Question No. 3 IBO - 01 International Business Environment Mcom 1st Year

 Solutions to Assignments 

IBO-01 International Business Environment

Question No. 3 A) 

Every business organization is a part of the business environment, within which it operates. No entity can function in isolation because there are many factors that closely or distantly surrounds the business, which is known as a business environment. It is broadly classified into two categories, i.e. microenvironment, and macro environment. The former affects the working of a particular business only, to which they relate to, while the latter affects the functioning of all the business entities, operating in the economy.

The following are the major difference between micro and macro environment:

1. The microenvironment is the environment which is in immediate contact with the firm. The environment which is not specific to a particular firm but can influence the working of all the business groups is known as Macro Environment.

2. The factors of the microenvironment affect the particular business only, but the macro-environmental factors affect all the business entities.

3. The microenvironmental factors are controllable by the business but to some extent only. However, the macroeconomic variables are uncontrollable.

4. The elements of the microenvironment affect directly and regularly to the firm which is just opposite in the case of the macro environment.

5. The study of the microenvironment is described as COSMIC analysis. Conversely, PESTLE Analysis is a study of the macro environment.

Question No. 3 B) 

 Fixed exchange rate and flexible exchange rate are two exchange rate systems, differ in the sense that when the exchange rate of the country is attached to the another currency or gold prices, is called fixed exchange rate, whereas if it depends on the supply and demand of money in the market is called flexible exchange rate.

The depreciation of Indian Rupee against US dollar is the common headline of almost all news dailies, since past few years. Not only India but the primary concern of the monetary policy of all the countries focus on stabilising the exchange rate. However, still, a major section of society is unaware about currency fluctuations in the international market, as they do not have sufficient knowledge.

The following points are noteworthy so far as the difference between fixed and flexible exchange rates is concerned:

1. The exchange rate which the government sets and maintains at the same level is called fixed exchange rate. The exchange rate that variates with the variation in market forces is called flexible exchange rate.

2. The fixed exchange rate is determined by government or the central bank of the country. On the other hand, the flexible exchange rate is fixed by demand and supply forces.

3. In fixed exchange rate regime, a reduction in the par value of the currency is termed as devaluation and a rise as the revaluation. On the other hand, in the flexible exchange rate system, the decrease in currency price is regarded as depreciation and increase, as appreciation.

4. Speculation is common in the flexible exchange rate. Conversely, in the case of fixed exchange rate speculation takes place when there is a rumour about change in government policy.

5. In fixed exchange rate, the self-adjusting mechanism operates through variation in the supply of money, domestic interest rate and price. As opposed to the flexible exchange rate that operates to remove external instability by the change in forex rate.

Question No. 3 C)

General Agreement on Tariffs and Trade (GATT) was made in the year 1947, that aimed at initiating an international trade, by liberalizing policies and removing tariffs. It was succeeded by World Trade Organization (WTO), which is a global organization, that encourages and facilitates inter-country trade and also helps in resolving trade disputes.

GATT is a multilateral agreement, between several nations of the world, that regulates international trade. Its primary objective is to reduce tariffs to a substantial amount along with abolishing other trade barriers. But, in the year 1995, WTO replaced GATT. WTO has more powers and augmented functions in dealing with the international economic affairs.

The points given below explain the difference between GATT and WTO in detail:

1. GATT refers to an international multilateral treaty, signed by 23 nations to promote international trade and remove cross-country trade barriers. On the contrary, WTO is a global body, which superseded GATT and deals with the rules of international trade between member nations.

2. While GATT is a simple agreement, there is no institutional existence, but have a small secretariat. Conversely, WTO is a permanent institution along with a secretariat.

3. The participating nations are called as contracting parties in GATT, whereas for WTO, they are called as member nations.

4. GATT commitments are provisional in nature, which after 47 years the government can make a choice to treat it as a permanent commitment or not. On the other hand, WTO commitments are permanent, since the very beginning.

5. The scope of WTO is wider than that of WTO in the sense that the rules of GATT are applied only when the trade is made in goods. As opposed to, WTO whose rules are applicable to services and aspects of intellectual property along with the goods.

6. GATT agreement is primarily multilateral, but plurilateral agreement is added to it later. In contrast, WTO agreements are purely multilateral.

7. The domestic legislation is allowed to continue in GATT, while the same is not possible in the case of WTO.

8. The dispute settlement system of GATT was slower, less automatic and susceptible to blockages. Unlike WTO, whose dispute settlement system is very effective.

Question No. 3 D)

A major point of distinction between a domestic and export contract lies in identifying the proper law governing the export contract. This is not a problem for domestic sales contracts because the proper law will always be the Indian law in India. It will be the respective national laws in each country so far as their domestic transactions are concerned. But in export transactions, there are two nations, that of the exporter and importer. Therefore, the question arises, which country’s law will apply to an export contract.

This is a very complex problem but the principle generally followed is that the parties to the contract may agree mutually about the applicability of particular country’s law. The country chosen must be either that of the exporter or the importer. In special circumstances, a third country’s law may be chosen, provided that the country has something to do with the contract. For example, that may be the country where the goods will be re-exported by the importer subsequently. Only when the parties fail to mention the applicable law and a dispute arises later on, the court will decide which law should apply.

Each country’s law has developed a set of rules which the courts consider while deciding on this issue. This is commonly known as ‘conflict of laws’ situation. Some of the factors considered by the courts are: the place where the contract is signed, the language the contract is written, the place of business of the parties, etc. However, these days, the courts normally identify as ‘proper law, i.e., the law applicable to the contract (as the one where the contract is to be carried. out, i.e., the place where the delivery is to take place). Since in most export transactions, delivery IS made n the exporter’s country (normally when the goods are placed on the carrier in the exporter’s country), the applicable law becomes the exporting countries law.