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.

Question No. 2B) IBO - 01 International Business Environment Mcom 1st Year

Solutions to Assignments 

IBO-01 International Business Environment

Solutions to Question No. 2 (B)

• Advantages of Foreign Direct Investment.

1. Economic Development Stimulation. 

Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.

2. Easy International Trade.

Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.

3. Employment and Economic Boost. 

Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.

4. Development of Human Capital Resources. 

One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.

5. Tax Incentives. 

Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.

6. Resource Transfer. 

Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.

• Disadvantages of Foreign Direct Investment

1. Hindrance to Domestic Investment. 

As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.

2. Risk from Political Changes. 

Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.

3. Negative Influence on Exchange Rates. 

Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.

4. Higher Costs. 

If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.

5. Economic Non-Viability. 

Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.

6. Expropriation. 

Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.

• Role of FDI in economic development 

FDI plays an important role in the economic development of a country. The capital inflow of foreign investors allows strengthening infrastructure, increasing productivity and creating employment opportunities in India. Additionally, FDI acts as a medium to acquire advanced technology and mobilize foreign exchange resources. Availability of foreign exchange reserves in the country allows RBI (the central banking institution of India) to intervene in the foreign exchange market and control any adverse movement in order to stabilize the foreign exchange rates. As a result, it provides a more favourable economic environment for the development of Indian economy.

The Indian government has initiated steps to promote FDI as they set an investor-friendly policy where most of the sectors are open for FDI under the automatic route (meaning no need to take prior approval for investment by the Government or the Reserve Bank of India). The FDI policy is reviewed on a continuous basis with the purpose that India remains an investor-friendly and attractive FDI destination. FDI covers various sectors such as Defence, Pharmaceuticals, Asset Reconstruction Companies, Broadcasting, Trading, Civil Aviation, Construction and Retail, etc.

In the Union Budget 2018, the cabinet approved 100% FDI under the automatic route for single-brand retail trading. Under this change, the non-resident entity is permitted to commence retail trading of ‘single brand’ product in India for a particular brand. Additionally, the Indian government has also permitted 100% FDI for construction sector under the automatic route. Foreign airlines are permitted to invest up to 49% under the approval route in Air India.

The main purpose of these relaxations in foreign investment by the government is to bring international best practices and employee the latest technologies which propel manufacturing sector and employment generation in India. To boost manufacturing sector with a focus on ‘Make in India’ initiative, the government has allowed manufacturers to sell their products through the medium of wholesale and retail, including e-commerce under the automatic route.

Question No. 2A) IBO - 01 International Business Environment Mcom 1st Year

 

Solutions to Assignments 

IBO-01 International Business Environment

Solutions to Question No. 2 (A)

The main cause of the disequilibrium in the balance of payments arises from imbalance between exports and imports of goods and services. When for one reason or another exports of goods and services of a country are smaller than their imports, disequilibrium in the balance of payments is the likely result.

When the prices of goods are high in the country, its exports are discouraged and imports encouraged. If it is not matched by other items in the balance of payments, disequilib­rium emerges.

• Cyclical Disequilibrium:

Cyclical disequilibrium is caused by the fluctuations in the economic activity or what are known as trade cycles. During the periods of prosperity, prices of goods fall and incomes of the people go down. These changes in incomes of the people and prices of goods affect exports and imports of goods and thereby influence the balance of payments.

“If prices rise in prosperity and decline in depression, a country with a price elasticity for imports greater than unity will experience a tendency for a decline in the value of imports in prosperity, while those for which imports price elasticity is less than one will experience a tendency for increase. These tendencies may be overshadowed by the effects of income changes, of course. Conversely, as prices decline in depression, the elastic demand will bring about an increase in imports, the inelastic demand a decrease.”

• Secular or Long-Run Disequilibrium:

Secular (long-run) disequilibrium in balance of payments occurs because of long-run and deep-seated changes in an economy as it develops from one stage of growth to another. The current account in the balance of payments follows a varying pattern from one stage to another.

In the initial stages of development, domestic investment exceeds domestic savings and imports exceed exports. Disequilibrium arises due to lack of sufficient funds available to finance the import surplus, or the import surplus is not covered by available capital from abroad.

Then comes a stage of growth when domestic savings tend to exceed domestic investment and export outrun imports. Disequilibrium may result because the long-term capital outflow falls short of the surplus savings or because surplus savings exceed the amount of investment opportunities abroad. At a still later stage of growth domestic savings tend to equal domestic investment and long-term capital movements are on balance, zero.

• Technological Disequilibrium:

Technological disequilibrium in the balance of payments is caused by various technological changes. Technological changes involve inventions or innovations of new goods or new tech­niques of production. These technological changes affect the demand for goods and productive factors which in turn influence the various items in the balance of payments. Each technological change implies a new comparative advantage to which a country adjusts to.

The innovation leads to increased exports if it is a new good and export-biased innovation. The innovation may lead to decline in imports if it is import-biased. This will create disequilibrium. A new equilibrium will require either increased imports or reduced exports.

• Structural Disequilibrium:

Let us see how the structural type of disequilibrium is caused. “Structural disequilibrium at the goods level occurs, when a change in demand or supply of exports alters a previously existing equilibrium, or when a change occurs in the basic circumstances under which income is earned or spent abroad, in both cases without the requisite parallel changes elsewhere in the economy.”

A change in supply may also cause a structural disequilibrium. Suppose Indian jute crop falls because of the change in the shift in the crop-pattern, Indian jute exports will fall and disequilibrium will be created. Apart from goods, a loss of service income may also upset the balance-of-payments position on current account.

Here we detail about the four methods adopted to correct disequilibrium in balance of payments.

1. Trade Policy Measures: Expanding Exports and Restraining Imports:

Trade policy measures to improve the balance of payments refer to the measures adopted to promote exports and reduce imports.

Exports may be encouraged by reducing or abolishing export duties and lowering the interest rate on credit used for financing exports. Exports are also encour­aged by granting subsidies to manufacturers and exporters.

Therefore, India had to face great difficulties with regard to balance of payments. At several occasions it approached IMF to bail it out of the foreign exchange crisis that emerged as a result of huge deficits in the balance of payments. At long last, economic crisis caused by persistent deficits in balance of payments forced India to introduce structural reforms to achieve a long-lasting solution of balance of payments problem.

2. Expenditure-Reducing Policies:

The important way to reduce imports and thereby reduce deficit in balance of payments is to adopt monetary and fiscal policies that aim at reducing aggregate expenditure in the economy. The fall in aggregate expenditure or aggregate demand in the economy works to reduce imports and help in solving the balance of payments problem.

3. Expenditure – Switching Policies: Devaluation:

A significant method which is quite often used to correct fundamental disequilibrium in balance of payments is the use of expenditure-switching policies. Expenditure switching policies work through changes in relative prices. Prices of imports are increased by making domestically produced goods relatively cheaper. Expenditure switching policies may lower the prices of exports which will encourage exports of a country. In this way by changing relative prices, expenditure-switching poli­cies help in correcting disequilibrium in balance of payments.

The important form of expenditure switching policy is the reduction in foreign exchange rate of the national currency, namely, devaluation. By devaluation we mean reducing the value or exchange rate of a national currency with respect to other foreign currencies. It should be remembered that devaluation is made when a country is under fixed exchange rate system and occasionally decides to lower the exchange rate of its currency to improve its balance of payments.

Under the Bretton Woods System adopted in 1946, fixed exchange rate system was adopted, but to correct fundamen­tal disequilibrium in the balance of payments, the countries were allowed to make devaluation of their currencies with the permission of IMF. Now, Bretton Woods System has been abandoned and most of the countries of the world have floated their currencies and have thus adopted the system of flexible exchange rates as determined by market forces of demand for and supply of them.

4. Exchange Control:

We know that deflation is dangerous; devalu­ation has a temporary effect and may provoke others also to devalue. Devaluation also hits the prestige of a country. These methods are, therefore, avoided and instead foreign exchange is controlled by the government.

Under it, all the exporters are ordered to surrender their foreign exchange to the central bank of a country and it is then rationed out among the licensed importers. None else is allowed to import goods without a licence. The balance of payments is thus rectified by keeping the imports within limits.

After the Second War World a new international institution’ International Monetary Fund (IMF)’ was set up for maintaining equilibrium in the balance of payments of member countries for a short term. Member countries borrow from it for a short period to maintain equilibrium in the balance of payments. IMF also advises member countries how to correct fundamental disequilibrium in the balance of Payments when it does arise. It may, however, be mentioned here that no country now needs to be forced into deflation (and so depression) to root out the causes underlying disequilib­rium as had to be done under the gold standard. On the contrary, the IMF provides a mechanism by which changes in the rates of foreign exchange can be made in an orderly fashion.

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

 

Solutions to Assignments 

IBO-01 International Business Environment

Solutions to Question No. 1 (B)

An international business environment refers to the surrounding in which international companies run their businesses. Therefore, it is mandatory for the people at the managerial level to work on the factors that comprise of International Business Environment.

• Economic Environment in International Business

The economic environment relates to all the factors that contribute to a country’s attractiveness for foreign businesses. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed or industrialised, the less developed or third world, & the newly industrialising or emerging economies.

Within each category, there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, & the newly industrialising (those moving from poorer to richer). These distinctions are generally made on the basis of the gross domestic product per capita (GDP/capita). Better education, infrastructure, & technology, healthcare, & so on are also often associated with higher levels of economic development.

Clearly, the level of economic activity combined with education, infrastructure, & so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, & a firm needs to recognise this environment if it is to operate successfully internationally. While analysing the economic environment, the organisation intending to enter a particular business sector may consider the following aspects:

1. An Economic system to enter the business sector.
2. Stage of economic growth & the pace of growth.
3. Level of national & per capita income.
4. Incidents of taxes, both direct & indirect tax
5. Infrastructure facilities available & the difficulties thereof.
6. Availability of raw materials & components & the cost thereof.
7. Sources of financial resources & their costs.
8. Availability of manpower-managerial, technical & workers available & their salary & wage structures.

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

Solutions to Assignments 

IBO-01 International Business Environment

Solutions to Question No. 1 (a)

A vibrant international trade environment benefits all participating parties. Countries with high levels of international trade have stronger economies, better standards of living and steadier growth.

1. International Trade Raises Living Standards

Exports boost the economic development of a country, reduce poverty and raise the standard of living. The world's strongest economies are heavily involved in international trade and have the highest living standards, according to the Operation for Economic Co-operation and Development (OECD).

Countries like Switzerland, Germany, Japan and the Scandinavian countries have high volumes of imports and exports relative to their gross domestic product and offer high standards of living. Nations with lower ratios of international trade, such as Greece, Italy, Spain and Portugal, face serious economic problems and challenges to their living standards. Even with low wages, less developed countries can use this advantage to create jobs related to exports that add currency to their economy and improve their living conditions.

2. Exports Increase Sales

Exporting opens new markets for a company to increase its sales. Economies rise and fall, and a company that has a good export market is in a better position to weather an economic downturn.

Furthermore, businesses that export are less likely to fail. It's not only the exporting companies that increase sales; the companies that supply materials to the exporters also see their revenues go up, leading to more jobs.

3. Exports Create Jobs 

A company that increases its exports needs to hire more people to handle the higher workload. Businesses that export have a job growth 2 to 4 percent higher than companies that don't; these export-related jobs pay about 16 percent more than jobs in companies with fewer exports. The workers in these export-related jobs spend their earnings in the local economy, leading to a demand for other products and creating more jobs.

4. Imports Benefit Consumers

Imported products result in lower prices and expand the number of product choices for consumers. Lower prices have a significant effect, particularly for modest and low-income households. Studies show that lower import prices save the average American family of four around $10,000 per year.

Besides lower prices, imports give consumers a wider choice of products with better quality. As a result, domestic manufacturers are forced to lower their prices and increase product lines to meet the competition from imports. Even further, domestic vendors may have to import more components of their products to stay price competitive.

5. Improved International Relations

International business removes rivalry between different countries and promotes international peace and harmony. Mutual trade creates a dependence on each other, improves confidence and fosters good faith.

A good example of co-dependency of nations is the relationship between the United States and China. Even though these countries have significant political differences, they try to get along because of the huge amount of trade between them.