MB0037 SET 2 February 2011

8/6/2019 MB0037 SET 2 February 2011

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Q.1 What is WTO? What is GATT? Explain both.

WTO

The World Trade Organization (WTO) is the only global internationalorganization dealing with the rules of trade between nations. At its heart arethe WTO agreements, negotiated and signed by the bulk of the world’strading nations and ratified in their parliaments. The goal is to help

producers of goods and services, exporters, and importers conduct their business.The WTO provides a forum for negotiating agreements aimed at reducingobstacles to international trade and ensuring a level playing field for all, thuscontributing to economic growth and development. The WTO also providesa legal and institutional framework for the implementation and monitoring

of these agreements, as well as for settling disputes arising from their interpretation and application. The current body of trade agreementscomprising the WTO consists of 16 different multilateral agreements (towhich all WTO members are parties) and two different plurilateralagreements (to which only some WTO members are parties).Over the past 60 years, the WTO, which was established in 1995, and its

predecessor organization the GATT have helped to create a strong and prosperous international trading system, thereby contributing tounprecedented global economic growth. The WTO currently has members,of which 117 are developing countries or separate customs territories. WTOactivities are supported by a Secretariat of some 700 staff, led by the WTODirector-General. The Secretariat is located in Geneva, Switzerland, and hasan annual budget of approximately CHF 200 million ($180 million, €130million). The three official languages of the WTO are English, French andSpanish.Decisions in the WTO are generally taken by consensus of the entiremembership. The highest institutional body is the Ministerial Conference,which meets roughly every two years. A General Council conducts theorganization's business in the intervals between Ministerial Conferences.

Both of these bodies comprise all members. Specialized subsidiary bodies(Councils, Committees, Sub-committees), also comprising all members,administer and monitor the implementation by members of the various WTOagreements.More specifically, the WTO's main activities are:

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— negotiating the reduction or elimination of obstacles to trade (importtariffs, other barriers to trade) and agreeing on rules governing the conductof international trade (e.g. antidumping, subsidies, product standards, etc.)

— administering and monitoring the application of the WTO's agreed rulesfor trade in goods, trade in services, and trade-related intellectual propertyrights

— monitoring and reviewing the trade policies of our members, as well asensuring transparency of regional and bilateral trade agreements

— settling disputes among our members regarding the interpretation andapplication of the agreements

— building capacity of developing country government officials ininternational trade matters

— assisting the process of accession of some 30 countries who are not yetmembers of the organization

— conducting economic research and collecting and disseminating tradedata in support of the WTO's other main activities

— explaining to and educating the public about the WTO, its mission and itsactivities.

The WTO's founding and guiding principles remain the pursuit of open borders, the guarantee of most-favored-nation principle and non-discriminatory treatment by and among members, and a commitment totransparency in the conduct of its activities. The opening of national marketsto international trade, with justifiable exceptions or with adequateflexibilities, will encourage and contribute to sustainable development, raise

people's welfare, reduce poverty, and foster peace and stability. At the same

time, such market opening must be accompanied by sound domestic andinternational policies that contribute to economic growth and developmentaccording to each member's needs and aspirations.

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GATT

The General Agreement on Tariffs and Trade (typically abbreviated GATT)was negotiated during the UN Conference on Trade and Employment andwas the outcome of the failure of negotiating governments to create theInternational Trade Organization (ITO). GATT was signed in 1947 andlasted until 1993, when it was replaced by the World Trade Organization in1995. The original GATT text (GATT 1947) is still in effect under the WTOframework, subject to the modifications of GATT 1994.[1]In 1993, the GATT was updated (GATT 1994) to include new obligationsupon its signatories. One of the most significant changes was the creation of the World Trade Organization (WTO). The 75 existing GATT members andthe European Communities became the founding members of the WTO on 1January 1995. The other 52 GATT members rejoined the WTO in the

following two years (the last being Congo in 1997). Since the founding of the WTO, 21 new non-GATT members have joined and 29 are currentlynegotiating membership. There are a total of 153 member countries in theWTO.

Of the original GATT members, Syria [4] [5] and the SFR Yugoslavia hasnot rejoined the WTO. Since FR Yugoslavia, (renamed to Serbia andMontenegro and with membership negotiations later split in two), is notrecognized as a direct SFRY successor state; therefore, its application isconsidered a new (non-GATT) one. The General Council of WTO, on 4May 2010, agreed to establish a working party to examine the request of Syria for WTO membership.[6][7] The contracting parties who founded theWTO ended official agreement of the "GATT 1947" terms on 31 December 1995. Serbia and Montenegro are in the decision stage of the negotiationsand are expected to become the newest members of the WTO in 2012 or innear future.Whereas GATT was a set of rules agreed upon by nations, the WTO is aninstitutional body. The WTO expanded its scope from traded goods to tradewithin the service sector and intellectual property rights. Although it was

designed to serve multilateral agreements, during several rounds of GATTnegotiations (particularly the Tokyo Round) plurilateral agreements createdselective trading and caused fragmentation among members. WTOarrangements are generally a multilateral agreement settlement mechanismof GATT

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Q.2 What is MNC? Explain the 3 stages of evolution.

An MNC is a parent company that

1. Engages in foreign production through its affiliates located in severalcountries,

2. Exercises direct control over the policies of its affiliates,

3. Implements business strategies in production, marketing, finance andstaffing that transcend national boundaries.

In other words, MNCs exhibit no loyalty to the country in which they areincorporated. Multinational companies may pursue policies that are homecountry – oriented or host country – oriented or world – oriented. Perlmutter uses such terms as ethnocentric, polycentric and geocentric. However,"ethnocentric" is misleading because it focuses on race or ethnicity,especially when the home country itself is populated by many differentraces, whereas "polycentric" loses its meaning when the MNCs operate onlyin one or two foreign countries.

Ownership criterion: some argue that ownership is a key criterion. A firm becomes multinational only when the headquarter or parent company iseffectively owned by nationals of two or more countries. For example, Shell

and Unilever, controlled by British and Dutch interests, are good examples.However, by ownership test, very few multinationals are multinational. Theownership of most MNCs is uni-national. (See videotape concerning theSmith-Corona versus Brothers case) Depending on the case, each isconsidered an American multinational company in one case, and each isconsidered a foreign multinational in another case. Thus, ownership does notreally matter.

Nationality mix of headquarter managers: An international company ismultinational if the managers of the parent company are nationals of severalcountries. Usually, managers of the headquarters are nationals of the homecountry. This may be a transitional phenomenon. Very few companies passthis test currently.

Business Strategy: global profit maximization

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Three Stages of Evolution

1. Export stage

· Initial inquiries Þ firms rely on export agents

· expansion of export sales· further expansion Þ foreign sales branch or assembly operations (to savetransport cost)

2. Foreign Production Stage

There is a limit to foreign sales (tariffs, NTBs)DFI versus LicensingOnce the firm chooses foreign production as a method of delivering goods to

foreign markets, it must decide whether to establish a foreign productionsubsidiary or license the technology to a foreign firm.LicensingLicensing is usually first experience (because it is easy)e.g.: Kentucky Fried Chicken in the U.K.

· It does not require any capital expenditure

· It is not risky

· Payment = a fixed % of salesProblem: the mother firm cannot exercise any managerial control over thelicensee (it is independent)The licensee may transfer industrial secrets to another independent firm,thereby creating a rival.Direct Investmentit requires the decision of top management because it is a critical step.

· It is risky (lack of information) (US firms tend to establish subsidiaries inCanada first. Singer Manufacturing Company established its foreign plants

in Scotland and Australia in the 1850s)

· Plants are established in several countries

· licensing is switched from independent producers to its subsidiaries.

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· Export continues

3. Multinational Stage

The company becomes a multinational enterprise when it begins to plan,organize and coordinate production, marketing, R&D, financing, andstaffing. For each of these operations, the firm must find the best location.

Q.3 Mention the differences between currency markets and

exchange rate markets in the context of international business

environment

The exchange rate regimes adopted by countries in today’s internationalmonetary and financial system, and the system itself, are profoundlydifferent from those envisaged at the 1944 meeting at Bretton Woodsestablishing the IMF and the World Bank. In the Bretton Woods system:

· Exchange rates were fixed but adjustable. This system aimed both to avoidthe undue volatility thought to characterize floating exchange rates and to

prevent competitive depreciations, while permitting enough flexibility toadjust to fundamental disequilibrium under international supervision;

· Private capital flows were expected to play only a limited role in financing payments imbalances, and widespread use of controls would preventinstability in such flows;

· temporary official financing of payments imbalances, mainly through theIMF, would smooth the adjustment process and avoid unduly sharpcorrection of current account imbalances, with their repercussions on tradeflows, output, and employment.

In the current market system, exchange rates among the major currencies(principally the U.S. dollar, the Euro, and Japanese yen) fluctuate inresponse to market forces, with short-run volatility and occasional largemedium-run swings (Figure 1). Some medium-sized industrial countries alsohave market – determined floating rate regimes, while others have adoptedharder pegs, including some European countries outside the Euro area.Developing and transition economies have a wide variety of exchange rate

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arrangements, with a tendency for many but by no means all countries tomove toward increased exchange rate flexibility.

Q.4 a) Explain the role of privatization in international business.

[b]Privatization is the incidence or process of transferring ownership of a business,

enterprise, agency or public service from the public sector (the state or government)

to the private sector (businesses that operate for a private profit) or to private non-

profit organizations. In a broader sense, privatization refers to transfer of any

government function to the private sector - including governmental functions like

revenue collection and law enforcement.[1]

The term "privatization" also has been used to describe two unrelated transactions.

The first is a buyout, by the majority owner, of all shares of a public corporation orholding company's stock, privatizing a publicly traded stock, and often described as

private equity. The second is a demutualization of a mutual organization or

cooperative to form a joint stock company.

The role of privatization in international business

1)Development would be faster (due to competition with the other private parties)2)Innovative solutions (due to again competition with the other private

parties)3)effective & time bound results4)cost cuttingsPrivatization is the implementation of a decision to sell companies owned bythe State to private individuals/ companies.Benefits of privatization are making the erstwhile public sector commercialenterprise survive in competitive markets through better efficiency, higher

productivity, improved product quality and customer service, and reductionof waste and leakages due to State ownership.There are no limitations of privatization except that hitherto unproductive or

less productive labor would have learn afresh the art of serving through hardwork and excellence.

4/b) Mention the relevance of these international commercial terms:

FCA, EXW, DES, CIF and DDP.

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FCA {+ the named point of departure}=Free Carrier

The delivery of goods on truck, rail car or container at the specified point(depot) of departure, which is usually the seller’s premises, or a namedrailroad station or a named cargo terminal or into the custody of the carrier,at seller’s expense. The point (depot) at origin may or may not be a customsclearance centre. Buyer is responsible for the main carriage/freight, cargoinsurance and other costs and risks.The term FCA is also used in the RO/RO (roll on/roll off) services. In theexport quotation, indicate the point of departure (loading) after the acronymFCA, for example FCA Hong Kong and FCA Seattle.

EXW {+ the named place}=Ex Works

Ex means from. Works means factory, mill or warehouse, which are theseller’s premises. EXW applies to goods available only at the seller’s premises. Buyer is responsible for loading the goods on truck or container atthe seller’s premises, and for the subsequent costs and risks.In the quotation, indicate the named place (seller’s premises) after theacronym EXW, for example EXW Kobe and EXW San Antonio.The termEXW is commonly used between the manufacturer (seller) and export-trader (buyer), and the export-trader resells on other trade terms to the foreign

buyers.

DES {+ the named port of destination}=Delivered Ex Ship

The delivery of goods on board the vessel is at the named port of destination(discharge) at seller’s expense. Buyer assumes the unloading fee, importcustoms clearance, payment of customs duties and taxes, cargo insurance,and other costs and risks.In the export quotation, indicate the port of destination (discharge) after theacronym DES, for example DES Helsinki and DES Stockholm.

CIF {+ the named port of destination}=Cost, Insurance and Freight

The cargo insurance and delivery of goods is to the named port of destination (discharge) at the seller’s expense. Buyer is responsible for theimport customs clearance and other costs and risks.In the export quotation, indicate the port of destination (discharge) after theacronym CIF, for example CIF Pusan and CIF Singapore.

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DDP {+ the named point of destination}=Delivered Duty Paid

The seller is responsible for most of the expenses, which include the cargoinsurance, import customs clearance, and payment of customs duties andtaxes at the buyer’s end, and the delivery of goods to the final point atdestination, which is often the project site or buyer’s premises. The seller may opt not to insure the goods at his/her own risks.In the export quotation, indicate the point of destination (discharge) after theacronym DDP, for example DDP Bujumbura and DDP Mbabane.

Q.5 Give short notes on Letter of credit and Bill of Lading

Letter of Credit

A letter of credit is a document issued mostly by a financial institutionwhich usually provides an irrevocable payment undertaking (it can also berevocable, confirmed, unconfirmed, transferable or others e.g. back to back:revolving but is most commonly irrevocable/confirmed) to a beneficiaryagainst complying documents as stated in the credit. Letter of Credit isabbreviated as an LC or L/C, and often is referred to as a documentarycredit, abbreviated as DC or D/C, documentary letter of credit, or simply ascredit (as in the UCP 500 and UCP 600). Once the beneficiary or a

presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC,comprising documents complying with the terms and conditions of the LC,the applicable UCP and international standard banking practice, the issuing

bank or confirming bank, if any, is obliged to honor irrespective of anyinstructions from the applicant to the contrary. In other words, the obligationto honors (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credithowever parties must balance potential risks. Letters of credit accomplishtheir purpose by substituting the credit of the bank for that of the customer,for the purpose of facilitating trade. There are basically two types:commercial and standby. The commercial letter of credit is the primary

payment mechanism for a transaction, whereas the standby letter of credit isa secondary payment mechanism.Letters of credit are often used in international transactions to ensure that

payment will be received. Due to the nature of international dealings

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including factors such as distance, differing laws in each country anddifficulty in knowing each party personally, the use of letters of credit has

become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have

been shipped.

Bill of Lading

A Bill of Lading is a type of document that is used to acknowledge thereceipt of a shipment of goods and is an essential document in transportinggoods overland to the exporter’s international carrier. A through Bill of Lading involves the use of at least two different modes of transport fromroad, rail, air and sea. The term derives from the noun "bill", a schedule of

costs for services supplied or to be supplied, and from the verb "to lade"which means to load a cargo onto a ship or other form of transport.In addition to acknowledging the receipt of goods, a Bill of Lading indicatesthe particular vessel on which the goods have been placed, their intendeddestination, and the terms for transporting the shipment to its finaldestination. Inland, ocean, through, and airway bill are the names given to

bills of lading.For example, suppose that a logistics company must transport gasoline froma plant in Texas to a gas station in Arizona via heavy truck. A plantrepresentative and the driver would sign the bill of lading after the gas isloaded onto the truck. Once the gasoline is delivered to the gas station inArizona, the truck driver must have the clerk at the station sign thedocument as well.

Q.6 Discuss the entry methods in international business with

relevant examples.

Methods of entry in international business

With rare exceptions, products just don’t emerge in foreign marketsovernight – a firm has to build up a market over time. Several strategies,which differ in aggressiveness, risk, and the amount of control that the firmis able to maintain, are available:· Exporting is a relatively low risk strategy in which few investments aremade in the new country. A drawback is that, because the firm makes few if any marketing investments in the new country, market share may be below

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potential. Further, the firm, by not operating in the country, learns less aboutthe market (What do consumers really want? Which kinds of advertisingcampaigns are most successful? What are the most effective methods of distribution?) If an importer is willing to do a good job of marketing, thisarrangement may represent a "win-win" situation, but it may be moredifficult for the firm to enter on its own later if it decides that larger profitscan be made within the country.

· Licensing and franchising are also low exposure methods of entry – youallow someone else to use your trademarks and accumulated expertise. Your

partner puts up the money and assumes the risk. Problems here involve thefact that you are training a potential competitor and that you have littlecontrol over how the business is operated. For example, American fast foodrestaurants have found that foreign franchisees often fail to maintain

American standards of cleanliness. Similarly, a foreign manufacturer mayuse lower quality ingredients in manufacturing a brand based on premiumcontents in the home country.

· Contract manufacturing involves having someone else manufacture products while you take on some of the marketing efforts yourself. Thissaves investment, but again you may be training a competitor.· Direct entry strategies, where the firm either acquires a firm or buildsoperations "from scratch" involve the highest exposure, but also the greatestopportunities for profits. The firm gains more knowledge about the localmarket and maintains greater control, but now has a huge investment. Insome countries, the government may expropriate assets withoutcompensation, so direct investment entails an additional risk. A variationinvolves a joint venture, where a local firm puts up some of the money andknowledge about the local market.

Documents

MB0037 SET 2 February 2011