DRIVE WINTER 2016

PROGRAM MBADS/ MBAFLEX/

MBAHCSN3/ MBA SEM 4
SUBJECT CODE & NAME MB0053
INTERNATIONAL BUSINESS
MANAGEMENT
BK ID B1724
CREDIT 4
MARKS 60

Q.1 Why is Comparative Cost Theory considered as an improvement upon Absolute

Cost Advantage Theory?

ANS. Comparative cost theory is the basis of international trade. It explains that it pays
countries to specialize in the production of those goods in which they possess greater
comparative advantage or the least comparative disadvantage. The principle of comparative
costs is based on the differences in production costs of similar commodities in different
countries. Production costs differ in countries because of geographical division of labour and
specialisation in production. Due to differences in climate, natural resources, geographical
situation and efficiency of labour, a country can produce one commodity at a lower cost than the
other.

In this way, each country specialises in the production of that commodity in which its
comparative cost of production is the least. Therefore, when a country enters into trade with
some other country, it will export those commodities in which its comparative production costs
are less, and will import those commodities in which its comparative production costs are high.

This is the basis of international trade, according to Ricardo. It follows that each country will
specialise in the production of those commodities in which it has greater comparative advantage
or least comparative disadvantage. Thus a country will export those commodities in which its
comparative advantage is the greatest, and import those commodities in which its comparative
disadvantage is the least.

Absolute Cost Advantage

Theory

Adam Smith in his book 'Wealth of Nation' argued that international trade is advantageous for
all the participating countries only if they enjoy absolute differences in the cost of production of
the commodity which they specialise. As in the case of individuals where each specialises in the
production of that commodity in which he has an absolutely superiority in terms of cost, so also
each country specialises in production of goods based on absolute advantage.

The principle of absolute difference in cost can be explained with the help of table given below.
Let us assume that we have 2 countries, I and II specialising in the production of X and Y.

In country I, one day's labour produces 20x or 10y. The internal exchange rate is 2 : 1. In country
II, one day's labour produce 10x or 20y which gives us the domestic exchange rate of 1 : 2.
Country I has the absolute advantage in the production of X (as 20 > 10) and country II in Y ( as
10 < 20). If these countries enter into trade with the international exchange of 1 : 1, both
countries stand to benefit. Country I will have 1y for 1x as against 1/2y for 1x within the country.
Similarly country II will have 1x for 1y as against 1/2x for 1y within the country.

Based on this example, according to Adam Smith, it can be pointed out that international trade to
be beneficial, each country must enjoy absolute difference in cost of production.

2. Equal Difference in Cost :-

Adam Smith, in order to strengthen his argument in favour of absolute difference in cost pointed
out that trade is not possible if countries operate under equal difference in cost instead of
absolute difference.

The above table gives us the internal exchange rate 2x : 1y in both countries. Since the exchange
ratio between X and Y in both countries is the same; none of them will benefit by entering into
international trade.
Based on this example, according to Adam Smith, for international trade to be beneficial
countries must enjoy absolute difference in cost. Trade would not take place when the difference
in cost is equal.

3. Comparative Difference in Cost :-

David Ricardo agreed that absolute difference in cost gives a clear reason for trade to take place.
He, however, went further to argue that even that the country has absolute advantage in the
production of both commodities it is beneficial for that country to specialise in the production of
that commodity in which it has a greater comparative advantage. The other country can be left to
specialise in the production of that commodity in which it has less comparative advantage.
According to Ricardo the essence for international trade is not the absolute difference in cost but
comparative difference in cost.

Ricardo's Theory of Comparative Advantage

David Ricardo stated a theory that other things being equal a country tends to specialise in and
exports those commodities in the production of which it has maximum comparative cost
advantage or minimum comparative disadvantage. Similarly the country's imports will be of
goods having relatively less comparative cost advantage or greater disadvantage.

Porters Diamond
Model

A model that attempts to explain the competitive advantage some nations or groups have due to
certain factors available to them. The Porter Diamond is a model that helps analyze and improve
a nation's role in a globally competitive field. The model was developed by Michael Porter, who
is recognized as an authority on company strategy and competition; it is a more proactive version
of economic theories that quantify comparative advantages for countries or regions. Traditional
economic theories cite land, location, natural resources, labor and population as determinants in
competitive advantage. The Diamond Model uses a more proactive approach in considering
factors such as:
-The firm strategy, structure and rivalry
-Demand conditions for products
-Related supporting industries
-Factor conditions
The Diamond Model demonstrates that countries can become competitive regardless of whether
they possess natural factor endowments such as land and natural resources. In the Diamond
Model, the role of government is to encourage and push organizations and companies to a more
competitive level, thereby increasing performance and ultimately the total combined benefit.

Q.2 Explain Hofstedes Cultural dimension

ANS-Hofstede's Cultural Dimensions

You know, dogs are interesting animals. If you have ever watched a group of different breeds of
dogs together, you see that there are dogs who are aggressive, those that are mellow, some want
to be the alpha male and some are content just playing and having a good time. These different
dimensions are very similar to Geert Hofstede's Cultural Dimension theory, a theory that
looks at unique aspects of cultures and rates them on a scale for comparison. Now, I am not
trying to say dogs to humans are the same, but the way they interact is quite similar.

The Six Different Types of Hoftede's Dimension

Geert Hofstede is a professor who researched how people from different countries and cultures
interact based on six different categories of cultural dimensions. Those categories are:

Power Distance: This dimension expresses the degree to which the less powerful
members of a society accept and expect that power is distributed unequally.
Individualism vs. Collectivism: This dimension focuses on the questions about whether
people prefer a close knit network of people or prefer to be left alone to fend for
themselves.
Masculinity vs. Femininity: Masculinity represents a preference in society for
achievement, heroism, assertiveness and material reward for success. Its opposite,
femininity, stands for a preference for cooperation, modesty, caring for the weak and
quality of life.
Uncertainty Avoidance: This dimension expresses the degree to which the member of a
society feels uncomfortable with uncertainty and ambiguity.
Long-term vs. Short-term Orientation: Long-term orientation dimension can be
interpreted as dealing with society's search for virtue. Societies with a short-term
orientation generally have a strong concern with establishing the absolute truth.
Dimensions of national Cultures
Geert has operated in an international environment since 1965, and his curiosity as a
social psychologist led him to the comparison of nations, first as a travelling international
staff member of a multinational (IBM) and later as a visiting professor at an international
business school in Switzerland. His 1980 book Culture's Consequences combined his
personal experiences with the statistical analysis of two unique data bases. The first and
largest comprised answers of matched employee samples from 40 different countries to
the same attitude survey questions. The second consisted of answers to some of these
same questions by his executive students who came from 15 countries and from a variety
of companies and industries. Systematic differences between nations in these two data
 bases occurred in particular for questions dealing with values. Values, in this case, are
"broad preferences for one state of affairs over others", and they are mostly unconscious.
The first four dimensions
The values that distinguished countries (rather than individuals) from each other grouped
themselves statistically into four clusters. They dealt with four anthropological problem
areas that different national societies handle differently: ways of coping with inequality,
ways of coping with uncertainty, the relationship of the individual with her or his primary
group, and the emotional implications of having been born as a girl or as a boy. These
became the Hofstede dimensions of national culture: Power Distance, Uncertainty
Avoidance, Individualism versus Collectivism, and Masculinity versus Femininity.
Between 1990 and 2002, these dimensions were largely replicated in six other cross-
national studies on very different populations from consumers to airline pilots, covering
between 14 and 28 countries. In the 2010 third edition of our book Cultures and
Organizations: Software of the Mind, scores on the dimensions are listed for 76 countries.
Power Distance
Power distance (click to hear it being introduced by Geert in ten minutes) is the extent to
which the less powerful members of organizations and institutions (like the family)
accept and expect that power is distributed unequally. This represents inequality (more
versus less), but defined from below, not from above. It suggests that a society's level of
inequality is endorsed by the followers as much as by the leaders. Power and inequality,
of course, are extremely fundamental facts of any society and anybody with some
international experience will be aware that "all societies are unequal, but some are more
unequal than others".
Uncertainty Avoidance
Uncertainty avoidance deals with a society's tolerance for uncertainty and ambiguity. It
indicates to what extent a culture programs its members to feel either uncomfortable or
comfortable in unstructured situations. Unstructured situations are novel, unknown,
surprising, different from usual. Uncertainty avoiding cultures try to minimize the
possibility of such situations by strict laws and rules, safety and security measures, and
on the philosophical and religious level by a belief in absolute Truth: "there can only be
one Truth and we have it". People in uncertainty avoiding countries are also more
emotional, and motivated by inner nervous energy. The opposite type, uncertainty
accepting cultures, are more tolerant of opinions different from what they are used to;
they try to have as few rules as possible, and on the philosophical and religious level they
are relativist and allow many currents to flow side by side. People within these cultures
are more phlegmatic and contemplative, and not expected by their environment to
express emotions.
Individualism
Individualism on the one side versus its opposite, collectivism, is the degree to which
individuals are integrated into groups. On the individualist side we find societies in which
the ties between individuals are loose: everyone is expected to look after her/himself and
her/his immediate family. On the collectivist side, we find societies in which people from
birth onwards are integrated into strong, cohesive in-groups, often extended families
(with uncles, aunts and grandparents) which continue protecting them in exchange for
unquestioning loyalty. The word collectivism in this sense has no political meaning: it
 refers to the group, not to the state. Again, the issue addressed by this dimension is an
extremely fundamental one, regarding all societies in the world.

Q.3 An economic union comprises of a common market and a custom union. Explain.

ANS-Customs Unions and Single Markets are examples of deeper economic integration between
countries . Countries often enter into different types of agreements with respect to their trade
policies. The objective of such agreements is to reduce the trade barriers among countries.

These types of agreements are generally referred to as trade blocs or regional trading agreements
(RTA), under which a group of countries agree to reduce or eliminate trade barriers.

These agreements will have internal rules that the members of the group follow for behavior
among themselves. They will also have external rules that the members follow for dealing with
non-members.

Different stages of economic integration

Different stages of No Internal Common Factor and Common

Common
economic integration Trade External Asset Economic
Currency
between countries Barriers Tariff Mobility Policy
Free Trade Area X
Customs Union X X
Single Market X X X
Monetary Union X X X X
Economic Union X X X X X

The Economics of a Customs Union

The European Union is a customs union. A customs union comprises countries which agree to:

Abolish tariffs and quotas between member nations to encourage free movement of
goods and services. Goods and services that originate in the EU circulate between
Member States duty-free. However these products might be subject to excise duty and
VAT
Adopt a common external tariff (CET) on imports from non-members countries.
Thus, in the case of the EU, the tariff imposed on, say, imports of Japanese TV sets will
be the same in the UK as in any other EU country
Preferential tariff rates apply to preferential or free trade agreements that the EU has
entered into with third countries or groupings of third countries
Exam tip: Specific knowledge of the economics of a customs union is needed for the exam.
Apart from the European Union, another example is that Kazakhstan and Belarus make up a
customs union with Russia forming for the basis for a new Eurasian customs union system

Common External Tariff - The European Union

1. A customs union shares the revenue from the CET in a pre-determined way in this case
the revenue goes into the EU budget fund. The EU receives its revenues from customs
duties from the common tariff, agricultural levies and countries paying 1% of their VAT
base. Payments are also made through contributions made by member states based on
their national incomes. Thus relatively poorer countries pay less into the EU and tend to
be net recipients of EU finances.
2. A single market represents a deeper form of integration than a customs union. It
involves the free movement of goods and services, capital and labour and the concept are
broadened to encompass economic policy harmonization for example in the areas of
health and safety legislation and monopoly & competition policy. Deeper economic and
business ties requires some degree of political integration, which also requires shared
aims and values between nations.

Q.4 Explain the components of International Financial Management.

ANS-Answer:

The term Financial Management refers to the proper maintenance of all the monetary transactions of
the organisation. It also means recording of transactions in a standard manner that will show the
financial position and performance of the organisation. The Financial Management can be categorised
into domestic and international financial management.

The domestic financial management refers to managing financial services within the country.
International financial management refers to managing finance and share between the countries.

The main aim of international finance management is to maximise the organisations value that in turn
will increase the impact on the wealth of the stockholders. When the doors of liberalisation opened,
entrepreneurs capitalised the opportunity to step their foot to conduct business in different parts of the
world.

International trade gave way for the growth of international business. For a corporation to be
successful, it is vital to manage the finance and business accounts appropriately. The rise in
significance and complexity of financial administration in a global environment creates a great
challenge for financial managers. The contributions of different financial innovations like currency
derivative, international stock listing, and multicurrency bonds have necessitated the accurate
management of the flow of international funds through the study of international financial
management.

The International Financial Management (IFM) came to its existence when the countries all over the
world started opening their doors for each other. This phenomenon is also called as liberalisation. But
after the end of the Second World War, the integration in terms of foreign activities has grown
substantially. The firms of all types are now opting to operate their business and deploy their resources
abroad. Furthermore, the differences between the countries have persisted that has given rise to the
prevalence of market imperfections.

1. Foreign exchange market

The Foreign exchange or the forex markets facilitates the participants to obtain, trade, exchange and
speculate foreign currency. The foreign exchange market consists of banks, central banks, commercial
companies, hedge funds, investment management firms and retail foreign exchange brokers and
investors. It is considered to be the leading financial market in the world. It is vital to realise that the
foreign exchange is not a single exchange, but is created from a global network of computers that
connects the participants from all over the world.

The foreign exchange market is immense in size and survives to serve a number of functions ranging
from the funding of cross-border investment, loans, trade in goods, trade in services and currency
speculation. The participant in a foreign exchange market will normally ask for a price.

The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency
requirements. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of the rate
until the deal is carried out. The spot rate that is intended to receive will be set by current market
conditions, the demand and supply of currency being traded and the amount to be dealt. In general, a
better spot rate can be received if the amount of dealing is high. The spot deal will come to an end in
two working days after the deal is struck.

The three ways of managing risks are as follows:

Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises. This
will result in a high risk and speculative strategy since one will not know the rate at which a transaction
is dealt until the day and time it occurs. Managing the business becomes difficult if it depends on the
selling or buying the currency in the spot market.
The decision must be made to book a foreign exchange contract with the bank whenever the foreign
exchange risk is likely to occur. This will help to fix the exchange rate immediately and will give a
clear idea of knowing the exact cost of foreign currency and the amount to be received at the time of
settlement whenever this due occurs.
A currency option will prevent unfavourable exchange rate movements in the similar way as a
forward contract does. It will permit gains if the markets move as per the expectations. For this base, a
currency option is often demonstrated as a forward contract that can be left if it is not followed. Often
banks provide currency options which will ensure protection and flexibility, but the likely problem to
arise is the involvement of premium of particular kind. The premium involved might be a cash amount
or it could also influence into the charge of the transaction.

2. Foreign currency derivatives

Currency derivative is defined as a financial contract in order to swap two currencies at a predestined
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 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.
3.Market upwings The financial markets have become increasingly unstable over recent years.
There are faster swings in the stock values and interest rates, adding to the enthusiasm for moving
further capital at faster rates.
The scope of international financial management includes management of working capital, financing
decisions and taxation.

Q.5 What are the differences between International Accounting Standards and Domestic
Accounting Standards
ANS- Accounting Standards-BREAKING DOWN 'Accounting Standard' An accounting standard is
a guideline for financial accounting, such as how a firm prepares and presents its business income and
expense, assets and liabilities. The Generally Accepted Accounting Principles is comprised of a large
group of individual accounting standards.

Domestic Accounting Standards- International Accounting Standards,

and the Predictability of Earnings
Abstract
We investigate (1) whether the variation in accounting standards across national boundaries relative to
International Accounting Standards (IAS) has an impact on the ability of financial analysts to forecast
non-US firms' earnings accurately, and (2) whether analyst forecast accuracy changes after firms adopt
IAS. IAS are a set of financial reporting policies that typically require increased disclosure and restrict
management's choices of measurement methods relative to the accounting standards of our sample
firms' countries of domicile. We
develop indexes of differences in countries' accounting disclosure and measurement policies relative to
IAS, and document that greater differences in accounting standards relative to IAS are significantly and
positively associated with the absolute value of analyst earnings forecast errors. Further, we show that
analyst forecast accuracy improves after firms adopt IAS. More specifically, after controlling for
changes in the market value of equity, changes in analyst following, and changes in the number of
news reports, we find that the convergence in firms' accounting policies brought about by adopting IAS
is positively associated with the reduction in analyst forecast errors.

Different -countries whether domestic or international, have different accounting standards. A

common belief is that these differences reduce the quality and importance of accounting information.
Accounting standards determine the financial reporting quality and provides separately verified
information about an organisation's financial performance to investors
creditors.

Though there are differences in accounting methods, domestic businesses are not affected. The
accounting system of a domestic organisation must meet the specialised and regulatory standards of its
home country. But, an MNC and its subsidiaries must meet differing accounting and auditing standards
of all the countries in which it operates. This leads to a need for comparability between businesses in
the group. In order to successfully manage and organise their operations, local managers require
accounting information, which should be prepared according to the local accounting concepts and
denomination in the local currency. Yet, for financial controllers, to measure the foreign subsidiarys
performance and worth, the subsidiarys accounts must be translated into the organisations home
currency. This translation is done using accounting concepts and measures, which are detailed by the
organisation. Investors worldwide look for the highest possible returns on their capital, in order to
interpret the track record, though they use a currency and an accounting system of their own. The
organisation also has to pay taxes to the countries where it does business, based on the accounting
statements prepared in these countries. Besides this, when a parent corporation tries to combine the
accounting records of its subsidiaries to produce consolidated financial statements, extra complexities
occur because of the changes in the value of the host and home currencies. There are many differences
between International Accounting Standards (IAS) and Domestic Accounting Standards (DAS). On the
basis of difference between the two, two indices, namely 'divergence' and 'absence', are created.
Absence is the difference between DAS and IAS; the rules on certain accounting issues are missed out
in DAS and covered in IAS. Divergence represents the differences between DAS and IAS; the rules on
the same accounting issue differ in DAS and IAS.
Q.6 Explain the key component of International Strategic management.

ANS- Strategic management involves the formulation and implementation of the major goals and
initiatives taken by a company's top management on behalf of owners, based on consideration of
resources and an assessment of the internal and external environments in which the organization
competes Strategic management involves the formulation and implementation of the major goals and
initiatives taken by a companys top management on behalf of owners, based on consideration of
resources and an assessment of the internal and external environments in which the organization
competes.

Strategic management provides overall direction to the enterprise and involves specifying the
organizations objectives, developing policies and plans designed to achieve these objectives, and then
allocating resources to implement the plans.

Strategic management provides overall direction to the enterprise and involves specifying the
organization's objectives, developing policies and plans designed to achieve these objectives, and then
allocating resources to implement the plans. Academics and practicing managers have developed
numerous models and frameworks to assist in strategic decision making in the context of complex
environments and competitive dynamics. Strategic management is not static in nature; the models often
include a feedback loop to monitor execution and inform the next round of planning.

International firms need to formulate company policies that take account of the fact that they
manufacture service, employ and market to or in countries with different laws, different beliefs and
different levels of socio-economic development compared to a firm's country of origin. This course
examines the contextual, organizational and managerial issues associated with the operation of
multinational firms. Interactions between contextual elements and management of an international
enterprise will be studied from both theoretical and practical perspectives. The major topics that will be
studied include international strategic planning and implementation in MNCs, strategies for
international competition international production and outsourcing, international joint ventures and
strategic alliances, organizational structure of MNCs, control in outsourcing, control in international
operations, intra and inter-firm technology and knowledge management, cross-cultural negotiation and
decision making, motivation and leadership in international management, international human resource
management and international social and ethical responsibly of firms.