Notes - International Business

International

Business

UNIT-I » International Business

 

Meaning of International Business

International business is the practice of conducting business across national borders. It involves the exchange of goods and services between different countries and often includes the formation of strategic partnerships and alliances with foreign companies. It is a multi-faceted field that combines global operations and business practices with an understanding of local cultures, customs, and regulations.

 

Definitions

1.     “International business is the exchange of goods, services, capital and/or knowledge across national boundaries, often involving multiple countries.”

~ Philip M. Rosenzweig

2. “International business is the study of the economic activities of firms and organizations that operate in more than one country.”

~ John Daniels

3. “International business is an area of study that focuses on how individuals, governments, and organizations interact and do business in a global environment.”

~ Stephen J. Kobrin

4. “International business is the process of conducting business operations in more than one country at the same time.”

~ Francis Cherunilam

5. “International business refers to any type of business activity that involves the coordination and integration of resources across two or more countries.”

~ David J. Teece

Evolution of International Business

Evolution international business is the process of companies expanding and adapting their operations to capitalize on new opportunities in different countries and regions. It involves taking a company’s existing products and services and adapting them to fit the needs and wants of people in different countries, as well as exploring new markets, creating new products and services, and building relationships with local businesses. In short, it is the process of a company growing and adapting to the changing global business landscape.

The evolution of international business can be divided into five distinct periods:

1.     Pre-1492: This period is marked by limited international trade and exchange, mainly between neighboring countries.

2.     1492-1840: This period saw the rise of mercantilism, a system of economic thought which emphasized the importance of colonies and their resources in the pursuit of wealth.

3.     1840-1914: This period saw the rise of industrialization and the creation of global companies, such as the East India Company, as well as the development of international trade agreements.

4.     1914-1945: This period saw the rise of protectionism and the Great Depression, which reduced international trade significantly.

5.     1945 to present: This period is marked by the rise of globalization and increased international trade, as well as the formation of the World Trade Organization.

 

Concepts of International Business

1.     Globalization: Globalization refers to the trend towards increased economic integration and interdependence between countries and businesses around the world. This includes a reduction in the barriers to the movement of goods, services, labor, capital, and technology.

 

2.     Comparative Advantage: Comparative advantage is the ability of a country or company to produce a good or service at a lower cost than its competitors. In international business, comparative advantage is used as a basis for deciding which products and services to produce and export.

 

3.     Trade Agreements: Trade agreements are legally binding documents between two or more countries that set out the terms and conditions for trading with each other. They can include tariff reductions, removal of non-tariff barriers, and agreements on other matters such as intellectual property and labor standards.

 

4.     Currency Exchange: Currency exchange is the process of converting one currency into another. This is necessary when conducting international business, as different countries have different currencies.

 

5.     International Investment: International investment is the investment of capital in a foreign country. This can include companies investing in foreign markets, or individuals investing in foreign stocks and bonds.

 

6.     Cultural Differences: Cultural differences refer to the various beliefs, customs, and practices of different societies and countries. In international business, it is important to be aware of these differences and to adjust approaches accordingly.

Approaches of International Business

Approaches of international business refer to the different strategies and tactics used by companies to operate in foreign markets. These approaches may include, but are not limited to, entering a foreign market through exporting, licensing, franchising, joint ventures and direct investment. Companies must take into account the various risks, rewards and complexities of each approach when deciding which approach is best for their business.

1)    Ethnocentric Approach

The domestic companies normally formulates their strategies, their product design and their operations towards the national markets, customers and competitors. The company exports the same products designed for domestic markets to foreign countries. Thus maintenance of domestic approach towards International business is Ethnocentric Approach.

•      The ethnocentric approach of international business is a strategy that focuses on the home country of the company.

•      This approach typically involves the company using its home country’s approaches and strategies in other international markets.

•      This approach is often seen as a way to ensure that the company’s core values and business practices remain consistent across all markets.

•      It also means that the company is likely to hire people from the home country to manage international operations, and to focus on products that the home country is familiar with.

Characteristics of Ethnocentric Approach

1.     Home Country Orientation: An ethnocentric approach to international business focuses on the home country as the center of operations and decision-making.

 

2.     Domestic Talent: This approach also focuses on hiring and utilizing domestic talent, as opposed to hiring foreign talent.

 

3.     Standardization: An ethnocentric approach also tends to focus on standardizing products and services across multiple countries. This can lead to more efficient operations and cost savings, while still providing a consistent experience for customers.

 

4.     Uniqueness: An ethnocentric approach can also lead to unique products or services specific to the home country, which can help differentiate the business from competitors in other countries.

 

5.     Localization: This approach does not completely ignore the local culture and environment, as it still takes into account local laws, customs, and preferences when making decisions. This helps create a better product or service for the local market.

 

2.    Polycentric Approach

The company establishes a foreign subsidiary company and decentralizes all the operations and delegates decision-making and policy making authority to its executives. In fact company appoints executives and personnel who direct reports to managing Director of that company. Company appoints key personnel from he home country and all other vacancies are filled by people of host country.

 

•      The polycentric approach to international business is a strategy that focuses on adapting to the needs and culture of each individual country in which a company operates.

•      This approach involves taking into account the unique cultural, political, and economic characteristics of each country, rather than attempting to impose a single, global strategy on each market.

•      This strategy can be beneficial for multinational companies that wish to maximize their presence in each individual market.

 

Characteristics of Polycentric Approach

1.     Multidomestic Strategy: This refers to a strategy in which the company operates according to local market conditions and tailors its products or services accordingly. The company may have different approaches to different countries and regions, and will focus on local needs and preferences.

 

2.     Multinational Strategy: This refers to a strategy in which the company operates globally and takes a global approach to its operations. This strategy typically involves the sharing of resources and knowledge across national boundaries to create a competitive advantage.

 

3.     Decentralized Management: This refers to a management approach in which decision making power is delegated to local managers, rather than a centralized headquarters. This allows the company to respond quickly to local market conditions and customer needs.

 

4.     Local Focus: This refers to a focus on local customers, cultures, and markets. The company will tailor its products or services to meet local needs and preferences and make sure that it is in tune with local trends and regulations.

 

5.     Adaptability: This refers to the ability of the company to adapt to changes in the local market. This includes the ability to quickly adjust its products or services to meet changing customer needs and preferences.

3.    Regiocentric Approach

The company after operating successfully in a foreign country, thinks of exporting to the neighboring countries of the host country. At this stage, the foreign subsidiary considers the regional environment for formulating policies. It markets more or less the same product design, under polycentric approach in other country of region with the different market strategy.

•      Regiocentric approach of international business is a strategy employed by multinational companies in which they focus on a particular region or geographical area, rather than trying to do business on a global basis.

•      The goal of this approach is to create a competitive advantage that can be leveraged when expanding into new markets.

•      In general, firms will focus on developing a strong presence in the region they have chosen, and use that as a base to expand into other regions in the future.

Features of Regiocentric Approach

1.     Regional focus: The regiocentric approach focuses on a particular region or a group of countries. Companies who follow this approach concentrate on increasing their presence in a certain region, rather than spreading out over the entire world.

 

2.     Localized products: Companies that employ the regiocentric approach usually develop products that are tailored to the needs of the local market, rather than trying to sell standardized products all over the world.

 

3.     Localization of personnel: Companies that use the regiocentric approach tend to look for local personnel in the target region. This helps them to better understand the local market and develop products and services that are better suited to the local needs.

 

4.     Regional partnerships: Companies that use the regiocentric approach also tend to form regional partnerships with other companies in the region. This helps them to better understand the market and gain access to resources that may not be available locally.

 

5.     Risk mitigation: The regiocentric approach helps companies to better manage their risks by limiting their exposure to certain regions. This helps them to better manage their costs and ensure that they do not overextend themselves in any particular region.

 

4.    Geocentric Approach

Under this approach, the entire world is just like a single country for the company. They select the employees from entire globe and operate with a number of subsidiaries. Each subsidiary functions as an autonomous company in formulating policies, strategies, product design, etc.

·       The geocentric approach of international business is an approach to international business that views the world as one market, regardless of national boundaries.

·       It is an approach that views the global economy as a single, interconnected system, and the company as part of this system.

·       It adopts a global perspective and seeks to identify the most attractive opportunities across the world.

·       This approach seeks to maximize the potential of a company by taking advantage of global opportunities, while still taking into consideration the impact of local factors.

Features of Geocentric Approach

6.     Focus on domestic markets: Geocentric approach focuses on the domestic market and believes that the domestic market should be the primary focus.

 

7.     Expansion into foreign markets: Geocentric approach allows for expansion into foreign markets if it is beneficial to the company’s bottom-line.

 

8.     Talent and resources: Geocentric approach recognizes that the best talent and resources can be found anywhere in the world.

 

9.     Cross-cultural understanding: Geocentric approach stresses the importance of understanding and adapting to different cultures.

 

10.  Global view: Geocentric approach takes a global view of the business, recognizing that success in one market can benefit the company in other markets.

 

11.  Strategic alliances: Geocentric approach encourages the formation of strategic alliances with other companies and countries in order to gain a competitive advantage.

Stages of Internationalisation

1.     Domestic Company: A domestic company is a business that is based in a single country and operates within that country’s political and economic boundaries. It typically sells its products and services to customers in the same country and is subject to the laws and regulations of that country.

2.  International: An international company is one that begins to operate in multiple countries, often through exports or licencing agreements. This type of company takes advantage of the different regulatory environments, labour costs, and access to new markets in order to increase profits.

3.     Multinational: A multinational company is one that has a presence in multiple countries and is actively managing its operations in each of those countries. This type of company typically has manufacturing and distribution operations in different countries and seeks to take advantage of the different regulatory environments, labour costs, and access to new markets to maximize profits. 

4.     Global: A global company is one that has a presence in multiple countries and is actively managing its operations in each of those countries. This type of company typically has a global headquarters and is actively managing its operations in multiple countries in order to take advantage of the different regulatory environments, labour costs, and access to new markets to maximize profits.

5.     Transnational: A transnational company is one that has a presence in multiple countries and is actively managing its operations in each of those countries. This type of company typically has a global headquarters and is actively managing its operations in multiple countries in order to optimize profits. This type of company seeks to take advantage of the different regulatory environments, labour costs, and access to new markets in order to maximize profits. It also seeks to minimize the costs of operating in each country and often utilizes global supply chains to optimize efficiency.

Theories of International Business

Theories of international business refer to the various theories and models that have been developed to explain and understand the global business environment. These theories provide a framework for understanding the international business environment, the competitive environment, and the strategic decisions that firms make in international markets. Theories range from microeconomic theories of international trade and investment, to theories of multinational enterprise, global strategy, and international business policy.

These theories are as follows;

1.     Absolute Cost Advantage Theory: This theory states that countries can gain advantage in international trade if they have an absolute cost advantage in producing certain goods. This cost advantage could be due to access to cheaper factors of production such as labor, natural resources, or capital. If a country has a lower cost of production, they can offer goods at a lower price and gain an advantage in international trade.

2.     Comparative Cost Theory: This theory states that countries can gain advantage in international trade if they produce goods that have a lower relative cost than other countries. This cost advantage could be due to access to technology, better production techniques, or the ability to specialize in certain goods. If a country can produce goods at a lower cost than other countries, they will have an advantage in international trade.

3.     Comparative Cost Theory With Money: This theory states that countries can gain advantage in international trade if they produce goods that have a lower cost when considering the exchange rate between currencies. This cost advantage could be due to fluctuations in the exchange rate between two currencies, or due to the fact that certain countries have access to cheaper capital than others. If a country can produce goods at a lower cost when considering the exchange rate, they will have an advantage in international trade.

4.     Relative Factor Endowment Theory: This theory states that countries can gain advantage in international trade if they have an abundance of certain factors of production compared to other countries. These factors of production could include access to labor, natural resources, or capital. If a country has an abundance of certain factors of production, they can use this to their advantage in producing certain goods, and gain an advantage in international trade.

5.     Country Similarity Theory: This theory states that countries can gain advantage in international trade if they have similar cultures, political systems, and economic structures. This similarity could mean that countries can more easily trade goods with each other, and benefit from specialization in certain goods. If two countries are similar, they can gain an advantage in international trade.

6.     Product Life Cycle Theory: This theory states that countries can gain advantage in international trade if they specialize in certain goods that are in different stages of the product life cycle. This could mean that countries specialize in producing goods that are either in the introduction, growth, maturity, or decline stage of the product life cycle. If a country specializes in producing goods in certain stages of the product life cycle, they can gain an advantage in international trade.

7.     Global Strategic Rivalry Theory: This theory states that countries can gain advantage in international trade if they have large domestic markets and engage in strategic rivalry with other countries. This could mean that countries use their large domestic markets to pressure other countries into trading certain goods and services. If a country engages in strategic rivalry with other countries, they can gain an advantage in international trade.

8.    Porter’s National Competitive Advantage Theory: This theory states that countries can gain advantage in international trade if they have the ability to create and sustain competitive advantages in certain industries. This could mean that countries have access to certain resources, technology, or know-how that allows them to create and sustain competitive advantages in certain industries. If a country can create and sustain competitive advantages in certain industries, they can gain an advantage in international trade.

Scope of International Business

The scope of international business includes the following:

 

1.     International Trade: This involves exporting and importing goods and services between countries. It includes the negotiation of trade agreements, the development of global supply chains, and the understanding of tariffs and customs regulations.

 

2.     International Investment: This involves investing in foreign markets and companies. It requires an understanding of international finance and taxation, as well as the ability to identify and assess investment opportunities in different countries.

 

3.     International Business Strategy: This involves developing strategies to compete in foreign markets. It includes the development of marketing plans, understanding cultural differences, and managing risks associated with foreign operations.

 

4.     International Human Resource Management: This involves managing personnel in a global context. It includes the recruitment, selection, and training of personnel from different countries, as well as understanding labor laws and regulations in different countries.

 

5.     International Business Law: This involves understanding the legal aspects of conducting business in foreign countries. It includes the study of contract law, dispute resolution, and intellectual property rights.

Competitive Advantages of International Business

The advantage of international business is that it allows companies to access new markets, increase profits, and diversify their operations. It also allows them to benefit from lower production costs and access to a larger pool of resources. Additionally, it can help promote economic growth in countries that are less developed.

1.     Lower Production Costs: Companies can benefit from lower production costs by taking advantage of lower labor costs and cheaper raw materials available in different countries.

 

2.     Access to New Markets: Companies can gain access to new markets by selling to customers in different countries.

 

3.     Increased Profits: Companies can increase profits by taking advantage of economies of scale, as well as by tapping into new markets and utilizing cheaper labor and resources.

 

4.     Exchange Rate Differences: Companies can benefit from exchange rate differences by selling their products in different currencies, thereby increasing their profits.

 

5.     Increased Brand Awareness: Companies can increase their brand awareness by marketing their products to new customers in different countries.

 

Problems in International Business

            International business is the term used to describe the process of conducting business activities that involve multiple countries or cultures. It involves the exchange of goods and services, the movement of capital and people, and the development of international trade relationships. The challenges of international business can be divided into three main categories: economic, cultural, and regulatory.

1.     Exchange Rate Risk: This is the risk associated with the exchange rate fluctuations between two countries. Changes in exchange rates can have a large impact on the profitability of international businesses

 

2.     Tariffs and Trade Barriers: Tariffs are taxes placed on imported goods, while trade barriers are non-tariff obstacles to trade, such as quotas and embargoes. Both tariffs and trade barriers can increase the cost of doing business internationally.

 

3.     Cultural Differences: Different cultures may have different ideas about appropriate business practices, leading to communication and other difficulties.

 

4.     Political Risk: Political risk is the risk associated with the instability of a government or region. This instability can lead to changes in the laws and regulations that can have a negative effect on businesses operating in that region.

 

5.     Transportation Costs: Shipping goods internationally can be expensive. Businesses must weigh the cost of transportation against the potential profits of selling products on an international market.

 

 

 

 

 

UNIT-I » Modes of Entering International Business

 

International Business Analysis

International business analysis is the process of analyzing the operations of an international business, including its operations in different countries and its interactions with different cultures. It involves assessing the risks, opportunities and challenges associated with international business operations. It also involves understanding the political, economic and legal environment in which the business operates, as well as the competitive landscape.

1.     Assessing the risks and opportunities associated with international business operations: International business analysis involves assessing the potential risks and opportunities associated with international business operations. This includes assessing the potential for currency exchange rate fluctuations, regulatory changes, and macroeconomic shifts.

 

2.     Understanding the political, economic, and legal environment: International business analysis requires an understanding of the political, economic, and legal environment in which an international business operates. This includes understanding the laws and regulations of the countries where the business operates, as well as the political and economic stability of those countries.

 

3.     Analyzing the competitive landscape: International business analysis also requires an understanding of the competitive landscape in which the business operates. This includes assessing the strengths and weaknesses of the business’s competitors, as well as the potential for new entrants into the market.

 

4.     Developing strategies for international operations: Once the risks and opportunities associated with international business operations have been assessed, international business analysis can be used to develop strategies and tactics for operating in different countries and dealing with different cultures. This includes understanding the local market and developing strategies for entering new markets and adapting products and services to fit local needs.

 

Modes of entry into International Business

Modes of entry into international business refer to the different ways a company can enter a foreign market. These include exporting, licensing, franchising, joint ventures, direct investment, and e-commerce. Each mode has its own advantages and risks, and companies must carefully consider which one is best suited to their business objectives.

These modes are;

1.     Exporting: Exporting is a type of international business in which a company sells its products and services in other countries. This can be done directly or through intermediaries such as a wholesaler or distributor. The company may export its own products, or source products from another country for export. Exporting can be a great way for a company to access new markets and expand its business.

 

2.     Licensing: Licensing is another popular way for companies to enter international markets. It involves a company granting a license to another company to manufacture, use, or sell its products or services in a foreign country. This can be a cost-effective way to expand into a new market, since the company doesn’t have to invest in manufacturing or other infrastructure.

 

3.     Franchising: Franchising is a popular model for international expansion. In this model, a company grants a franchisee the right to use its brand and products in a foreign country. The franchisee is responsible for setting up the business and managing operations. This model can be a great way for a company to expand quickly, since the franchisee is responsible for the costs associated with setting up the business.

 

4.     Joint Ventures: A joint venture is an agreement between two or more companies to cooperate in a specific business activity. In a joint venture, each company contributes capital and resources, and shares in the profits and losses of the venture. This can be an effective way for companies to enter international markets and leverage each other’s strengths.

 

5.     Direct Investment: Direct investment is when a company invests in the operations of another company in a foreign country. This can involve the purchase of a foreign company, setting up a subsidiary, or other forms of investment. Direct investment can be a great way for a company to gain access to new markets and resources.

 

6.     Strategic Alliances: Strategic alliances are agreements between two or more companies to collaborate on specific projects or activities. These alliances can involve sharing resources, developing joint products and services, and other forms of cooperation. Strategic alliances can be a great way for companies to access new markets and leverage each other’s strengths.

 

7.     Online Business: Online business is another popular form of international business. This involves selling products or services online through a website or online store. This can be a great way for companies to reach a global audience and expand their business. It can also be a cost-effective way to enter a new market, since there are no physical infrastructure costs associated with setting up an online business.

 

Globalization

Meaning of Globalization

Globalization in international business is the process of integrating economies, industries, markets, cultures, and policies around the world. This integration is driven by international trade, investment, finance, migration, and the exchange of technology, goods, services, and information. Globalization has helped open up new opportunities for businesses to expand their operations across borders and has been a major contributor to the growth of international trade and investment.

 

Definitions of Globalization

“Globalisation is the increasing integration of economies, societies, and cultures around the world due to advances in communication, transportation, and technology.”

~ Kenneth Prewitt

 

“Globalisation is a process through which the world’s economies become increasingly interconnected, allowing goods, services, capital, and labour to flow freely across borders.”

~ Joseph Stiglitz

 

“Globalisation is the integration of markets, nations, and technologies to a degree never seen before—in a way that is enabling individuals, corporations, and countries to reach around the world farther, faster, deeper, and cheaper than ever before.”

~ Thomas Friedman

 

Characteristics of Globalization

Features of globalization refer to the different aspects of the world becoming increasingly connected, including increased economic integration, increased cross-border trade, increased movement of people and capital, and improved access to technology. These features have led to a greater interconnectedness of the world, allowing for the exchange of goods, services, and ideas on a global scale.

 

1.     Increased International Trade: Globalization has resulted in increased international trade, with goods and services being exchanged across national borders in a much larger volume than before.

2.     Increased Investment: Globalization has allowed for increased foreign direct investment (FDI) from companies around the world, as well as increased portfolio investment from investors.

3.     Mobility of Capital: Globalization has enabled the rapid movement of capital from one country to another, allowing for quick and efficient investment and repatriation of profits.

4.     Mobility of Labour: Globalization has enabled the movement of labour across borders, allowing countries to tap into pools of labour in other countries.

5.     Increased Cultural Exchange: Globalization has created an environment of increased cultural exchange, allowing people to learn and experience different cultures, religions and customs.

6.     Technological Advancement: Globalization has created an environment of increased technological exchange, allowing countries to access and benefit from the latest technologies and innovations.

7.     Increased Competition: Globalization has created an environment of increased competition, forcing companies to become more efficient and innovative in order to remain competitive.

Drivers of Globalization

Drivers of globalization refer to the factors that have enabled global integration and the increased interconnectedness of different societies and cultures around the world. These drivers can be both physical, such as improved transportation, and technological, such as the internet, and social, such as increased communication and cultural exchange.

The drivers of globalization can be broken down into four main categories: economic, technological, political, and cultural.

1.     Economic: Economic globalization has been driven by the liberalization of trade and investment laws, which has made it much easier for businesses to operate across borders. This has resulted in increased competition, increased efficiency, and lower prices for consumers. The globalization of markets has meant that businesses have been able to access markets that were previously inaccessible, leading to increased profits.

Economic drivers of globalization include liberalization of trade policies, free trade agreements, and the emergence of multinational corporations. These factors have enabled businesses to access new markets, leading to increased interdependence between countries and a surge in international trade.

2.     Technological: Advances in technology, such as the internet, have made it much easier for businesses to communicate and collaborate internationally, allowing them to take advantage of global markets. Technology has also enabled businesses to reduce costs, such as production and transportation, making it easier to produce and deliver goods and services in different parts of the world.

Technology has been one of the major drivers of globalization, enabling businesses to expand their reach beyond their local markets and enabling goods and services to be exchanged across international borders. The rise of the Internet and the development of mobile technologies has enabled businesses to operate on a much larger scale, allowing them to reach customers in different countries and to source supplies from around the world.

 

3.     Political: The fall of the Soviet Union and the end of the Cold War, as well as the rise of free trade agreements, have opened up many countries to international trade. This has allowed businesses to access new markets and to take advantage of cheaper labor and resources in different countries.

Political drivers of globalization include the development of global institutions such as the United Nations, the World Trade Organization, and the International Monetary Fund. These organizations have helped to facilitate global cooperation and the creation of international laws, enabling countries to trade more freely with each other.

 

4.     Cultural: The growth of international tourism and the spread of cultural influences through media has meant that people from different countries are more aware of one another’s cultures and lifestyles. This has led to an increase in cross-cultural interactions, which in turn has led to an increase in international trade and investment.

Cultural drivers of globalization include increased mobility of people, the spread of popular culture, and a convergence of norms and values across different countries. The globalization of culture has enabled people to learn about different cultures and to share their own cultures with others, leading to increased understanding and appreciation of diversity.

Overall, economic, technological, political, and cultural forces have all combined to drive the globalization of markets and economies. The result has been an increased level of competition, increased efficiency, and lower prices for consumers.

 

Components of Globalisation

Components of globalization refer to the various elements that make up the global economy. These components include economic activities, financial flows, technological advances, social and cultural exchanges, and political and legal frameworks. Globalization is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture.

1.     Economic activities: Globalization refers to the increased movement of goods, services, capital, and labor between countries, creating a more unified world economy. This movement is facilitated by the reduction of barriers to trade and investment, such as tariffs, taxes, and other regulations, thus allowing companies to access new markets and resources. Globalization has also increased the flow of goods and services between countries, with goods and services being produced and consumed all over the world.

2.     Financial flows: Globalization has resulted in an increase in the flow of capital among countries. This includes foreign direct investment (FDI), portfolio investment, and cross-border lending and borrowing. FDI is when a company invests in a foreign country and can take the form of either setting up a new facility or establishing a joint venture with a local company. Portfolio investment involves buying and selling stocks and bonds of companies based in different countries. Cross-border lending and borrowing is when a bank or other financial institution lends or borrows money to or from another country.

3.     Technological advances: Technological advances are one of the key drivers of globalization, as they have allowed for the unprecedented flow of information and goods, creating a more interconnected world. This includes the growth of the internet, which has made it easier for individuals and companies to communicate and do business with each other, regardless of location. It has also allowed for the development of new technologies, such as artificial intelligence, robotics, and blockchain, which are transforming the way businesses operate and interact with each other.

4.     Social and cultural exchanges: Globalization has also led to increased social and cultural exchanges between countries. This includes the exchange of ideas and values, as well as the sharing of different cultures and languages. This has created a more diverse and interconnected world, allowing people to learn more about different cultures and perspectives.

5.     Political and legal frameworks: Globalization is also driven by the formation of political and legal frameworks, such as international organizations and agreements, which aim to promote cooperation and collaboration between countries. These include organizations such as the United Nations, the World Trade Organization, and the International Monetary Fund, which are responsible for setting the rules and regulations that govern international trade and commerce. These organizations also help to ensure that countries abide by the same standards of conduct, creating a level playing field for businesses operating in different countries.

6.     Cross-Border Flows of Goods and Services: This refers to the movement of goods and services across international borders. This includes the import and export of goods from one country to another, as well as the movement of services such as tourism and business activities, among others. This type of cross-border activity has become increasingly important in the global economy, as it has allowed for increased access to different markets, resources, and technologies.

7.     Capital: This refers to the movement of money across borders, often to invest in foreign markets or to finance operations in other countries. This type of cross-border capital flow has been particularly important in recent years, as it has allowed businesses to access new markets, new technologies, and new resources.

8.     People: This refers to the movement of people across international borders, often for the purpose of work or study. This type of cross-border movement has become increasingly important in recent years, as it has allowed people to access new opportunities and experiences, while also allowing businesses to access a global talent pool.

9.     Data and Ideas: This refers to the flow of information and ideas across international borders. This type of cross-border activity has been particularly important in recent years, as it has allowed businesses to access new technologies, share best practices, and develop innovative solutions to global challenges.

 

Benefits/ Merits/ Advantages of Globalisation

Globalisation is the process of increasing the connectivity and interdependence of the world's markets and businesses. The benefits of globalisation include increased economic efficiency, increased access to better technology, increased access to new markets, increased access to new ideas, increased access to new sources of capital, increased access to new labour markets, increased competition, increased cultural exchange, increased global understanding, increased global economic integration, increased availability of global products, and increased opportunities for global trade.

1.     Increased Trade: Globalization has opened up the markets for international trade. This has allowed countries to specialize in what they do best and then trade for goods and services that they cannot produce themselves. This increased trade has led to an increase in the global production of goods and services, leading to more jobs and improved living standards.

 

2.     Improved Technology: Globalization has allowed for the transfer of technology and knowledge between countries. This has led to more efficient production processes and improved product quality. It has also allowed businesses to compete more effectively on a global scale.

 

3.     Increased Competition: Globalization has led to increased competition in the global marketplace, driving down prices and increasing product variety and quality. This has allowed businesses to become more efficient and productive, leading to increased profits and improved living standards.

 

4.     Greater Investment Opportunities: Globalization has opened up new markets for investment. This has allowed businesses to access new sources of capital, helping to create new jobs and stimulate economic growth.

 

5.     Increased Access to Markets: Globalization has allowed businesses to access new markets, increasing the size of their customer base. This has helped to create more jobs and improved living standards.

 

6.     Improved Cultural Exchange: Globalization has allowed people to learn about different cultures and traditions. This has led to a greater understanding and appreciation of other cultures, leading to improved relationships and mutual understanding.

 

Problems/ Demerits/ Disadvantages of Globalisation

In short points

1.     Increased competition: Increased competition from global sources can put pressure on domestic businesses, making it more difficult for them to compete.

2.     Loss of jobs: Globalisation can lead to job losses in certain sectors as companies shift production to countries with lower labour costs.

3.     Exploitation of workers: Globalisation can lead to exploitation of workers in developing countries, where wages are lower and working conditions are poor.

4.     Cultural homogenisation: Globalisation can lead to homogenisation of cultures as countries become increasingly influenced by Western values and products.

5.     Inequality: Globalisation can lead to an increase in inequality as the wealthier countries are able to take advantage of the lower wages and poorer working conditions in developing countries.

 

In Wider points

There are several drawbacks associated with globalisation, such as:

1.     Loss of local culture: Globalisation has led to a homogenisation of culture, with local cultures being pushed aside in favour of a more international culture. This can lead to the loss of traditional customs and practices, as well as the loss of unique cultural identities.

2.     Unequal distribution of wealth: Globalisation has resulted in an unequal distribution of wealth, with the majority of the world's wealth concentrated in the hands of a few. This can lead to an increase in poverty and inequality.

3.     Environmental damage: Globalisation has led to increased production and consumption, which can have a negative impact on the environment. It can also lead to an increase in pollution and the overuse of natural resources.

4.     Exploitation of workers: Globalisation has led to an increase in the exploitation of workers in developing countries, with companies taking advantage of lax labour laws and poor working conditions.

5.     Job insecurity: Globalisation has also led to an increase in job insecurity, as companies are able to move their operations to countries with lower wages and labour costs. This can lead to an increase in unemployment and a decrease in wages.

 

Foreign Direct Investment (FDI)

Meaning

Foreign Direct Investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country. It is typically used to expand a business into a foreign market or to acquire assets in another country. FDI typically involves participation in management, joint-venture, transfer of technology, and expertise. It is a major component of economic growth and a key source of capital for countries around the world.

Characteristics of FDI

1.     Capital-Intensive: FDI is typically capital-intensive in nature. It requires significant capital investment in order to set up operations in a foreign country, which often includes long-term investments in infrastructure and technology.

2.     Long-term Commitment: FDI is a long-term commitment, as investors often make large investments in foreign countries with the intention of staying there for a long period of time to gain a return on the investment.

3.     Risky: FDI is inherently risky, as there are many unknowns involved in investing in a foreign country. Investors must consider the economic, political, and legal risks associated with investing abroad, as well as the potential for currency devaluation and other economic risks.

4.     Transfer of Technology: FDI can lead to the transfer of technology and expertise from developed countries to less developed countries, which can be beneficial in terms of increased economic growth and development.

5.     Creation of Jobs: FDI can create jobs in the host country, as foreign companies often hire local workers to help run their operations. This can lead to increased employment opportunities for local citizens.

 

FPI – Foreign Porfolio Investment

Meaning

Foreign Portfolio Investment (FPI), refers to the investment made in the financial assets of an enterprise, based in one country by the foreign investors. Such an investment is made with the purpose of getting short term financial gain and not for obtaining significant control over managerial operations of the enterprise.

The investment is made in the securities of the company, i.e. stock, bonds, etc. for which the overseas investors deposit money in the host country’s bank account and purchase securities. Usually, FPI investors go for securities that are highly liquid.

 

 

FDI vs. FPI

FDI stands for Foreign Direct Investment and FPI stands for Foreign Portfolio Investment. FDI is when a foreign company or individual invests directly into a company, property, or project in another country. FPI is when a foreign investor buys shares or other securities in a foreign company or other asset. FDI is generally done with the intention of having influence in a company or project and typically involves a long-term commitment, while FPI is done with a shorter-term outlook and is more speculative.

 

Comparison Chart

BASIS FOR COMPARISON	FOREIGN DIRECT INVESTMENT	FOREIGN DIRECT INVESTMENT
Meaning	FDI refers to the investment made by the foreign investors to obtain a substantial interest in the enterprise located in a different country.	When an international investor, invests in the passive holdings of an enterprise of another country, i.e. investment in the financial asset, it is known as FPI.
Role of investors	Active	Passive
Degree of control	High	Very less
Term	Long term	Short term
Management of Projects	Efficient	Comparatively less efficient.
Investment in	Physical assets	Financial assets
Entry and exit	Difficult	Relatively easy.
Results in	Transfer of funds, technology and other resources.	Capital inflows

                                                                                        

          The key difference between FDI and FPI can be drawn clearly on the following grounds:

 

i.          The investment made by the international investors to obtain a substantial interest in the enterprise located in a different country is a Foreign Direct Investment or FDI. The investment made in passive holdings like stocks, bonds, etc. of the enterprise of a foreign country by overseas investors is known as a Foreign Portfolio Investment (FPI).

ii.          FDI investors play an active role in the management of the investee company whereas FPI investors play a passive role, in the foreign company.

iii.          As the FDI investors gain both ownership and management right through investment, the level of control is relatively high. Conversely, in FPI the degree of control is less as the investors obtain only ownership right.

iv.          FDI investors have a substantial and long-term interest in the firm which is not in the case of FPI.

v.          FDI projects are managed with great efficiency. On the other hand, FPI projects are less efficiently managed.

vi.          FDI investors invest in financial and non-financial assets like resources, technical know-how along with securities. As opposed to FPI, where investors invest in financial assets only.

vii.          It is not easy for FDI investors to sell out the stake acquired. Unlike FPI, where the investment is made in financial assets which are liquid, they can be easily sold.

 

Types of FDI

                                                                                         Foreign Direct Investment (FDI) is an investment made by a company or individual in one country into business interests located in another country. FDI is an important source of capital for businesses around the world, and it can provide a wide range of economic benefits to both the home and host countries. Types of FDIs include horizontal FDIs, vertical FDIs, and conglomerate FDIs.

Types of FDI:

1.     Direct Investment: This is the most common form of foreign direct investment and involves a foreign investor making a long-term commitment to a specific domestic business. The foreign investor will own a controlling stake in the business and have a significant influence on its management and direction.

2.     Portfolio Investment: This type of FDI involves a foreign investor investing in a domestic business without gaining any control or influence. A portfolio investor will buy stocks and bonds in the domestic business and will not be involved in its management.

3.     Joint Ventures: This type of FDI involves a foreign investor and a domestic business forming a joint venture, where they both share ownership and control of the business. This is an attractive option for both sides as it gives the foreign investor access to local knowledge and resources, and the domestic business access to foreign capital and technology.

4.     Strategic Alliances: This is a type of FDI where two or more companies come together to form a strategic alliance. The companies involved share resources, technology, and expertise, but maintain their independence. This type of FDI is usually used to access new markets or to gain a competitive advantage.

5.     Mergers & Acquisitions (M&A): This type of FDI involves a foreign investor acquiring an existing domestic business, or merging with it to form a new entity. This is a very risky but potentially lucrative form of FDI as the foreign investor will gain control over the domestic business and its assets.

6.     Horizontal FDIs: These are the investments made in business interests in the same industry or sector. These investments are made to gain access to new markets, increase production capacity, and increase economies of scale.

7.     Vertical FDIs: These are the investments made in business interests that are related to the investor's current industry or sector. These investments are typically made to gain access to raw materials, production processes, and distribution networks.

8.     Conglomerate FDIs: These are the investments made in business interests that are unrelated to the investor's current industry or sector. These investments are typically made to diversify the investor's portfolio, enter new markets, and access new technologies.

 

Costs and Benefits of FDI to Home and Host Countries

The costs of foreign direct investment (FDI) to the home and host countries vary depending on the type of investment and the nature of the relationship between the two countries.

 

A.   Home country:

The costs to the home country of FDI can include reduced domestic investment, loss of local jobs, and decreased competition in the domestic market. In addition, there may be political risks associated with FDI, such as a lack of transparency in the transactions, and potential corruption.

 

B.    Host country:

The costs to the host country of FDI can include disruption of local industries, environmental damage, and labor exploitation. There may also be social costs associated with FDI, such as increased inequality and decreased cultural autonomy. In addition, there is a risk that the host country will become too dependent on foreign capital, which can lead to a lack of economic autonomy.

 

Costs

1.     Loss of Domestic Control: FDI may lead to foreign companies taking control of domestic markets and displacing domestic capital and labor. This could lead to a country’s economic and cultural sovereignty being compromised.

2.     Political Costs: FDI can lead to a country’s political sovereignty being compromised if the foreign investors seek to influence domestic policies or interfere in the country’s internal affairs.

3.     Tax Revenue Losses: FDI can lead to a reduction in tax revenues due to the presence of foreign companies in the country.

4.     Environmental Costs: FDI can lead to increased pollution and environmental degradation in the host country due to the presence of foreign companies.

 

Benefits

Home Country Benefits

1.     Job Creation: FDI helps to create job opportunities for people in the home country by providing employment for skilled and unskilled labour.

2.     Increased Tax Revenue: FDI helps to increase government revenue in the form of corporation tax, income tax, etc.

3.     Transfer of Technology: FDI brings advanced technology to the home country, which helps to improve the quality of products and services and increase productivity.

4.     Capital Influx: FDI brings in capital to the home country, which can be used for various development projects.

5.     Improved Infrastructure: FDI helps to improve the infrastructure of the home country, such as roads, ports, telecommunications, etc.

 

Host Country Benefits

1.     Economic Growth: FDI helps to create jobs and businesses, which leads to economic growth.

2.     Investment in Local Industries: FDI helps to invest in local industries, which helps to increase the productivity of the local economy.

3.     Foreign Exchange Earnings: FDI helps to generate foreign exchange earnings, which can be used to finance imports and repay foreign debt.

4.     Improved Infrastructure: FDI helps to improve the infrastructure of the host country.

 

Trends in FDI

Trends in FDI refer to the flow of foreign direct investments (FDI) into an economy. This includes the type of investors, sectors and countries that are investing, the size of investments, and the growth of FDI over time. FDI trends can provide insight into the economic performance of a country, as well as the health of the global economy.

1.     Increased Cross-Border Investment: Cross-border investment in FDI has been on the rise in recent years, with foreign investors increasingly looking for opportunities outside their home countries.

2.     Growing Interest in Emerging Markets: Emerging markets have become increasingly attractive to foreign investors, as they offer higher returns and lower risk.

3.     Increasing Mergers and Acquisitions: Mergers and acquisitions (M&A) are becoming increasingly popular among foreign investors, as they offer a way to quickly expand into new markets.

4.     Growing Role of Technology: Technology has been an important factor in recent FDI trends, as foreign investors look to use it to gain a competitive edge.

5.     Increased Interest in Sustainable Investment: Sustainable investment has become increasingly popular among foreign investors, as they look to invest in projects that have a positive impact on the environment and society.

 

India’s FDI Policy

·       India’s Foreign Direct Investment (FDI) Policy is designed to allow foreign investors to participate in the growth and development of India’s economy. The policy allows foreign investors to invest in a variety of sectors including manufacturing, services, and infrastructure. The policy aims to promote investment and development in India while providing protection to Indian businesses.

·       The policy allows foreign companies to invest up to 100% of the total project cost in most sectors. In certain sectors like defence, space and atomic energy, foreign companies are allowed to invest up to 49% of the total project cost. The policy also allows foreign companies to set up wholly owned subsidiaries in India.

·       The policy also contains provisions aimed at making it easier for foreign companies to invest in India. These include tax incentives, streamlined regulatory processes, and easier access to capital.

·       The policy also encourages foreign companies to create jobs and transfer technology to India. To ensure that foreign companies adhere to this requirement, the policy requires that foreign companies set up manufacturing units in India for at least three years.

·       The policy also requires that foreign companies make investments in the Indian economy, rather than just taking profits out of the country. This helps ensure that the benefits of foreign investments are shared among all stakeholders.

·       Overall, the FDI policy is designed to ensure that foreign investment helps India to grow and develop. It provides the necessary incentives, protections and regulations to ensure that foreign investments are beneficial to the Indian economy.

·       India has been liberalizing its Foreign Direct Investment (FDI) policy since 1991, allowing foreign investment in several sectors.

·       As of 2020, FDI up to 100% is allowed in most sectors through the automatic route, and FDI up to 74% can be made through the government route.

·       The FDI policy is regulated by the Department for Promotion of Industry and Internal Trade (DPIIT), which is part of the Ministry of Commerce and Industry.

·       Sectors such as defence and retail trading are still restricted for FDI, while certain sectors like banking and insurance require special licenses.

·       India has also signed several bilateral investment treaties with other countries, which allow investors from those countries to invest in India without any restrictions.

 

Balance of Payment

Meaning

The balance of payments is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, usually a calendar year. This statement records the payments and receipts of a country’s international transactions over time, including its exports, imports, investments, and loans. The balance of payments is important because it helps measure the value of a country’s economic activity, including its currency and financial stability. It also provides a record of a country’s economic performance.

Points to know about Balance of Payment

·       The BOP is composed of two accounts—the current account and the capital account.

·       The current account measures a country’s net income from trade (exports minus imports) and other payments such as income from overseas investments.

·       The capital account measures a country’s net change in financial assets from foreign investments and other transactions.

·       The sum of the current and capital accounts is the overall balance of payments.

·       A country’s balance of payments can affect its currency exchange rate, inflation, and economic growth.

·       A country with a trade surplus (more exports than imports) may experience an appreciation of its currency, while a country with a trade deficit (more imports than exports) may experience a depreciation of its currency.

 

Importance of Balance of Payment

1.     Balance of payments helps to understand the economic health of a country. It provides an overview of the country’s international financial transactions, which provides a better understanding of the economy’s strengths and weaknesses.

2.     Balance of payments can be used to evaluate the competitiveness of a country’s economy in the global market.

3.     Balance of payments helps governments to identify areas where their economies are weak and need assistance.

4.     Balance of payments provides a record of how much money is spent on imports and how much money is earned from exports.

5.     Balance of payments helps to assess the impact of government policies on the country’s international trade.

6.     Balance of payments helps to identify currency exchange rate fluctuations and the effects they have on the economy.

7.     Balance of payments helps to identify potential sources of debt and credit, and to assess the financial health of a country.

8.     Balance of payments highlights the impact of foreign direct investment on the country’s economy.

9.     Balance of payments can be used to understand the effects of international trade on a country’s economy.

10.  Balance of payments helps to identify opportunities for a country to increase its international trade and improve its financial standing.

 

Components of Balance of Payment

1.     Current Account:

This is the record of all the transactions which involve the buying and selling of goods and services. It includes exports, imports, income, transfers and unilateral payments.

2.     Capital Account:

It covers all international transactions involving the purchase and sale of financial assets. It includes foreign direct investment (FDI), portfolio investment, and other capital flows.

3.     Financial Account:

This account covers all the international transactions involving the purchase and sale of financial assets. These transactions include foreign direct investments, portfolio investments, and other capital flows.

4.     Official Reserve Account:

This account is used to record the official reserve assets and liabilities of a country. These assets include foreign currencies, gold, and Special Drawing Rights (SDRs).

5.     Errors & Omissions:

This account is used to balance the other four accounts. It is used to account for any discrepancies in the other accounts.

6.     Balance of Trade:

The balance of trade is the difference between a country's exports and imports. It is the total amount of goods and services exported minus the total amount of goods and services imported.

7.     Balance of Payments Surplus or Deficit:

This is the net balance of all the transactions recorded in the balance of payments. It is calculated as the sum of all the exports minus the sum of all the imports.

8.     Capital Account Balance:

This is the difference between the total inflows and outflows of capital. It is calculated as the difference between the total inflows of capital and the total outflows of capital.

9.     Trade Balance:

This is the difference between the total value of exports and the total value of imports. It is the total value of exports minus the total value of imports.

10.  Exchange Rate:

The exchange rate is the rate at which one currency can be exchanged for another. It is an important factor in determining the balance of payments since it affects the prices of imports and exports.

 

 

World Trade Organisation (WTO)

Meaning

The World Trade Organisation or the WTO is the only such global international entity that deals with the rules and regulations related to international trade between different countries. Such regulations and obligations only cover countries which hold the membership to the World Trade Organisation.

          The World Trade Organization (WTO) is an intergovernmental organization that regulates international trade. It is the only global international organization that deals with the rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

Points to know about WTO,

1.     The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade.

2.     The WTO was established in 1995 and is the successor to the General Agreement on Tariffs and Trade (GATT) which was created in 1947.

3.     The current WTO membership includes 164 countries and is the only international organization that deals with the global rules of trade between nations.

4.     The WTO’s main function is to ensure that trade flows as smoothly, predictably and freely as possible.

5.     The WTO provides a forum for trade negotiations, resolves disputes between members and monitors the implementation of trade agreements.

6.     The WTO also provides technical assistance and capacity building to developing countries.

7.     The WTO is based in Geneva, Switzerland and all decisions are taken by consensus among members.

8.     The WTO’s agreements cover goods, services and intellectual property.

9.     The WTO also has its own dispute settlement system which is used to resolve trade disputes between members.

10.  The WTO is currently working on the Doha Development Round of trade negotiations which aim to further liberalize world trade.

Establishment of WTO

The World Trade Organisation was established on January 1, 1995, following the Marrakesh Agreement which was ratified on April 15, 1994. The General Agreement on Tariff and Trade was substituted by the Marrakesh Agreement.

The income in the annual budget of the World Trade Organisation is accumulated from the contribution made by member countries. The formula for the contribution is consistent with the volume of international trade of each member country.

 

Objectives of WTO

Top 10 objectives of WTO

1.     Promoting Open, Fair and Undistorted Trade: The WTO seeks to eliminate trade barriers and promote open, fair, and undistorted trade by ensuring that all countries’ trade policies are transparent and consistent with international rules.

2.     Reducing Tariffs and Other Barriers: The WTO works to reduce tariffs and other trade barriers, which enable more goods and services to be traded across borders.

3.     Improving Market Access: The WTO works to reduce the cost of trading by improving market access, including through the reduction of non-tariff barriers such as quotas and local content requirements.

4.     Preserving the Multilateral Trading System: The WTO is committed to preserving the multilateral trading system, which allows countries to trade with each other in an equitable and efficient manner.

5.     Enhancing Trade-Related Capacity Building: The WTO seeks to enhance trade-related capacity building by providing technical assistance and training to developing countries in areas such as trade policy, trade negotiations, and the implementation of WTO agreements.

6.     Promoting Development: The WTO works to promote development by encouraging trade liberalization and helping to ensure that the benefits of trade are shared by all countries.

7.     Promoting Trade Facilitation: The WTO works to promote trade facilitation by reducing the costs of trading and improving the efficiency of international trade.

8.     Enhancing Cooperation: The WTO seeks to enhance cooperation between countries through the use of formal negotiations and the establishment of global trade rules.

9.     Addressing Trade-Related Issues: The WTO works to address trade-related issues, such as food security, environmental protection, and public health.

10.  Ensuring Compliance: The WTO seeks to ensure compliance with WTO agreements and rules through its dispute settlement mechanism.

 

6 Key Objectives of WTO

The six key objectives of World Trade Organisation have been discussed below:

1. Establishing and Enforcing Rules for International Trade

The international trading rules by the World Trade Organisation are established under three separate agreements - rules relating to the international trade in goods; the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Services (GATS).

The international trading rules by the World Trade Organisation are established under three separate agreements:

      I.          Rules relating to the international trade in goods

    II.          The agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

  III.          The General Agreement on Trade in Services (GATS).

 

2. Acting As A Global Apex Forum

World Trade organisation is the global forum for monitoring and negotiating further trade liberalisation. The premise of trade liberalisation measures undertaken by WTO is based on the benefits of member countries to optimally utilise the position of comparative advantage due to free and fair trade regime.

 

3. Resolution of Trade Disputes

Trade disputes, before the WTO, usually arise out of deviation from agreements between member countries. The resolution of such trade disputes does not take place unilaterally but through a multilateral system involving set rules and procedures before the dispute settlement body.

 

4. Increasing Transparency in Decision Making Process

The World Trade Organisation attempts to increase transparency in the decision-making process by way of more participation in the decision-making and consensus rule, in particular. The combined effect of such measures helps to develop institutional transparency.

 

5. Collaboration Between International Economic Institutions

The global economic institutions include the World Trade Organisation, the International Monetary Fund, the United Nations Conference on Trade and Development, and the World Bank.

With the advent of globalisation, close cooperation has become necessary between multilateral institutions. These institutions are functional in the sector of formulation and implementation of a global economic policy framework. In the absence of regular consultation and mutual cooperation, policymaking may be disrupted.

 

6. Safeguarding The Trading Interest of Developing Countries

Stringent regulations are implemented by the WTO to protect the trading interests of developing countries. It supports such member countries to leverage the capacity for carrying out the mandates of the organisation, managing disputes, and implementing relevant technical standards.

 

Features of WTO

 

The major features of the World Trade Organisation are -

·       The scope of WTO is far more expansive than the erstwhile General Agreement on Trade and Tariff. For instance, GATT solely focused on goods while excluding textiles and agriculture. On the other hand, WTO covers all goods, services and investment policies along with intellectual property.

·       WTO Secretariat has formalised and bolstered the mechanisms for the review of policies as well as the settlement of disputes.

·       There are rules implemented for the protection of small and weak countries against the discriminatory trade practices of developed countries.

·       National Treatment articles and Most Favoured Nation (MFN) clause permits equal access to markets for just treatment of both domestic and foreign suppliers.

·       National Treatment articles and Most Favoured Nation (MFN) clause permits equal access to markets for just treatment of both domestic and foreign suppliers.

·       Each member country of the WTO carries single voting right and all members enjoy privilege on the global scale.

 

ROLES & FUNCTIONS OF WTO

Functions of WTO

1.     Implementing Agreements: The World Trade Organization (WTO) is responsible for implementing and monitoring the various trade agreements concluded by its members.

2.     Resolving Disputes: The WTO provides a forum for member countries to resolve trade disputes through consultation and negotiation.

3.     Negotiating Trade Agreements: The WTO facilitates the negotiation of new trade agreements between its members.

4.     Supervising Domestic Trade Policies: The WTO monitors the implementation of its members' domestic trade policies to ensure that these policies comply with WTO obligations.

5.     Promoting Fair Competition: The WTO works to ensure that markets are open and competitive and to prevent the abuse of market power by large companies.

6.     Enhancing Developing Countries' Participation in International Trade: The WTO seeks to increase the participation of developing countries in international trade.

7.     Facilitating Trade Liberalization: The WTO works to reduce barriers to trade and promote economic integration among its members.

8.     Enhancing Transparency: The WTO promotes transparency in international trade by publishing trade data and other information related to its activities.

9.     Providing Technical Assistance: The WTO provides technical assistance to its members to help them better understand and implement WTO agreements.

10.  Strengthening the Multilateral Trading System: The WTO works to strengthen the rules-based multilateral trading system, which provides a predictable environment for international trade.

 

BROAD EXPLANATION ON FUNCTIONS OF WTO

The broad reach of WTO and its functions have been mentioned below:

 

1.     Implementation of Rules for Review of Trade Policy

The international rules of trade provide stability and assurance and lead to a general consensus among member countries. The policies are reviewed to ensure that even with the ever-changing trading scenarios, the multilateral trading system thrives. It also helps in the facilitation of a transparent and stable framework for conducting business.

 

2.     Forum for Member Countries Discuss Future Strategies

The WTO, as a forum, allows for trade negotiations in the multilateral trading system. In the absence of trade negotiations, growth may stunt, and issues related to tariff and dumping may go unaddressed. Further liberalisation of trade is also subject to consistent trade negotiations.

 

3.     Implementing and Administering Bilateral and Multilateral Trade Agreements

The bilateral or multilateral trade agreements have to be necessarily ratified by the parliaments of respective member countries. Unless such ratification comes through, the non-discriminatory trading system cannot be put into practice. The executed agreements will ensure that every member is guaranteed to be treated fairly in other members' markets.

 

4.     Trade Dispute Settlement

The dispute settlement by the WTO is concerned with the resolution of trade disputes. Independent experts of the tribunal interpret the agreements and give out judgment mentioning the due commitments of the concerned member states. It is encouraged to settle the disputes by way of consultation among the members as well.

 

5.     Optimal Utilisation of the World's Resources

Resources across the world can be further optimally utilised by harnessing the trade capacities of the developing economies. It requires special provisions in the WTO agreements for the least-developed economies. Such measures may include providing greater trading opportunities, longer duration to implement commitments, and also support to build the sue infrastructure.

 

Agriculture Agreements

Agriculture agreements in international business refer to agreements between two or more countries related to the buying and selling of agricultural goods and services. These agreements are often negotiated and signed by government representatives and involve the setting of tariffs and other trade regulations as well as the establishment of quotas, production subsidies, and other measures for controlling the trade of agricultural products. They may also involve the exchange of technology and the coordination of agricultural research and development programs.

 

General Agreement on Trade in Services (GATS)

The General Agreement on Trade in Services (GATS) is the first multilateral agreement covering trade in services. It was negotiated during the last round of multilateral trade negotiations, called the Uruguay Round, and came into force in 1995.

GATS envisages the objective of  establishing a sound multilateral framework or principles and rules for trade in services. The GATS  agreement covers all services under GATS) financial services (banking insurance etc), education, telecommunications, maritime transport, etc.

 

    Who participates?

All WTO members are at the same time members of the GATS and, to varying degrees, have assumed commitments in individual service sectors.

 

     Objectives?

GATS has two primary objectives: first, to ensure that all signatories are treated equitably when accessing foreign markets; and second to promote progressive liberalization of trade in services (over time, eliminating trade barriers to enable further participation in one another's markets).

The Four Modes of Services Supply

The GATS defines services in four 'modes' of supply: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.

 

Mode 1: Cross Border

Services that themselves cross-frontiers from one country to another e.g. Distance learning, consultancy, BPO services

 

Mode 2: Consumption abroad

Services, which are made available within a country for foreign consumers, e.g.: tourism, educational students, medical treatment, etc.

 

Mode 3: Commercial Presence

Services supplied by an entity of one country, which is commercially present in another e.g.: banking, hotel, etc.

 

Mode 4: Movements of natural persons

This is a foreign national providing services like that of a doctor, nurse, IT engineer, etc. functioning as a consultant, or employee, from one country to another.

TRIPS Agreement

TRIPS agreement means the agreement on Trade-Related Aspects of Intellectual Property Rights. This is the most comprehensive multilateral agreement on intellectual property. The TRIPS agreement came into force in 1995.

 

What are intellectual property rights?

Intellectual Property Rights are the rights given to persons/agencies for their creativity/innovations. These rights usually give the creator, an exclusive right over the use of his/her creation for a certain period.

The obligations under the TRIPS Agreement relate trelatingprovision of a minimum standard of protection within the member countriecountries'ystems and practices.

TRIPS agreement establishes minimum standards for the use, scope, and availability of different forms of intellectual property covered by it. Some areas of intellectual property that the TRIPS agreement covers are:

 

      I.          Copyrights

    II.          Trademarks Service Marks

  III.          Industrial designs

  IV.          Patents

    V.          Geographical Indication

  VI.          Trade Secrets

 

Trade-Related Investment Measures (TRIMS)

Trade-Related Investment Measures is the name of one of the four principal legal agreements of the World Trade Organization (WTO), a trade treaty. TRIMS are rules that restrict the preference of domestic firms and thereby enable international firms to operate more easily within foreign markets.

These requirements may be mandatory conditions for investment or can be attached to fiscal or other incentives. The TRIMS Agreement does not cover services. All WTO member countries are parties to this Agreement. This Agreement went into effect on January 1, 1995.

The TRIMS Agreement prohibits certain measures that violate the national treatment and quantitative restrictions requirements of the General Agreement on Tariffs and Trade (GATT).

 

Prohibited TRIMS may include requirements to:

      I.          achieve a certain level of local content;

    II.          produce locally;

  III.          export a given level/percentage of goods;

  IV.          balance the amount/percentage of imports with the amount /percentage of exports;

    V.          transfer technology or proprietary business information to local persons; or

  VI.          balance foreign exchange inflows and outflows.

 

EU (European Union)

Ø  The European Union is a group of 27 countries in Europe.

Ø  These countries came together to make things better, easier, and safer for people.

Ø  They agreed to work together and help each other.

Ø  Founded on 1 November 1993.

Ø  Headquarter is currently located in Brussels, Belgium.

Ø  The United Kingdom withdrew from the European Union on 31 January 2020.

 

The idea to make the European Union came after two big wars happened in Europe. Countries in Europe saw that it is better to work together than to fight against each other.

 

The objective of the EU (European Union)

The main objective is

a)     to promote peace and improve the well-being of nations

b)    to create a free and safe Europe with no internal borders.

c)     to ensure smooth and efficient trade within Europe. Competition between companies is free and fair.

d)    peace in Europe and people having good lives

e)     things are fair for all people and nobody is left out

f)      the languages and cultures of all people are respected

g)    there is a strong European economy and countries use the same coin to do business together.

 

The North American Free Trade Agreement (NAFTA)

·       Established in the year January 1, 1994

·       It was a treaty between Canada, Mexico, and the United States

 

 Eliminate most tariffs between the counties.

1.     It was replaced by the United States-Mexico-Canada Agreement (USMCA) on July 1, 2020.

2.     The Secretariat is located in separate national offices in Mexico City, Ottawa, and Washington.

 

Objectives of NAFTA

1. Eliminate trade barriers and facilitate cross borders  movements

A.   To promote Fair Competition

B.     To Increase Investment Opportunities

C.    To Provide adequate and Effective Protection for IPR

 

It was established on 8 August 1967 in Bangkok, Thailand

 

Ten Member States of ASEAN

Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore, and Thailand.

 

The aims and purposes of ASEAN  are:

1.     To accelerate economic growth, social progress, and cultural development in the region.

2.     To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries of the region.

3.     To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific, and administrative fields.

4.     To Assistance each other in the form of training and research facilities in the educational, professional, technical, and administrative spheres.

5.     To collaborate more effectively for the greater utilization of their agriculture and industries, the expansion of their trade, including the study of the problems of international commodity trade, the improvement of their transportation and communications facilities, and the raising of the living standards of their peoples.

6.     To promote Southeast Asian studies.

 

FUNDAMENTAL PRINCIPLES

•  Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations.

•The right of every State to lead its national existence free from external interference, subversion, or coercion;

•Non-interference in the internal affairs of one another.

• Settlement of differences or disputes in a peaceful manner

•Renunciation of the threat or use of force; and

• Effective cooperation among themselves.

 

SAARC

 

The South Asian Association for Regional Cooperation conference was held in Kathmandu, Nepal in the year 8 December 1985.

The total number of member states is 8.

Its member states are Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka.

 

The Objectives of the SAARC

 

·       To promote the welfare of the people of South Asia and to improve their quality of life.

·       To accelerate economic growth, social progress, and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential.

·       To promote and strengthen collective self-reliance among the countries of South Asia.

·       To contribute to mutual trust, understanding, and appreciation of one another problems.

·       To promote active collaboration and mutual assistance in the economic, social, cultural, technical, and scientific fields.

·       To strengthen cooperation with other developing countries.

·       To strengthen cooperation among themselves in international forums on matters of common interests; and

·       To cooperate with international and regional organizations with similar aims and purposes.

 

Principles of SAARC

 

Cooperation within the framework of the SAARC shall be based on:

 

•Respect for the principles of sovereign equality, territorial integrity, political independence, non-interference in the internal affairs of other States, and mutual benefit.

• Such cooperation shall not be a substitute for bilateral and multilateral cooperation but shall complement them.

UNIT-I » International Finance

International Finance

Meaning

International finance is the study of monetary transactions that take place between two or more countries. It encompasses a broad range of topics, including international trade, international investment, foreign exchange markets, international banking, and international financial markets. International finance also involves understanding the economic and political implications of global economic developments, and how they might affect the financial markets. International finance is important because it enables companies to expand their operations beyond their domestic markets and to access new sources of capital. It also allows countries to borrow and lend money to each other, helping to facilitate global economic growth.

 

International Accounting

Meaning

International accounting is a field of accounting that focuses on the preparation and analysis of financial statements for companies that conduct business in multiple countries. It encompasses the accounting standards, regulations, and practices used in different countries, and involves the application of both domestic and international accounting standards. It also involves the ability to understand and adjust to different accounting systems, and to be able to communicate financial information across a variety of countries and cultures. International accounting is important to international businesses since it helps them to accurately reflect their financial position and performance in different countries.