RTAs1 1. Framework Agreement on Comprehensive Economic Co-operation between the Association

of South East Asian Nations (ASEAN) and India. 2. India-Singapore Comprehensive Economic Cooperation Agreement (CECA) 3. Framework Agreement for establishing Free Trade between India and Thailand 4. Joint Study Group (JSG) to Explore the Feasibility of Comprehensive Economic Cooperation

Agreement (CECA) between India and Malaysia 5. Joint Study Group (JSG) to Explore the Feasibility of Comprehensive Economic Cooperation

Agreement (CECA) between India and Indonesia 6. Framework Agreement with South Africa Customs Union (SACU) 7. Preferential Trade Agreement between India-Chile

1 http://commerce.nic.in/india_rta_main.htm __________________________________ Managing Multinationals - Executive MBA - Semester IV

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8. Comprehensive Economic Cooperation and Partnership Agreement (CECPA) between India

with Mauritius. 9. Free Trade Agreement (FTA) between India and Gulf Cooperation Council(GCC) 10. Status of Negotiations between India and Korea 11. Status of Negotiation between India and Japan 12. Status of India-China RTA Negotiations 13. India-Mercosur PTA 14. ASIA PACIFIC TRADE AGREEMENT (APTA) 15. Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) 16. Global System of Trade Preferences (GSTP) 17. Generalized System of Preferences (GSP) 18. Agreement on South Asia Free Trade Area (SAFTA) 19. India-Afghanistan Preferential Trade Agreement 20. Agreement on India-Bhutan Trade & Commerce 21. India-Nepal Treaty of Trade 22. India-Sri Lanka Free Trade Agreement 23. Trade Agreement between India and Bangladesh 24. Trade Agreement between India and Maldives 25. Joint Study Group between India and Russia 26. Joint Study Group between Israel and India 27. India-EU High Level Trade Group

India-MERCOSUR PTA

A Framework Agreement was signed between India and MERCOSUR on 17th June 2003 at Asuncion, Paraguay. The aim of this Framework Agreement is to create conditions and mechanisms for negotiations in the first stage, by granting reciprocal tariff preferences and in the second stage, to negotiate a free trade area between the two parties in conformity with the rules of the World Trade Organization. 2. As a follow up to the Framework Agreement, a Preferential Trade Agreement (PTA) was signed in New Delhi on January 25, 2004. The aim of this Preferential Trade Agreement is to expand and strengthen the existing relations between MERCOSUR and India and promote the expansion of trade by granting reciprocal fixed tariff preferences with the ultimate objective of creating a free trade area between the parties. 3. The India-MERCOSUR PTA provides for five Annexes. These five annexes have been signed between the two sides on March 19, 2005, upon the conclusion of G-20 Meeting in New Delhi. The five Annexes are: Offer List of MERCOSUR, Offer List of India, Rules of Origin, Safeguard Measures and Dispute Settlement Procedure. 4. Under this PTA India and MERCOSUR have agreed to give tariff concession to the other side on 450 and 452 tariff lines respectively. 5. The PTA would be operational after its ratification by the legislatures of the MERCOSUR countries. 6. Through IBSA Declaration made by the Heads of India, Brazil and South Africa on 13th September 2006, it was agreed that India-MERCOSUR PTA would be expanded by


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increasing the number of products covered and increasing the tariff concessions agreed by each side. Accordingly, a preliminary discussion to work out the modalities of the future negotiations was held in New Delhi on 15 and 16 November 2006 wherein India presented a wish list of 626 additional products. In December 2006, MERCOSUR also presented its wish list of 2099 products which is being considered in consultation with all concerned stakeholders. Association of South East Asian Nations (ASEAN) and India.

India’s engagement with the Association of South East Asian Nations (ASEAN) started with its "Look East Policy" in the year 1991. ASEAN has a membership of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. India became a Sectoral Dialogue Partner of ASEAN in 1992 and Full Dialogue Partner in 1996. In November 2001, the ASEAN-India relationship was upgraded to the summit level. At the First ASEAN-India Summit held on 5 November 2002 in Phnom Penh, Cambodia, the erstwhile Prime Minister of India made the following major announcements:-

i. India will extend special & differential trade treatment to ASEAN countries, based on their levels of development to improve their market access to India; ii. FTA within 10 years timeframe;

3. A Framework Agreement on Comprehensive Economic Cooperation between the Association of South East Asian Nations (ASEAN) and India was signed by the Prime Minster of India and the Heads of Nation/Governments of ASEAN members during the Second ASEAN – India Summit on 8th October 2003 in Bali, Indonesia. 4. The key elements of the Framework Agreement on Comprehensive Economic Cooperation between the Association of South East Asian Nations (ASEAN) and India cover FTA in Goods, Services and Investment, as well as Areas of Economic Cooperation. The Agreement also provided for an Early Harvest Programme (EHP) which covers areas of Economic Cooperation and a common list of items for exchange of tariff concessions as a confidence building measure. Current Status 5. The ASEAN-India Trade Negotiating Committee (TNC) was constituted and 14 meetings have been held so far. The ASEAN-India TNC is undertaking negotiations for a Comprehensive Economic Cooperation Agreement (CECA) which includes a Free Trade Area in goods, services and investment. Due to difference of opinion on Rules of Origin, the EHP, agreed under the Framework Agreement, on Goods could not be implemented. The new time frame for FTA in Goods has been agreed. The ASEAN-India FTA(AI-FTA) negotiations are targeted to be concluded by July, 2007. Agreement has been reached on the Rules of Origin. The TNC is now negotiating the Sensitive Lists, modalities for tariff reduction and elimination, Dispute Settlement Mechanism, etc. Both sides have reached an agreement recently on the size of Negative List to be maintained by both sides, which will be 490 products with a trade value cap of 5%. Negotiations in Trade in Services and Investment are expected to begin immediately after the Agreement on Trade in Goods is concluded


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Ch 7 International Cultural Environment

• Self Reference Criterion (SRC) An unconscious reference to one’s own cultural values, experiences, and knowledge as a basis for decision-making. SRC significantly influences ability of international managers to objectively evaluate environmental factors and make business decision.

• • Approach to Eliminate SRC Step 1:Define the business problem or goal in home-country traits, habits, or norms. Step 2:Define the business problem or goal in foreign country cultural traits, habits, or

norms. Make no value judgments. Step 3:Isolate the SRC influence in the problem and examine it carefully to see how it

complicates the problem. Step 4:Redefine the problem without the SRC influence and solve for the optimum

business goal situation.

• The Concept of Culture Culture is the way of life of people, including their attitudes, values, beliefs, arts, sciences, modes of perception, and habits of thought and activity. Cultural differences across the countries significantly influence business decisions.

• Constituents of Culture A variety of learned traits that influence human behaviour can

contribute to the culture of a social group, the major constituents, include: • value system • norms • aesthetics • customs and traditions • language • religion

• Characteristics of culture Learned Shared Trans-generational Symbolic Patterned Adaptive

• Value System Shared assumptions of a group about how things ought to be or abstract ideas about what a group believes to be good, desirable, or right.

• Value systems vary among managers across different countries : Eg. US managers : high achievement orientation vs Japanese managers how have a growth and size orientation vs Indian Managers who have moralistic orientation.

• Norms Guidelines or social rules that prescribe appropriate behaviour in a given situation.

For eg. In Japan, aggressive selling is not perceived in the positive spirit. Eg. Indian use hands or different types of spoons for eating. Chinese and Japanese use chopsticks. Europeans and American use forks and knives to cut the food before eating. Lessons: International managers need to know what is acceptable , unacceptable in foreign culture. They also need to know cultural tolerance to business customs that may be grouped as : Cultural Imperatives; Cultural Exclusives; Cultural Adiaphora


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Culture Imperatives It refers to norms that must be followed / avoided in a foreign

country. For Eg. Too much eye contact in Japan is considered to completely offensive. On the other hand in the Gulf , strong eye contact necessary with an Arab, to establish trustworthiness.

Cultural Exclusives: Social patterns which are considered appropriate for locals and in which foreigners are expected not to participate. Eg. Foreigners should stay away from discussions on local country politics, social customs and practices.

Cultural Adiaphora : social customs in which a foreigner may participate, so that the Intl. manager may decide whether to participate or avoid. Eg. Bowing in Japanese culture is not expected of foreigners, but such display may be appreciated .

• Aesthetics Ideas and perceptions that a cultural group upholds in terms of beauty and

good taste. music, It includes areas related to dance, painting, drama, architecture, etc. Eg. Colours have different aesthetic value in different cultures: Africa : bright colours are favourites Japan : pastel colours preferred as they express harmony. China : red is lucky colour but associated with witchcraft in Africa. America : blues and greys are perfect for official environments. But blue is evil in Africa

Death colours : Black signifies death in America, Europe; In India, Japan & other Asian countries it is

white, For Latin Americans Purple means death; Dark red is the mourning colour in the Ivory Coast.

• Traditions and Customs Traditions: passed The down elements from of culture

generation to generation. Customs: An established pattern behaviour within a society. International managers need to know the customs and traditions of the culture being dealt with: Eg. Food Habits eg. Chocolate flavors preferred are different in different cultures : Eg. Americans and Germans prefer blends, French- Dark, Dutch –White. Coffee brews: Nescafe manufactures200 different varieties of coffee to suit local tastes. The concept of Indian vegetarianism is very complex for foreigners to understand. Vessels used for cooking both should be different. KFC offers vegetarian dishes in its Indian outlets. Pizza Hut offers Jain Pizza in India alone. Lessons: companies need to modify products/services to suit the local customs and traditions.

• Manners and Customs. Manners in gift giving: A lot of preparation and sensitivity required while giving gifts. What and when is important. China : occasion : New Year Preferred Gifts: Modest gifts such as coffee table, books, ties, pens. Japan: Oseibo( January 1) Preferred Gifts : Brandy. Scotch, round fruits such as melons Manners and Customs in the Way Products are used should also be considered Example Orange juice: Breakfast item in US, Refreshment in France Moisturizers : After bath lotion in one, beauty 19 product in another.

• Language A systematic means of communicating ideas or feelings by the use of conventionalized signs, gestures, marks, or especially articulate vocal sounds. The Four Roles of Language Language aids in information gathering and evaluation. Language provides access to local society. Language capability is increasingly important in company communications. Language provides more than the ability to communicate because it extends beyond

mechanics to the interpretation of contexts that may influence business operations __________________________________ Managing Multinationals - Executive MBA - Semester IV

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• Language … some lessons for managers Even though English is considered lingua-

franca for non English speaking countries, it fails to provide non-verbal cues … for example: Coca – Cola was named Ke-kou-ke-la in China which translates in Mandarin to ‘Bite the wax tadpole’. Subsequently Coke found a close phonetic equivalent Ko-kou-ko-Le which translates to ‘Happiness in the mouth’ after researching 40,000 Chinese characters. The Swedish vacuum cleaner Manufacturer Electrolux introduced the same print ad which was successful in Britain in the US Market with the tag line ‘ Nothing sucks like an Electrolux’. Later they found this to be a disaster in the US because ‘sucks’ in American means ‘really Bad’. i.e. Electrolux is a ‘really bad vacuum cleaner’

• Religion Religious beliefs significantly influence people behaviour and business decision making. Religion encompasses three distinct elements: Explanation: God seen as a ‘first cause’ behind the creation of the universe A standard organization: Consisting of places of worships and rituals Moral rules of good behaviour : concerning principles of right and wrong in human

behaviour. • Religion : lessons for managers Considerable influences international business

decisions. For. Eg. Location of commerical buildings and office interiors need to be as per Fen shui in China and Vastu Shastra in India, as it concerns free flow of cosmic energy and keeps evil spirits away. Advertisements and corporate communications must keep religious sentiments in mind. For eg. Islam does not permit shaving. So Shaving equipment makers like Gillette need to be sensitive while advertising their product in Islamic countries.

• Comparison of Cross Cultural Behavior An appreciation facilitates of cultural international conceptualize and differences managers implement to business strategies in view of cultural sensitivities in various countries.

Hofstede’s Cultural Classification Power distance The extent to which less powerful members of an institution accept that power is distributed unequally. High Power Distance Countries •High social inequalities tolerated with differences in

power and income distribution •Organizational structures are hierarchical based an inequality among superiors and subordinates •Decision making is centralized •Juniors blindly follow the orders of their superiors For instance, Malaysia, countries, India etc.

Low Power Distance Countries S upe riors a nd s ubordina te s consider each other equal Orga niz instance, Austria, Sweden, Great Britain, the US etc. Lessons: In view of the power distance, the international manager has to asses the organizational dynamics, identify the key decision makers and accordingly formulate their business strategy for different countries.

Individualism vs. Collectivism Individualism: The tendency of people to look after themselves and their immediate

family. S trong work ethics P romotio in the organization is calculative. Ability to be the key criterion for success in individualistic societies. Countries with high individualism include, the US, Great Britain, France, South Africa etc


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Collectivism: The tendency of people to belong to groups and to look after each other in

exchange for loyalty. In such cultures, interest of groups have precedence over individual interest . For instance, Guatemala, Pakistan, Singapore, Malaysia etc. Lessons: International Business strategy is greatly influenced by individualism vs. collectivism in terms of decision making and market communication. For a product to be successful. In collective societies, it should have group individualistic societies. acceptability unlike in the

Masculinity vs. femininity In masculine societies, the dominant values emphasize on work goals, such as earnings, advancement, success, and material belongings. e.g. Japan, Switzerland, Great Britain, the US etc. In feminine societies the dominant values are achievement of personal goals, such as quality of life, caring for others, friendly atmosphere, getting along with boss and others. e.g. Sweden, Norway, Denmark, Thailand etc. India falls in between. Summarily, in masculine societies, people ’live to work’, whereas in feminine societies people’ work to live’.

Uncertainty avoidance The extent to which people feel threatened by ambiguous situations. In high uncertainty avoidance societies there is lack of tolerance for ambiguity and the need for formal rules. For instance, Greece, Portugal, Japan, France are the most uncertainty avoidance countries. Low uncertainty avoidance countries Singapore, Denmark, India, the US etc. include

Trompenaars’ Cultural Classification

Universalism vs. Particularism

• Universalism: The belief that ideas and practices can be defined and applied everywhere

without modification e.g. the US, Australia, Germany, Sweden etc. • Particularism: The belief that unique circumstances and relationships, rather than abstract

rules are more important considerations that determine how ideas and practices should be applied e.g. Venezuela, the US, Indonesia, China etc.

Individualism vs. Communitarianism

• Individualism: people regarding themselves as individuals. For instance the US, Czechoslovakia, Argentina, the CIS, Mexico, and the UK . Societies with high individualism make frequent references to ‘I’ and ‘me’. And achievement and responsibility are personal.

• Communitarianism: people regarding themselves as part of a group. For instance, Singapore, Thailand, Japan, and Indonesia. In collectivist societies ‘we’ is used more frequently than ‘I’ and achievement is considered group achievement.

Neutral vs. Affective • Neutral Cultures: Cultures in which people tend to hold back their emotions and try not to

exhibit their feelings. For instance, Japan, the UK, Singapore, Australia, etc. Will consider anger, delight or intensity in the workplace as ‘unprofessional’

• Affective Cultures: Cultures where emotions are expressed openly. For instance, Mexico, Netherlands, Switzerland, China, Brazil, etc. Will consider holding back of emotions by colleagues to signify ‘emotionally dead’ or a ‘mask of deceit’.


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Specific vs. Diffused The relative size of ‘Public space and Private space ‘ and the degree to which individuals feed comfortable sharing it with others differ considerably across societies . • Specific Cultures: Cultures in which individuals tend to have a large public space which is

readily shared, and a smaller private space. For instance, Australia, the UK, the USA and Switzerland.

• Diffused Cultures: Culture in which public and private space are more or less similar and public space is guarded more carefully. For instance, Venezuela, China and Spain

Achievement vs. Ascription • Achievement Cultures: Culture in which status is accorded to high achievers and high

performers. For instance Austria, the USA, Switzerland, the UK, Sweden and Mexico etc. Ascription Cultures: Culture in which status is accorded to those who ‘naturally’ evoke admiration from others such as elderly, seniors, highly qualified and skilled people. For instance, Venezuela, Indonesia, China, the CIS, and Singapore etc.

Other Cross-Cultural Classifications • High Context vs. Low Context High Context Cultures: Culture in which high significance

is given to implicit communications, such as non-verbal and subtle situational cues. For instance, countries. China, Korea, Japan and Arab Low Context Cultures: Cultures in which communication is more explicit with heavy reliance on words to convey the meanings. For instance, Germany, Switzerland, Scandinavia, North America and Britain.

Homophilous vs. Heterophilous • Homophilous Cultures: Cultures where people share beliefs, speak the same language,

and practice the same religion. For instance, Japan, Korea and Scandinavian countries. • Heterophilous Cultures: Countries that have a fair amount of differentiation in languages,

beliefs, and religions followed. For instance, India and China. Relationship vs. Deal-focused • Relationship-focused Cultures: Cultures in which strong orientation towards building

relationships and developing mutual trust. For instance, India, Japan, China, Singapore, Saudi Arabia, United Arab Emirates, Egypt, Brazil, Mexico, and Russia.

• Deal-focused Cultures: Task-oriented cultures with openness to hold direct business talks with strangers. For instance, Britain, USA, Germany, Denmark, Australia, Canada, Finland etc.

Formal vs. informal cultures

• Formal Cultures: Status differences are large and valued and formality is used to show respect. For instance, India, UAE, Egypt, Brazil, Russia, Poland, Japan, China,, Singapore, France, Belgium, Britain, Germany, Denmark, Finland etc

• Informal Cultures: Status differences are not valued and Informal behaviour is not considered disrespectful. For instance, the USA, Canada, and Australia etc.

Polychronic vs. Monochronic


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• Polychronic Cultures: Cultures in which time schedules and deadlines are flexible and

relationships take precedence. For instance, India, Thailand, Philippines, UAE, Egypt, Brazil, Russia etc.

• Monochronic Cultures: Cultures with rigid time schedules and deadlines with high emphasis on punctuality. For instance, Japan, China, Singapore, Britain, USA, Canada, Australia, Germany, Denmark etc.

Expressive vs. Reserved Cultures

• Expressive cultures: people are more expressive with direct eye contact. For instance, Russia, Poland, Romania, USA, Australia, and Canada

• Reserved cultures : people restrain their facial expression and gesturing. For instance, India, Japan, China, Singapore, Britain, Germany, Denmark, Finland etc

• Parochialism vs. Simplification

• Parochialism: Belief that views the rest of the world from one’s own cultural perspective. • Simplification: Exhibiting same cultural orientation groups.

EPRG Approach

• Ethnocentric orientation The belief which considers one’s own culture as superior to

others. The belief that the business strategy which has worked in the home country would also be suitable in alien cultures.

• Polycentric orientation It is based on the belief that substantial differences exist among various countries. Therefore, a single business strategy cannot be effective across the world and customized business strategies need to be adapted in different countries.

• Regiocentric orientation A firm treats the region as a uniform cultural segment and adopts a similar business strategy within the region but not across the region. For example Mc Donald’s strategy is to not serve beef based products in India, but serves beef based products in other countries. Also in the Middle East, it does not serve pork and all meat based preparations are made out of halal process only .

• Geocentric orientation The approach considers the whole world a single market and attempts to formulate integrated business strategies. A geocentric firm attempts to identify cultural similarities across countries and formulates a globally uniform business strategy. Examples: the Harry Potter series of books and films, cartoon characters and their serials, Jeans, T-shirts etc… apparels like

• Emic vs. Etic Dilemma • The Emic school holds that attitudes, interests, and behaviour are unique to a culture and

best understood in their own terms. It emphasizes studying the business research problem in each country’s specific context and identifying and understanding its unique facets. The

• Etic school emphasizes identifying and assessing universal attitudinal and behavioural concepts and developing ‘pan-cultural’ measures. Thus, etic is basically concerned with measuring universal behavioural and attitudinal traits.


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• Operationalisation of Emic and Etic Emphasis is often placed an identifying and developing

constructs that are feasible across countries and cultures, while conducting cross country research.


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Ch-12, RM Joshi (Pg 506-522)

Theories of International Investment

The FDI theories explain the reason why FDI occurs and the determinants of FDI They are grouped into three categories:- 1).Traditional theories Traditional theories are based on neo-classical economic and explain FDI in terms of location-specific advantages. 2).Modern theories Modern theories emphasise the fact that product and factor markets are imperfect both domestically and internationally and that considerable transactional costs are involved in market solutions. Also they acknowledge that managerial and organisational functions play an important role in undertaking FDI. 3).Radical theories - The radical theories, these take a more critical view of Multinational National Corporation (MNCs). • Monopolistic Advantage Theory

• Product and Factor Market Imperfections • International Product Life Cycle • Other Theories Follow-the-leader theory Cross investment Internationalism theory Dunning’s Eclectic Theory of International Production Ownership-specific Internalization Location-specific

TRADITIONAL THEORY Capital arbitrage theory - The theory states that direct investment flows from countries where profitability is low to countries where profitability is high. It means therefore that capital is mobile both nationally and internationally. But sometimes implication is that countries with abundant capital should export and countries with less capital should import. If there was a link between the long-term interest rate and return on capital, portfolio investment and FDI should be moving in the same direction. International trade theory-the country will specialise in production of, and export those commodities which make intensive use of the country’s relatively abundant factor. MODERN THEORY


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Product-cycle theory – New products appear first in the most advanced economy in respond to demand conditions. The maturing product stage is described by standardisation of the product, increased economies of scale, high demand and low price. The standardised product stage is reached when the commodity is sold entirely on price basis. Internalisation Theories Of FDI The theory explain that why the cross-border transactions of intermediate products are organised by hierarchies rather than determined by market forces. Theory Of Appropriability. The theory explains why there is a strong presence of high-technology industries among MNCs. Eclectic Theory of FDI The theory tries to offer a general framework for determining the extent and pattern of both foreign-owned production undertaken by a country’s own enterprises, and that of domestic production owned or controlled by foreign firm. Dunning and Lundan(2008) assert that, the eclectic theory of international production enlarges the theoretical framework by including both home-country and host-country characteristics as international explanatory factors. It argues that the extent, form, and patterns of international production are determined by the configuration of three sets of advantages as perceived by the enterprises. • First Ownership (O) advantage • 2nd Location (L) and • 3rd Internalization (I) advantage in order for the firm to transfer its ownership advantages

across national boundary Theories of FDI may be classified under the following headings: Production Cycle Theory of Vernon Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in the manufacturing industry. Vernon believes that there are four stages of production cycle: innovation, growth, maturity and decline. According to Vernon, in the first stage the U.S. transnational companies create new innovative products for local consumption and export the surplus in order to serve also the foreign markets. According to the theory of the production cycle, after the Second World War in Europe has increased demand for manufactured products like those produced in USA. Thus, American firms began to export, having the advantage of technology on international competitors. If in the first stage of the production cycle, manufacturers have an advantage by possessing new technologies, as the product develops also the technology becomes known. Manufacturers will standardize the product, but there will be companies that you will copy it. Thereby, European firms have started imitating American products that U.S. firms were exporting to these countries. US companies were forced to perform production facilities on the local markets to maintain their market shares in those areas. This theory managed to explain certain types of investments in Europe Western made by U.S. companies between 1950-1970. Although there are areas where Americans have not __________________________________ Managing Multinationals - Executive MBA - Semester IV

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possessed the technological advantage and foreign direct investments were made during that period. Theory of Exchange Rates on Imperfect Capital Markets This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. Itagaki (1981) and Cushman (1985) analyzed the influence of uncertainty as a factor of FDI. In the only empirical analysis made so far, Cushman shows that real exchange rate increase stimulated FDI made by USD, while a foreign currency appreciation has reduced American FDI. Currency risk rate theory cannot explain simultaneous foreign direct investment between countries with different currencies. The sustainers argue that such investments are made in different times, but there are enough cases that contradict these claims. The Internalisation Theory This theory tries to explain the growth of transnational companies and their motivations for achieving foreign direct investment. In his Doctoral Dissertation, Hymer identified two major determinants of FDI. One was the removal of competition. The other was the advantages which some firms possess in a particular activity (Hymer, 1976). Buckley and Casson, who founded the theory demonstrates that transnational companies are organizing their internal activities so as to develop specific advantages, which then to be exploited. • Internalisation theory is considered very important also by Dunning, who uses it in the

eclectic theory, but also argues that this explains only part of FDI flows. • Hennart (1982) develops the idea of internalization by developing models between the two

types of integration: vertical and horizontal. • The concept of firm-specific advantages and demonstrates that FDI take place only if the

benefits of exploiting firm-specific advantages outweigh the relative costs of the operations abroad. According to Hymer (1976) the MNE appears due to the market imperfections that led to a divergence from perfect competition in the final product market. Hymer has discussed the problem of information costs for foreign firms respected to local firms, different treatment of governments, currency risk (Eden and Miller, 2004). The result meant the same conclusion: transnational companies face some adjustment costs when the investments are made abroad. Hymer recognized that FDI is a firm-level strategy decision rather than a capital-market financial decision.

The Eclectic Paradigm of Dunning The eclectic theory developed by professor Dunning is a mix of three different theories of direct foreign investments (O-L-I): • “O” from Ownership advantages: This refer to intangible assets, which are, at least for a

while exclusive possesses of the company and may be transferred within transnational companies at low costs, leading either to higher incomes or reduced costs. But TNCs operations performed in different countries face some additional costs. Thereby to successfully enter a foreign market, a company must have certain characteristics that would triumph over operating costs on a foreign market. These advantages are the property competences or the specific benefits of the company. The firm has a monopoly over its own


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specific advantages and using them abroad leads to higher marginal profitability or lower

marginal cost than other competitors. There are three types of specific advantages: a) Monopoly advantages in the form of privileged access to markets through ownership of natural limited resources, patents, trademarks; b) Technology, knowledge broadly defined so as to contain all forms of innovation activities c) Economies of large size such as economies of learning, economies of scale and scope, greater access to financial capital;

• “L” from Location: When the first condition is fulfilled, it must be more advantageous for

the company that owns them to use them itself rather than sell them or rent them to foreign firms. Location advantages of different countries are de key factors to determining who will become host countries for the activities of the transnational corporations. The specific advantages of each country can be divided into three categories:

a) The economic benefits consist of quantitative and qualitative factors of production, costs of transport, telecommunications, market size etc. b) Political advantages: common and specific government policies that affect FDI flows c) Social advantages: includes distance between the home and home countries, cultural diversity, attitude towards strangers etc.

• “I” from Internalisation: Supposing the first two conditions are met, it must be profitable for the company the use of these advantages, in collaboration with at least some factors outside the country of origin . This third characteristic of the eclectic paradigm OLI offers a framework for assessing different ways in which the company will exploit its powers from the sale of goods and services to various agreements that might be signed between the companies. As cross-border market Internalisation benefits is higher the more the firm will want to engage in foreign production rather than offering this right under license, franchise.

• • Eclectic paradigm OLI shows that OLI parameters are different from company to company

and depend on context and reflect the economic, political, social characteristics of the host country. Therefore the objectives and strategies of the firms, the magnitude and pattern of production will depend on the challenges and opportunities offered by different types of countries.


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Ch-13, RM Joshi ; Sections Focus on 13.5 and 13.6

Measuring the extent of MNEs Internationalisation • Size – size determined may be by sales of revenue , profits , market value, return of equity etc • Structure – Based on number of countries an MNE operates in, the citizenship of its top managers and corporate owners influence the level of internalization of an MNE.

• Performance - The extent of commitment of the firms resources to foreign operations and the rewards from these commitments are used to determine the MNEs performance. Eg foreign sales , profits, assets etc • Management Orientation -

The EPRG framework attempts, four broad types of orientation of a firm towards foreign marketing. They are: 1. ETHNOCENTRIC ORIENTATION : The ethnocentric orientation of a firm considers that the products, marketing strategies and techniques applicable in the home market are equally so in the overseas market as well. In such a firm, all foreign marketing operations are planned and carried out from home base, with little or no difference in product formulation and specifications, pricing strategy, distribution and promotion measures between home and overseas markets. The firm generally depends on its foreign agents and export-import merchants for its export sales. 2. REGIOCENTRIC ORIENTATION : In regiocentric approach, the firm accepts a regional marketing policy covering a group of countries which have comparable market characteristics. The operational strategies are formulated on the basis of the entire region rather than individual countries. The production and distribution facilities are created to serve the whole region with effective economy on operation, close control and co-ordination. 3. GEOCENTRIC ORIENTATION : In geocentric orientation, the firms accept a world wide approach to marketing and its operations become global. In global enterprise, the management establishes manufacturing and processing facilities around the world in order to serve the various regional and national markets through a complicated but well co-ordinated system of distribution network. There are similarities between geocentric and regiocentric approaches in the international market except that the geocentric approach calls for a much greater scale of operation. 4. POLYCENTRIC OPERATION :


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When a firm adopts polycentric approach to overseas markets, it attempts to organize its

international marketing activities on a country to country basis. Each country is treated as a separate entity and individual strategies are worked out accordingly. Local assembly or production facilities and marketing organisations are created for serving market needs in each country. Polycentric orientation could be most suitable for firms seriously committed to international marketing and have its resources for investing abroad for fuller and long-term penetration into chosen markets. Polycentric approach works better among countries which have significant economic, political and cultural differences and performance of these tasks are free from the problems created primarily by the environmental factors.

Indices for Measuring the extent of MNEs Internationalisation Transnationality Index - is the relationship between home and foreign activities for any particular company. Thus a company is considered to be very internationalised if the ratio of its foreign to domestic activities is very high, independently of whether those foreign activities take place in one single foreign country or in many of them. The Transnationality Index (TNI) is a means of ranking multinational corporations that is employed by economists and politicians. It is calculated as the arithmetic mean of the following three ratios (where "foreign" means outside of the corporation's home country):-

• the ratio of foreign assets to total assets • the ratio of foreign sales to total sales • the ratio of foreign employment to total employment

Internationalisation Index - Network Spread Index A different indicator of internationalisation has been developed and values calculated in Vernon (1979). The indicator __________________________________ Managing Multinationals - Executive MBA - Semester IV

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assesses the overall spread of activities in terms of the number of countries in which the TNCs have direct linkages (affiliates/subsidiaries). A company is therefore assessed as having a high degree of internationalisation if it operates in many foreign countries. It is an attempt to measure the overall geographical spread of TNCs subsidiaries according to the number of countries/nations/states in which they are established.


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Ch-14, RM Joshi ; Focus on Sec 14.5 and 14.6 and Presentations shared in Wiggio-

Path is Group Folders > MBA(E) FMS North Campus Folder > MANAGING MULTINATIONALS > eBook-PPT

Read PPTs for Ch1, Ch8-16

Ch-14, RM Joshi ; Focus on Sec 14.5 and 14.6

Sec 14.5 - ENTRY MODE DECISIONS • Entry Mode is the institutional mechanism to make the company’s products and services

available in international markets. Various types of entry mode are as follows :- • Low Investment Entry modes - such as exports are yield low returns but are less risky and

involve much lower exit costs. Small firms usually prefer exports as entry modes. Large companies use these for testing new markets

• Contractual Entry Modes - such as international licensing and franchising, offers rapid

entry market entry opportunity with low resource commitment . Sec 14.6 – International Marketing Mix Decisions • Four Ps of marketing Mix – Price product place and promotion. • External Environmental Factors such as social legal political economic etc are called

uncontrollable elements over which marketer has no control. • Marketing challenge is to adapt the Controllable elements of marketing mix like Price

product place and promotion and distribution


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PRODUCTS – WHAT TO EXPORT ?

Products – What To Export ?

The wisdom of finding the right product for exports comes with research and experience –

LED lights ; handicrafts; drugs and pharma. There are some sites on the internet which provide reliable data on the export and import

covering about 90% of all the traded products in the world trade.

Data Mining on the export product is essential: What is the size of the world market for a product ? What are the trends for that market – i.e. is the market growing and by how much ? With which countries does my country currently trade for certain products? Are there opportunities to identify new or alternative markets? What tariff and non tariff barriers exist in a specific market for the identified product? Which countries compete to supply to a specific market and to the world ?

Rules ? Anything allowed. Almost everything is allowed (Open General License – OGL) One can export goods and services. Restricted and prohibited items are on the DGFT website.

ITC HS (International Trade Classification Harmonised System) Code The primary search engine for any product in international trade is the ITC HS

(International Trade Classification Harmonised System) Code The ITC HS Code is like an identification badge of a good being traded in the world

markets. It readily classifies the good under a 2 digit , 4 digit , 6 digit or more codes and helps in data entry, monitoring , regulation and eases the flow of trade information.

First two digits – Identify the chapter the goods belong to. Next two digits – Identify groupings within the chapter. Next two digits – More specific classification. For example -: 09 - Coffee , Tea , Mate and Spices. 09.02 – Tea , whether or not flavoured. 09.02.10 – Green Tea (not fermented) Specificity increases with number of digits, with most developed nations using 10 or 12

digit codes now – eg EU.

Most of the exports are freely allowed (OGL). However there are some controls predominantly on account of security, public health, public morals, environmental grounds and exhaustible resources.

Prohibited items – 59 – beef , ivory. Restricted items – 155 – live animals , birds. Canalised items through State Trading Enterprises (STC/MMTC) – 15 - Urea


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Export restrictions Export restrictions fall under two categories -: General Trading Items : For these exports , one has to approach Export Facilitation

Committee (EFC) at DGFT HQs. The Dual Use Items (SCOMET – Special Chemicals , Organisms , Materials, Equipment

and Technologies) – Special provisions for nuclear material under the WMD Act , 2005. Most of the items are allowed to be freely imported (OGL) However, there are some import controls on account of security, public health, public morals

and environmental grounds. Prohibited items include beef, beef tallow, products of wild animals and ivory. Restricted items include live animals, birds, Restricted imports - Vegetable planting material , psychotropic substances, special

chemicals, unworked stones, arms and ammunition, aircrafts, security printing paper, second hand consumer goods, certain categories of waste and scrap, satellite and communication equipment of certain frequency

Canalised imports through State Trading Enterprises – food grains , coconut oil, certain petroleum products , fertilisers etc.

Import controls : Less than 4% of India’s tariff lines (at 8 digit level) are under import controls, Rest about 11,100 lines are free for import.

Presently : Prohibited items – 53 lines. Restricted items – 485 lines. Canalised items (through STEs) – 33 lines

India’s Export Basket

Merchandise exports – 300 billion USD appx Petroleum products – 60 billion USD Gems and Jewellery – 40 billion USD Engineering products – auto components etc Textiles – Ready made garments etc Pharmaceuticals Handicrafts , Leather Merchandise Imports – 500 billion USD appx Petroleum crude – 170 billion USD Gold – 55 billion USD Pearls , semi precious stones – 23 billion USD Coal , Coke – 15 billion USD Vegetable oils - 11 billion USD

India has an adverse Balance of Trade – Merchandise Exports < Merchandise Imports

Service Exports – 150 billion USD out of which software exports are about 50%. Service Imports – 80 billion USD Thus India has a surplus in its Balance of Services as Service exports > Service

imports.


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Even though net remittances are positive , the overall balance in the current account

of Balance of Payments (BoP) is negative. This is balanced by a positive in the capital account of BoP.

Markets – Where To Export ?

Emergent (serendipitous) strategy – Honda penetrated the USA market by chance – Honda cubs – 50/100 cc motorcycles took on the might of Harley Davidson, the American icon.

Deliberate (systematic ) strategy – Honda penetrated the Indian market by choice by forging a joint venture with Hero ; later aborted this joint venture and now is present in India as Honda Motorcycle and Scooter Ltd; Hero Moto Corp is entering Latin America by setting up an assembly plant in Columbia ; penetrating the African market through Kenya and SAARC market through Bangladesh.

Naive rule – use the same expansion mode for all foreign markets ignoring the heterogeneity of different foreign markets.

Pragmatic rule – enter a few markets initially with a low risk entry mode. Strategy rule – all alternative expansion modes need to be systematically compared.

Waterfall approach – cascading effect – first penetrate the platform economies like Dubai / Singapore/ Hongkong and then focus on emerging economies like Vietanam , Myanmar, Laos and Cambodia OR growth economies like BRICS or mature economies like South Korea/ Taiwan OR established economies like USA , EU and Japan.

Sprinkler approach – penetrate all economies, all at the same time.

Sovereign and Political risk – The first and foremost is peaceful and lawful conditions ; political stability so that MNC businesses can flourish with a sense of security and confidence . Today , Ukraine (in the midst of a civil war) ; Syria ; Iraq and some countries in Africa – Somalia ; earlier Rwanda and Sere Leone were theatres of war and thus out of bounds for the MNCs.

Legal and contractual risk – a good market / country should have rule of law ; strong legal system where legal contracts and property rights can be enforced. Afghanistan fares very poorly on this criterion.

Market size – Population – Hon’ble PM of India attracts FDI and FPI into India by our 3 Ds – Demand ; Demographic dividend and Democracy . We are the second largest populated country in the world after China ; 65% of our population is below the age of 35 years and we are the world’s largest democracy thereby attracting the attention of the world’s most powerful democracy – USA. In National Income Accounting -:

Y = C + I + G + X – M

Income – GDP (nominal and PPP) and Per Capita Income. India’s nominal GDP is about 2 Trillion USD but in terms of PPP terms it is ranked fourth in

the world after USA , China and Japan. Our USP is our affluent middle class – about 300 million with robust purchasing power making every MNC – FMCG / Consumer durables / Luxury brands look at India seriously.


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Macro economic strength and stability – Fiscal , Monetary, Trade & Commercial ,

Wage & Income policies should be transparent , consistent, stable and predictable. Voda phone retrospective tax issue was a big dampener earlier.

World Economic Forum (WEF) ranks the countries in terms of Global Competitiveness Index (GCI) . GCI refers to a set of institutions, policies and factors that determine the level of productivity of a country which in return determines the rate of return obtained by investing in that country. GCI sits on 12 pillars -:

(i) Institutions. (ii) Infrastructure. (iii) Market Size. (iv) Macro economic stability. (v) Health and Primary education. (vi) Higher education and training. (vii) Goods market efficiency. (viii) Labour market efficiency. (ix) Financial market sophistication. (x) Business sophistication. (xi) Technological readiness. (xii) Innovation.

World Bank computes the Ease of doing business across the economies , based on

regulations affecting the ten stages of a business’s life -: (i) Starting a business. (ii) Dealing with licences. (iii) Employing workers. (iv) Registering property. (v) Getting credit. (vi) Protecting investors. Ease of doing business:- (vii) Paying taxes . (viii) Trading across borders. (ix) Enforcing contracts. (x) Closing a business.


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Chapter 16 SCM

Chapter 17 HRM


Documents

01- MM Notes KadsDatabank