INTERNATIONAL

BUSINESS MANAGEMENT

Q no-1The world economy is globalizing at an accelerating pace. Discuss this statement and list the
benefits of globalization.
ANSWER- 1

The world economy is globalising at an accelerating pace as countries previously closed to foreign
companies have opened up their markets. Geographic distance is shrinking because of the Internet, as the
ambitious companies aim for global leadership. All this is possible because of booming international
business.
Globalisation
Globalisation is a process where businesses are dealt in markets around the world, apart from the local and
national markets. According to business terminologies, globalisation is defined as the worldwide trend of
businesses expanding beyond their domestic boundaries. It is advantageous for the economy of countries
because it promotes prosperity in the countries that embrace globalisation. In this section, we will
understand globalisation, its benefits and challenges.
International vs. global business
Most of us assume that international and global business are the same and that any company that deals with
another country for its business is an international or global company. In fact, there is a considerable
difference between the two terms.
International companies Companies that deal with foreign countries for their business are considered as
international companies. They can be exporters or importers who may not have any investments in any other
country, apart from their home country.
Global companies Companies, which invest in other countries for business and also operate from other
countries, are considered as global companies. They have multiple manufacturing plants across the globe,
catering to multiple markets.
Thus, there is a meaningful distinction between a company that operates in few selected foreign countries
and a company that operates and markets its products across several countries and continents with
manufacturing capabilities in several of these countries.
Benefits of globalisation
The merits and demerits of globalisation are highly debatable. While globalisation creates employment
opportunities in the host countries, it also exploits labour at a very low cost compared to the home country.
Let us consider the benefits and ill-effects of globalisation. Some of the benefits of globalisation are as
follows:
1. Promotes foreign trade and liberalisation of economies.
2. Increases the living standards of people in several developing countries through capital investments
in developing countries by developed countries.
3. Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies
to be competitive by keeping the cost low, with increased productivity.
4. Promotes better education and jobs.
5. Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best
practices, and culture.
6. Provides better quality of products, customer services, and standardised delivery models across
countries.
7. Gives better access to finance for corporate and sovereign borrowers.
8. Increases business travel, which in turn leads to a flourishing travel and hospitality industry across
the world.

9. Increases sales as the availability of cutting edge technologies and production techniques decrease
the cost of production
10. Provides several platforms for international dispute resolutions in business, which facilitates
international trade.

QUES NO. 2 Discuss the role of demographic environment in international business.

ANSWER- 2 Demographic Environment
In international business; scanning of demographic environment plays an important role as it helps firm
understand the various demographic factors such as gender; age; religious background and ethnicity. Firms;
while appraising international markets for new business opportunity or product launch; use demographic
environments to identify target markets for specific products or services it wishes to cater. There are both
advantages and disadvantages in scanning the demographic environment of the country. One has to
understand both sides of the demographic environment while planning strategy for international markets.
1. Segment selection
Demographic profiling of the country helps us select the right segments for which we should offer its
products or services. By properly appraising demographic factors such as age; gender; ethnicity; education
background; cultural & religious background; income group, etc., the firm can plan good marketing
standpoint of sales. Without proper focus on target groups the firm may end up spending on advertising,
sales promotion, etc., on groups that has no interest in the product.
2. Branding and strategy
Scanning of demography provides specific information about different consumer groups. Once the firm has
this data, it can develop well-defined marketing strategies to reach to target audience and position products
better. Appraising of demographic environment also helps the firm to develop their brands thus generating
better sales and ensuring sustainability of the product in market. For example, mobile companies are
launching a series of products for the teenage group with appealing advertisement campaign and some of
them have been successful to establish their products as brands.
3. Market trending and comparison among products
A firm can find out the general trends about a product in a market by collecting demographic data over
extended periods of time and comparing such information at different points and angles. Firm can do
generalisations based on such trends after cross comparing its product with similar products in the markets
and it can plan a corrective action on time including launching of new products.
4. Assumption of country culture
Marketers face problems during the demographic profiling of customers in different cultures like the
assumptions taken about consumers or predictions made about what will happen with a particular consumer
group in a particular country. Reading people minds and cultural background is a tough job and it becomes
even tougher if it has to be done for different global markets. A case let on assumptions of different cultures
about numbers is tabled below and is self explanatory.
5. Understanding demographic changes
The demographic environment never remains constant as people migrate from place to place in search of
better opportunity. Moreover, there will be changes in birth and death rates in due course along with
economic development. Marketers; especially in international business have to constantly update such
information in order to have a realistic picture of what is happening at given point in particular a market.
This requires a great deal of effort and it is a constant expense to a business.
6. Socio-cultural environment
The cultural and social norms of people differ worldwide in all key markets as they have been shaped over
centuries passing from one generation to another. Language, material culture, customs, aesthetics, religious
beliefs, attitudes, values and social organisation has been important for survival and development of
societies globally. Due to these socio-cultural factors, the customers/consumers of a particular
country/region become conditioned to accept certain things as per conditioned behaviour. The increasingly
competitive international business environment necessitate the exporters/ companies doing business
overseas to customize their organisational polices keeping in mind the local cultural norms. For example,

Coca-Cola has to sweeten its drinks in India as Indians have an affinity towards sweet taste. Indian meat
exporters export only HALAL meat to Arab countries with the inscription FIT FOR ISLAMIC USE
during packing. If a firm fails to adapt their business approach to the culture and traditions of specific
foreign markets or is unwillingness to do, its survival may be under danger. In the context of the sociocultural environment, there are a number of factors that firm has to consider while foraying into international
markets. The same has been explained in detail in chapter 4 entitled Culture & International Business.

Q no-3Regional integration is helping the countries in growing their trade. Discuss this statement.
Describe in brief the various types of regional integrations.

ANSWER-3Overview of Regional Integration

Regional integration can be defined as the unification of countries into a larger whole. It also reflects a
countrys willingness to share or unify into a larger whole. The level of integration of a country with other
countries is determined by what it shares and how it shares. Regional integration requires some compromise
on the part of participating countries. It should aim to improve the general quality of life for the citizens of
those countries.
In recent years, we have seen more and more countries moving towards regional integration to strengthen
their ties and relationship with other countries. This tendency towards integration was activated by the
European Union (EU) market integration. This trend has influenced both developed and developing
countries to form customs unions and Free Trade Areas (FTA). The World Trade Organisation (WTO) terms
these agreements of integration as Regional Trade Agreements (RTA). Table 6.1 gives a list of regional trade
integration initiatives taken by India.
India's Trade Agreements at a Glance
Existing

Ongoing

FTAs/PTAs under Study and

Consideration

1. Bangkok Agreement
2. Global System of Trade
Preferences (GSTP)
3. SAARC Preferential Trading
Agreement (SAPTA)
4. India - Sri Lanka FTA
5. India - Thailand FTA
6. India Singapore
Comprehensive Economic
Cooperation (CECA)
7. Indo-Nepal Trade Treaty
8. India-Mauritius PTA
9. India-Chile PTA

1. Indo-ASEAN CECA
2. South Asian Free Trade
Agreement (SAFTA)
3. BIMSTEC (Bay of Bengal
Initiative for Multi-Sectoral
Technical & Economic
Cooperation)
4. India - MERCOSUR PTA

1. Gulf Cooperation Council

(GCC)
2. China
3. South Korea
4. Japan
5. Malaysia
6. Pakistan
7. Southern African Customs
Union (SACU)
8. Egypt
9. Israel
10. Russia
11. Australia

Types of Integration :
In the previous section an overview and the need for regional integration was covered. A whole range of
regional integrations exist today. Different types of regional integration are discussed in this section.
1. Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of economic
integration and aims to reduce taxes on few products to the countries who sign the pact. The tariffs are not

abolished completely but are lower than the tariffs charged to countries not party to the agreement. India is
in PTA with countries like Afghanistan, Chile and South Common Market (MERCOSUR). The introduction
of PTA has generated an increase in the market size and resulted in the availability and variety of new
products.
2. Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic
integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and quotas
on services and goods traded between them. Countries choose this kind of economic integration if their
economical structures are similar. If countries compete among themselves, they are likely to choose customs
union.
The importers must obtain product information from all suppliers within the supply chain in order to
determine the eligibility for a Free Trade Agreement (FTA). After receiving the supplier documentation, the
importer must evaluate the eligibility of the product depending on the rules pertaining the products. The
importers product is qualified individually by the FTA. The product should have a minimum percentage of
local content for it to be qualified.
3. Custom union
Custom Union is an agreement among two or more countries having already entered into a free trade
agreement to further align their external tariff to help remove trade barriers. Custom union agreement among
negotiating countries may encompass to reduce or eliminate customs duty on mutual trade. Under customs
union agreement, countries generally impose a common external -tariff (CTF) on imports from non-member
countries. Such common external tariff helps the member countries to reap the benefits of trade expansion,
trade creation and trade diversification. In the absence of common external tariff, there is a possibility that
countries with lower custom duties may become conduits for members which has higher custom duty.
Custom union is third stage in level of economic integration and is followed only after free trade agreement
among participating countries.
4. Common market
Common market is a group formed by countries within a geographical area to promote duty free trade and
free movement of labour and capital among its members. European community is an example of common
market. Common markets levy common external tariff on imports from non-member countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on product
regulation, and freedom of movement of goods, capital, labour and services, which are known as the four
factors of production. This agreement aims at making the movement of four factors of production between
the member countries easier. The technical, fiscal and physical barriers among the member countries are
eliminated considerably as these barriers hinder the freedom of movement of the four factors of production.
The member countries must come forward to eliminate these barriers, have a political will and formulate
common economic policies.
A common market is the first step towards a single market. It may be initially limited to a FTA with
moderate free movement of capital and services, but it is not capable of removing the other trade barriers.
Benefits and costs
A single market has many advantages. The freedom of movement of goods, capital, labour and services
between the member countries results in the efficient allocation of these production factors and increases
productivity.
A single market presents a challenging environment for businesses as well as for customers making the
existence of monopolies difficult. This affects inefficient companies and hence, results in a loss of market
share and the companies may have to close down. However, efficient companies can gain from the increased
competitiveness, economies of scale and lower costs. Single market also benefits the consumers in a way
that the competitive environment provides them with inexpensive products, more efficient providers of
products and increased variety of products.
A country changing over to a single market may experience some short term negative effects on the national
economy due to increased international competition. National companies that earlier benefited from market
protection and subsidies may find it difficult to cope with their efficient peers. If these companies fail to
improve their methods, they may have to close down leading to migration and unemployment.

5. Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common
market with a customs union. The countries that are part of an economic union have common policies on the
freedom of movement of four factors of production, common product regulations and a common external
trade policy.
The purpose of an economic union is to promote closer cultural and political ties while increasing the
economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal agreement among
independent countries with the intention of fostering greater economic integration. The members of an
economic union share some elements associated with their national economic jurisdictions.
These include the free movements of:
Goods and services within the union along with a common taxing method for imports from non-member
countries.
Capital within the economic union.
Persons within the economic union. Some forms of cooperation usually exist while framing fiscal and
monetary policies.
6. Political union
A political union is a type of country, which consists of smaller countries/nations. Here, the individual
nations share a common government and the union is acknowledged internationally as a single political
entity. A political union can also be termed as a legislative union or state union.

Q no-4Write short note on:

a) Foreign currency derivatives
b) bases of international tax systems

ANSWER-4Foreign currency derivatives

Currency derivative is defined as a financial contract that seeks to swap two currencies at a predestermined
rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of
two currencies at the spot. The currency derivative trades in markets that correspond to the spot (cash)
market. Hence, the spot market exposures can be enclosed with the currency derivatives. The main
advantage from derivative hedging is the basket of currency available.
Figure 8.1 describes the examples of currency derivatives. The derivatives can be hedged with other
derivatives. In the foreign exchange market, currency derivatives like the currency features, currency options
and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign
currencies in future is termed as currency futures. These are usually traded through organised exchanges.
The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option.
These will help the businessmen to enhance their foreign exchange dealings. The agreement undertaken to
exchange cash flow streams in one currency for cash flow streams in another currency in future is provided
by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources.

Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are:
Credit risk takes place, arising from the parties involved in a contract.

Market risk occurs due to adverse moves in the overall market.

Liquidity risks occur due to the requirement of available counterparties to take the other side of the
trade.

Settlement risks similar to the credit risks occur when the parties involved in the contract fail to
provide the currency at the agreed time.

Operational risks are one of the biggest risks that occur in trading derivatives due to human error.

Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is
taking place.

Taxation
Taxation plays a vital role for the worldwide operation of firms. The tax decision or taxation which is
relevant in domestic firms has become central to various financing decisions involving fund raising
decisions, international investment decisions, international working capital decisions and decisions related to
dividend and other payments.
The various reasons why international corporations find managing taxation an extremely difficult issue are
stated below:
1. Multiple tax jurisdictions or authorities with diverse tax rates and irregular administration of the tax
system in areas firms are expected to work in.
2. A more complex interaction of varying descriptions of the tax base determine the ultimate tax load in
the framework of international firms.
3. The difference in tax treatment in different nations will direct to distortions in worldwide trade and
investment. The companies which are situated in the low-tax country can have a periphery over other
firms in worldwide market. There are possibilities to divert the investment to those countries that
have low cost rates.
4.

Internation firms overlap with different tax jurisdictions and this enables them to utilise the arbitrage
opportunities which helps them retain an edge over the domestic firms.

The bases of international tax system are:

Tax neutrality To keep the economic efficiency from being affected the international tax system should
remain neutral.For the nationality of the invester or the locality of the investment not to be influenced, a
neutral tax is important. . Such an environment will allow capital to move from a nation with lesser return to
a nation with higher return, resulting in well allocated resourses that will ensure a high gross world output..
Tax equity The principle of tax equity states that all equally positioned tax players contribute in the cost of
operating the government according to the equal rules. The concept of equity can be perceived in two ways.
It is assert by the first view that the input of each tax player must be consistent with the amount of public
services as received. The second maintains that the contribution of each tax player must be in terms of their
ability to pay. The ability to pay means the one with greater ability is likely to pay a larger amount of tax.
Avoidance of double taxation The avoidance of double income asserts that one must not be taxed twice
for the same income. However, double taxation occurs if the recipient of post-tax income in a foreign
country is taxed again. As an alternative, the requirements of foreign tax credits may be formed in the
domestic tax system.
There also exist some tax laws which prevent the tax through artificial transactions such as transfer pricing.
In addition, the corporate structures will help to reduce the overall tax burden to the enterprise.

Q no-5Strategic planning involves allocation of resources to firms to fulfil their long term goals. What are
the types of strategic planning? Compare Top-down Vs Bottom-up planning.

ANSWER 5Strategic Planning

Strategic planning involves the structured efforts of an organisation to effectively recognise its purposes for
existing, the direction that the organisation will pursue, and how that direction will allow the entity to
achieve its short-term and long-term goals. Strategic planning is an important element in all kinds of
organisations and is applied by governments, non-profit agencies, individuals and businesses.
Types of planning
Strategic planning process involves allocation of resources to firms to fulfil their long-term goals. Any
business plan can be classified into three types. They are:
1.Strategic planning: This planning process is the best among the three business planning processes. It is a
long-term process thatthe business owners utilise to unveil their business vision and mission. It also
determines a gateway for business owners for achieving their goals. Strategic planning fulfills the mission
and the overall goals of the firm. Whereas, the other two are rather more short-term and are used
sometimes without any relation to the long-term business goals. However these three kinds of planning work
well when used within a strategic plan.
2.Intermediate planning: This planning process is for six months to two years. They outline the manner in
which the strategic plan is pursued. Intermediate plans are often used for campaigns with the purpose and
goal of supporting the trades long-term goals.
3.Short-term planning: This planning process involves planning for few weeks or at least for a year. It
involvesdetailing out the functioning of a strategic plan on a daily basis. Resources are allocated for business
management and development that takes place daily within the strategic plan.
Top-down vs. bottom-up planning
Top-down planning
Top-down planning is a common strategy that is used for project planning. It helps maintain the decision
making process at the senior level. Goals and allowances are established at the highest level. Senior-level
managers have to be very specific when laying out expectations because the people following the plan are
not involved in the planning process. It is very important to keep the morale of the employees high and
motivate them to perform the job.Since employees are not included in any of the decision making processes,
they are motivated only through fear or incentives.

Management must choose techniques to align projects and goals with top-down planning. Management
alone is held responsible for the plans set and the end result. The benefit of talented employees with prior
experience on definite aspects of the project are not utilised based on the assumption that the management
can plan and perform a project better without the inputs from these employees. Some think that the topdown planning process is the rightway to make a plan, and that the plan development is not important. It
permits the management to segregate a project into steps, and then break the work into smaller executable
parts of the project. Simultaneously, the work that is broken down is analysed until all the steps could be
studied, due-dates are precisely assigned, and then parts of the project are given to employees. However, the
focus is on long-term goals and the short-term and uncertain goals can get lost. This approach is best
applicable for small projects.
Bottom-up planning
Bottom-up planning is commonly referred to as tactics. With bottom-up planning, an organisation gives its
project deeper focus because each organisation has a huge number of employees involved, and each
employee is an expert in their own area. Team members work side-by-side and contribute during each stage
of the process. Plans are developed at the lowest levels, and then passed on to each of the subsequent higher
levels. Finally, it then reaches the senior management for approval.
Lower-level employees take personal interest in a plan that they are involved in planning. Employees are
more encouraged which in turn improves their morale. Project managers are responsible for the successful
completion of the project. Let us now consider the key points of top-down and bottom-up planning.
Top-down planning
Top-down planning helps:
Determine all the goals at the initial stage of the process.
Identify the lack of ground level staff participation.
Estimate the inflexibility.
Find how management imposes the processes.
Determine the lack of motivation.
Find whether the staffs feel that their input is valued or not.
Bottom-up planning
Bottom-up planning helps:
As there are no long term vision here.
Encourage teamwork.
Estimate flexibility.
Determine whether team motivation is of high level.
Identify whether the project is team driven.
Find whether the staff feels valued or not.
Finally, a combination of these two project management methods is most effective. Using the positive
aspects of each, the organisation can align each step so that the requirements of the project are met. An
organisation can determine the top requirements of the project and allow accountability to get down with the
lower levels. With this combination, the vision of senior management with the skills of lower level
employees is merged. This helps in completion of the project more efficientlyusing the best employees of
the organisation.

Q no-6Discuss the various payment terms in international trade. Which is the safest method and why?
ANSWER - 6Payment terms in foreign trade
Since international trade deals with exchange of goods, there are various ways in which the payment terms
(finance) will be handled.
Bothe seller and trader should be careful about the method of payment as they are at different locations and
transactions happen without face-to-face interaction. There are four methods of payment for the international
transactions. This includes the Cash-in-advance method, Letter of Credit, Documentary collections and the
Open Account. These are shown in figure 14.1.

Payment Risk Diagram

As shown in figure 14.1, there is uncertainty during the time when payment transactions happen between
importer and exporter. The figure compares and contrasts the most suitable methodology from the
perspective of importer and exporter. Apparently the most secure methodologies that work for the exporter is
not safe for the importer. For exporters, documentary collection and open account are less secure and letter
of credit and cash in advance are more secure methods. In the same way, with respect to the importer, the
letter of credit and cash in advance are less secure and the documentary collection and open account are
more secure. These terms are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter receives the
payment before the transfer of goods. The options that are available with the cash-in-advance method
include wire transfers and credit cards. This is the least attractive method for many of the buyers as it creates
cash flow problems. The buyers are concerned about the quality/quantity and delivery of the goods that are
not sent if the payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the commitment
made by the bank that the payment will be made to the exporter if the terms and conditions are met. The
terms and conditions of the payment are explained in the required documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the documents to
the importer's bank (collecting bank). The document contains information about the payment. The funds are
collected from the importer and paid to the exporter through the banks involved in the collection, in
exchange for the documents.

Open account
The open account transaction involves the shipping and delivery of goods in advance. The payment is due
usually from 30 to 90 days. This is advantageous for the importer in cash flow and cost terms, but at the
same time it is very risky for the exporters. Buyers from abroad stress on open accounts since the extension
of credit from the seller to the buyer are more common in many countries. Exporters who avoid extending
credit may face loss in the sale because of competitors in the market.
Letter of credit
International Trade is affected by distance, laws, political instability and lack of familiarity by the
transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It is a
document that is issued by the bank that guarantees payment to a beneficiary. It is written by the financial
institution in favour of the importer of goods to the seller. In the letter, the bank promises that it will honour
the drafts drawn on it if the seller confirms to the specific conditions that are set forth in the letter of credit.
The process of letter of credit works as shown under:
Process of Execution for Payment under L/C Mode