ESP - International Business

Compiled from:

Business School – University of Bedfordshire

(2008) Core Program – Level 2, Pearson Costom
Publishing

Emmerson, P. (2007) Business English Handbook:

Advanced, Macmillan

Frendo, E. & Mahoney, S (2007) English for

Accounting – Express Series, Oxford University
Press

Johnson, C. (2000) Banking and Finance –

Business English, Longman.

MacKenzie, I. (2002) English for Business

Studies: A Course for Business Studies and
Economics Students, Cambridge University Press.

Mackenzie, I. (1997) Financial English,

Thompson, Heinle

Mackenzie, I. (2008) English for the Financial

Sector Learning, Cambridge University Press.

Sweeney, S. (2002) Test Your Professional

English: Management, Penguin

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COURSE INTRODUCTION
INSTRUCTOR

Teacher’s name: ……………………………………….

Email address: ………………………………..
Hand phone: ………………………………..

COURSE OBJECTIVES

This course provides students with opportunities to learn the basic concepts of
different areas of business, including international trade, financing, mergers and
banking… To that end, students will be able to build up a substantial reservoir of
business vocabulary throughout the course with reading, discussion and other
practices.
“English for Special Purposes II” is for students of English anywhere in general and
for the fourth-year students of Foreign Trade University in particular whose primary
reason in learning English is for the purpose of conducting business. Many of them
will find this book useful for learning business terminology and concepts. This is to
help them operate more effectively in their business dealings in the international
market place where communication is in English.
COURSE STRUCTURE AND TEACHING METHODS
The course is organized as one class per week, for 10 weeks, incorporating instruction
and various practice activities such as group work, discussion, and mini presentations.
The course emphasizes several skills which students need to develop if they are to
conduct business in English. There are several types of vocabulary exercises.
Emphasis is placed on developing the ability to learn meaning from context. Reading
exercises give an overview of a particular topic, introduce key business and economic
concepts and teach the student to grasp what has been said by analyzing the passage to
find the main ideas, to note details, and to make inferences. Writing exercises given by
the teacher during the study are included in order to help students develop and express
their own thoughts or opinion about a topic related to the lesson. There are also
additional proposals for debates, discussion or group presentations… to enable the
student to use orally some of the words and ideas that have been learned in the course
of the unit.. The variety and scope of the exercises, together with the information given
in the reading selections, should further develop both English language skills and
student comprehension of the basic elements of business. This book not only provides
a good foundation for continuing a more specialized study in the field, it also
illustrates techniques that will be useful to the professional in understanding and
writing up presentation in the world of business.
Students are expected to participate and contribute actively. For each class student
should:
 Prepare the unit and/or the handouts BEFORE the class

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  Participate in class activities
 Do home assignment.

Class rule:

 Attendance is checked regularly

 Mobile phone, private chatting are not allowed during class time

Meeting schedule: DAY – TIME – VENUE

…………………………………………

ASSESSMENT

1. Attendance: 10% - Every class check

2. Mid-term test: 20% - Multiple choice, Short answers, Long answers
3. Final exam: 70% - Multiple choice, Short answers, Long answers

COURSE OUTLINE

Unit 1  International Trade

Unit 2  Foreign direct investment
Unit 3  Foreign exchange trading
Unit 4  Payment in International Trade
Unit 5  Marketing
Unit6  Transportation
Unit 7  Insurance
Unit 8  Multinational
Unit 9  Merger and Acquisition
Unit 10  Arbitration

Unit 1. International Trade

A. Terms, theories and definitions:

1. International trade: Purchase, sale, or exchange of goods and services across

national borders.

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 2. Foreign Direct Investment (FDI): Purchase of physical assets or a significant
amount of the ownership of a company in another country to gain a measure of
management control.

3. Portfolio Investment: Investment that does not involve obtaining a degree of

control in a company.

Theories of International trade

1.Mercantilism: Trade theory holding that nations should accumulate financial wealth,
usually in the form of gold, by encouraging exports and discouraging imports.

2. Absolute advantage: Ability of a nation to produce a good more efficiently than any
other nation.

3. Comparative advantage: Inability of a nation to produce a goods more efficiently

than other nations, but an ability to produce that good more efficiently than it does any
other good.

4. Factor proportions theory: Trade theory holding that countries produce and export
goods that require resources (factors) that are abundant and import goods that require
resources in short supply.

Terms of trade

Terms of trade or TOT is the relative prices of a country's export to import

(TOT=PE /PI)

The balance of trade

 Visible trade consists of all those goods which can be seen and touched such as
machines, televisions, motorcycles, refrigerators, food, raw materials…

 Invisible trade refers to all those items which we export, which cannot be seen
or touched such as sales of insurance, banking services, airline seats or sea
cargo….

 The balance of trade is the difference in value between imports and exports of
goods over a particular period.

The balance of payments

 In economics, the balance of payments (BOP) measures the payments that flow
between any individual country and all other countries.

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 IMF definition: "Balance of Payments is a statistical statement that summarizes
transactions between residents and nonresidents during a period.”
 The balance of payments comprises the current account, the capital account,
and the financial account. "Together, these accounts balance in the sense that
the sum of the entries is conceptually zero.”
Current account
 Current account is a national account that records transactions involving the
import and export of goods and services, income receipts on assets abroad, and
income payments on foreign assets inside the country
 Current account surplus (a trade surplus): When a country exports more goods,
services, and income than it imports.
 Current account deficit (a trade deficit): When a country imports more goods,
services and income than it exports.
Capital account
 Capital account: A national account that records transactions involving the
purchase or sale of assets
Financial account

 The financial account records transactions that involve financial assets and
liabilities and that take place between residents and nonresidents.

 A balance of payments equilibrium is defined as a condition where the sum of

debits and credits from the current account and the capital and financial
accounts equal to zero; in other words, equilibrium is where

Current account + (Capital + Financial account) = 0

Balance of payments identity

Current Account = Capital Account + Financial Account + Net Errors and

Omissions

Protectionism is the economic policy of restraining trade between nations, through

methods such as tariffs on imported goods, restrictive quotas, and a variety of other
restrictive government regulations designed to discourage imports, and prevent
foreign take-over of local markets and companies. This policy is closely aligned
with anti-globalization, and contrasts with free trade, where government barriers to
trade are kept to a minimum. The term is mostly used in the context of economics,

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 where protectionism refers to policies or doctrines which "protect" businesses and
workers within a country by restricting or regulating trade with foreign nations.

An import quota is a type of protectionist trade restriction that sets a physical

limit on the quantity of a good that can be imported into a country in a given period
of time. Quotas, like other trade restrictions, are used to benefit the producers of a
good in a domestic economy at the expense of all consumers of the good in that
economy. Critics say quotas often lead to corruption (bribes to get a quota
allocation), smuggling (circumventing a quota), and higher prices for consumers.
In economics, quotas are thought to be less economically efficient than tariffs
which in turn are less economically efficient than free trade.

A tariff is a tax imposed on goods when they are moved across a political
boundary. They are usually associated with protectionism, the economic policy of
restraining trade between nations. For political reasons, tariffs are usually imposed
on imported goods, although they may also be imposed on exported goods

B. Vocabulary:

Match up these words and expressions with the definitions below

1. trade in goods A. autarky

2. trade in services (banking, insurance, tourism, and so B. deficit
on) C. quotas
3. direct exchanges of goods, without the use of money D. balance of payments
4. the difference between what a country receives and E. dumping
pays for its exports and imports of goods
F. surplus
5. the difference between a country’s total earnings from
exports and its total expenditure on imports G. balance of trade
6. the (impossible) situation in which a country is H. invisible imports
completely self –sufficient and has no foreign trade and exports
7. a positive balance of trade or payments I. tariffs
8. a negative balance of trade or payments K. visible trade (GB)
or merchandise trade
9. selling goods abroad at (or below) cost price (US)
10. imposing trade barriers in order to restrict imports L. barter or counter-
11. taxes charged on imports trade
12. quantitative limits on the import of particular products M. protectionism
or commodities

C. . Reading :

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Reading 1: Read the text and answer the following questions
- Why do most economists oppose protectionism?
- Why do most governments impose import tariffs and/ or quotas?
- Why were many developing countries for a long time opposed to GATT?
- Why have many developing countries recently reduced protectionism and
increased their international trade?

PROTECTIONISM AND FREE TRADE

The majority of economists believe in the comparative cost principle, which proposes
that all nations will raise their living standards and real income if they specialize in the
production of those goods and services in which they have the highest relative
productivity. Nations may have an absolute or a comparative advantage in producing
goods and services because of factors of production (notably raw materials), climate,
division of labour, economies of scale, and so forth.
This theory explains why there is international trade between North and South, e.g.
semiconductors going from the USA to Brazil, and coffee going in the opposite
direction. But it does not explain the fact that over 75% of the exports of the advanced
industrial countries go to other similar advanced nations, with similar resources, wage
rates, and levels of technology, education, and capital. It is more a historical accident
than a result of natural resources that the US leads in building aircraft, semiconductors,
computers and software, while Germany makes luxury automobiles, machine tools and
cameras.
However, the economists who recommend free trade do not face elections every four
or five years. Democratic governments do, which often encourages them to impose
tariffs and quotas in order to protect what they see as strategic industries- notably
agriculture-without which the country would be in danger if there was a war, as well as
other jobs. Abandoning all sectors in which a country does not have a comparative
advantage is likely to lead to structural unemployment in the short (and sometimes
medium and long) term.
Other reasons for imposing tariffs include the following:
 to make imports more expensive than home-produced substitutes, and thereby
reduce a balance of payments deficit;
 as a protection against dumping (the selling of goods abroad at below cost price
in order to destroy or weaken competitors or to earn foreign currency to pay for
necessary imports);
 to retaliate against restrictions imposed by other countries;
 to protect ‘infant industries’ until they are large enough to achieve economies of
scale and strong enough to compete internationally.
 with tariffs, it is impossible to know the quantity that will be imported, because
prices might be elastic. With quotas, governments can set a limit to imports. Yet
unlike tariffs, quotas provide no revenue for the government. Other non tariff

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 barriers that some countries use include so-called safety norms, and the
deliberate creation of customs, difficulties and delays.
The General Agreement on Tariffs and Trade (GATT), an international organization set
up in 1947, had the objectives of encouraging international trade, of making tariffs the
only form of protectionism, and of reducing these as much as possible. The most
favored nation clause of the Gatt agreement specified that countries could not have
favored trading partners, but had to grant equally favorable conditions to all trading
partners. The final Gatt agreement- including services, copyright, and investment, as
well as trade in goods- was signed in Marrakech in 1994, and the organization was
superseded by the World Trade Organization.
It took nearly 50 years to arrive at the final Gatt agreement because until the 1980s,
most developing countries opposed free trade. They wanted to industrialize in order to
counteract what they rightly saw as an inevitable fall in commodity prices. They
practised import substitution (producing and protecting goods that cost more than
those made abroad), and imposed high tariff barriers to protect their infant industries.
Nowadays, however, many developing countries have huge debts with Western
commercial banks on which they are unable to pay the interest, let alone repay the
principal. Thus they need to rollover (or renew) the loans, to reschedule ( or postpone)
repayments, or to borrow further money from the International Monetary Fund, often
just to pay the interest on existing loans. Under these circumstances, the IMF imposes
severe conditions, usually including the obligation to export as much as possible.
Quite apart from IMF pressure, Third World governments are aware of the export
successes of the East Asian ‘ Tiger’ economies ( Hong Kong, Singapore, South Korea
and Taiwan), and of the collapse of the Soviet economic model. They were afraid of
being excluded from the work trading system by the development of trading blocks
such as the European Union, finalized by the Maastricht Treaty, and the North
American Free Trade Agreement (NAFTA), both signed in the early 1990s. So they
tended to liberalize their economies, lowering trade barriers and opening up to
international trade.

Reading comprehension tasks:

Write questions, relating to the text, to which these could be the answer.
1. Factors of production, most importantly raw materials, but also labor and
capital, climate, economies of scale, and so on.
2. Because it doesn’t explain why the majority of the exports of advanced
industrialized country go to other very similar countries.
3. A recently developed one that has not yet grown to the point where it
benefits from economies of scale, and can be internationally completive.
4. Unlike quotas, they produce revenue.
5. Unlike tariffs, you know the maximum quantity of goods that will e
imported.

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Reading 2:
Trade and development

With political independence, the Less Developed Countries (LDCs) inherited a

structure of production and international trade that had largely been designed to serve
the interests of the metropolitan powers, rather than those of the LDCs themselves.

They were heavily dependent on the production and export of a limited range of
primary commodities (foodstuffs, fuels and industrial raw materials) going mainly to
the developed capitalist economy. In many cases, that dependence has not yet been
broken.

At the present time, for example, coffee still represents approximately 90 per cent of
Burundi’s recorded export and 50 per cent of Columbia’s; copper accounts for more
than 70 per cent of Zambia’s export; cocoa represents more than 70 percent of Ghana’s
exports. Many other examples could be given.

The import structures of the LDC/s were dominated by the importation of

manufactured goods and intermediate inputs – durable consumer goods, machinery,
and transport equipment, chemicals, petroleum and so on . At independence most
trade was with the colonial “mother country”.

Orthodox economists tended to argue that this structure of production and trade
was consistent with the LDCs’ comparative advantage and that they enjoy
significant gains from trade. The critics of this view, however, maintain that the gain
from trade were more likely, for variety of reasons, to be appropriated by the
developed capitalist economies. The unequal exchange thesis espoused by some neo-
Marxrists, went further and suggested that trade was actually carried out at the
expense of the LDCs , producing the condition of under development and poverty.

At the center of the relationship between trade and development remains the
controversy concerning the long-term behavior of the terms of trade of the LDCs.
The commodity, or net barter, terms of trade are the ratio of the unit price of export to
the unit price of import and the deterioration in the index implies that a given volume
of exports is exchanged for a smaller volume of imports.

The secular deterioration hypothesis is associated with the work of Hans Singer and
Raul Prebisch. In its original form, it was based on the argument that in the developed
countries strong trade unions could ensure that workers, rather than consumers,
benefited from productive gains, whereas in the LDCs, higher productivity led to
lower prices, thus benefiting consumers in the developed economies. Associated with,
although formally separated from, such argument was the view that primary

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commodity export prices were highly unstable and prone violent fluctuations, thus
damaging the development of the LDCs.

Reading comprehension tasks:

1. What is a structure of production and trade of LDCs? What about MDCs?

2. Give three examples of the current reliance of LDCs on primary products for export.

3. What are the arguments which suggest that there were no advantages to be gained
by LDCs from their structure of production and trade?

4. Give a definition of the net barter terms of trade.

D. . Exercises

Exercise 1: Replace the underlined words and expressions in the text with the words and
expressions below

balance of payments balance of trade barter pr counter-trade

climate commodities division of labour economies of scale
factors of production nations protectionism quotas tariffs

(1) Countries import some goods and services from abroad, and export others to the
rest of the world. Trade in (2) raw materials and goods is called visible trade in Britain
and merchandise trade in the US. Services, such as banking, insurance, tourism, and
technical expertise, are invisible imports and exports. A country can have a surplus or a
deficit in its (3) difference between total earnings from visible exports and total
expenditure on visible imports, and in its (4) difference between total earnings from all
exports and total expenditure on all imports. Most countries have to pay their deficits
with foreign currencies from their reserves, although of course the USA can usually
pay in dollars, the unofficial world trading currency. Countries without the currency
reserves can attempt to do international trade by way of (5) direct exchanges of goods
without the use of money. The (imaginary) situation which a country is completely self
sufficient and has no foreign trade is called autarky

The General Agreement on Tariffs and Trade (GATT), concluded in 1940, aims to
maximize international trade and to minimize (6) the favouring of domestic industries.
GATT is based on the comparative cost principle, which is that all nations will raise
their income if they specialize in producing the commodities in which they have the
highest relative productivity. Countries may have an absolute or a comparative
advantage in producing particular goods or services, because of (7) inputs (raw
materials, cheap or skilled labour, capital, etc), (8) weather conditions, (9)

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specialization of work into different jobs, (10) savings in unit costs arising from large-
scale production, and so forth. Yet most governments still pursue protectionist policies,
establishing trade barriers such as (11) taxes charged on imports, (12) restrictions on
the quality of imports, administrative difficulties, and so on.

Exercise 2: There is a logical connection among three of the four words in each of the
following groups. Which is the odd one out, and why?

1. absolute advantage- barriers- comparative advantage- free trade

2. autarky- counter trade- invisible trade- visible trade
3. balance- deficit- dumping- surplus
4. banking- insurance- merchandise- tourism
5. comparative advantage- protectionism- quotas- tariffs
6. non tariff barriers- norms- quotas- taxes
7. barter- import substitution- infant industries- tariff barriers
8. debt- reschedule- protect- subsidize- substitute
9. liberalize- protect- subsidize- substitute
Exercise 3: Complete the summary using the list of words, A-K, below.

THE TRANSPORT REVOLUTION

Modern cargo-handling methods have had a significant effect on 1 .................... as the

business of moving freight around the world becomes increasingly streamlined.
Manufacturers of computers, for instance, are able to import 2 .................... from
overseas, rather than having to rely on a local supplier. The introduction of
3 .................... has meant that bulk cargo can be safely and efficiently moved over long
distances. While international shipping is now efficient, there is still a need for
governments to reduce 4.................... in order to free up the domestic cargo sector

A tariffs B components C container ships D output

E employees F insurance costs G trade H freight
I fares H software H international standards
Exercise 4:
DELIVERING THE GOODS

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The vast expansion in international trade owes much to a revolution in the business
of moving freight
A International trade is growing at a startling pace. While the global economy has
been expanding at a bit over 3% a year, the volume of trade has been rising at a
compound annual rate of about twice that. Foreign products, from meat to
machinery, play a more important role in almost every economy in the world, and
foreign markets now tempt businesses that never much worried about sales beyond
their nation's borders.

B What lies behind this explosion in international commerce? The general worldwide
decline in trade barriers, such as customs duties and import quotas, is surely one
explanation. The economic opening of countries that have traditionally been minor
players is another. But one force behind the import-export boom has passed all but
unnoticed: the rapidly falling cost of getting goods to market. Theoretically, in the
world of trade, shipping costs do not matter. Goods, once they have been made, are
assumed to move instantly and at no cost from place to place. The real world,
however, is full of frictions. Cheap labour may make Chinese clothing competitive
in America, but if delays in shipment tie up working capital and cause winter coats
to arrive in spring, trade may lose its advantages.
C At the turn of the 20th century, agriculture and manufacturing were the two most
important sectors almost everywhere, accounting for about 70% of total output in
Germany, Italy and France, and 40-50% in America, Britain and Japan.
International commerce was therefore dominated by raw materials, such as wheat,
wood and iron ore, or processed commodities, such as meat and steel. But these
sorts of products are heavy and bulky and the cost of transporting them relatively
high.
D Countries still trade disproportionately with their geographic neighbours. Over
time, however, world output has shifted into goods whose worth is unrelated to
their size and weight. Today, it is finished manufactured products that dominate the
flow of trade, and, thanks to technological advances such as lightweight
components, manufactured goods themselves have tended to become lighter and
less bulky. As a result, less transportation is required for every dollar's worth of
imports or exports.
E To see how this influences trade, consider the business of making disk drives for
computers. Most of the world's disk-drive manufacturing is concentrated in South-
east Asia. This is possible only because disk drives, while valuable, are small and
light and so cost little to ship. Computer manufacturers in Japan or Texas will not
face hugely bigger freight bills if they import drives from Singapore rather than
purchasing them on the domestic market. Distance therefore poses no obstacle to
the globalisation of the disk-drive industry.
F This is even more true of the fast-growing information industries. Films and
compact discs cost little to transport, even by aeroplane. Computer software can be
'exported' without ever loading it onto a ship, simply by transmitting it over
telephone lines from one country to another, so freight rates and cargo-handling

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 schedules become insignificant factors in deciding where to make the product.
Businesses can locate based on other considerations, such as the availability of
labour, while worrying less about the cost of delivering their output.
G In many countries deregulation has helped to drive the process along. But, behind
the scenes, a series of technological innovations known broadly as containerisation
and inter-modal transportation has led to swift productivity improvements in cargo-
handling. Forty years ago, the process of exporting or importing involved a great
many stages of handling, which risked portions of the shipment being damaged or
stolen along the way. The invention of the container crane made it possible to load
and unload containers without capsizing the ship and the adoption of standard
container sizes allowed almost any box to be transported on any ship. By 1967,
dual-purpose ships, carrying loose cargo in the hold* and containers on the deck,
were giving way to all-container vessels that moved thousands of boxes at a time.
H The shipping container transformed ocean shipping into a highly efficient, intensely
competitive business. But getting the cargo to and from the dock was a different
story. National governments, by and large, kept a much firmer hand on truck and
railroad tariffs than on charges for ocean freight. This started changing, however,
in the mid-1970s, when America began to deregulate its transportation industry.
First airlines, then road hauliers and railways, were freed from restrictions on what
they could carry, where they could haul it and se what price they could charge. Big
productivity gains resulted. Between 1985 and 1996, for example, America's
freight railways dramatically reduced their employment, trackage, and their fleets
of locomotives - while increasing the amount of cargo they hauled. Europe's
railways have also shown marked, albeit smaller, productivity improvements.
I In America the period of huge productivity gains in transportation may be almost
over, but in most countries the process still has far to go. State ownership of
railways and airlines, regulation of freight rates and toleration of anti-competitive
practices, such as cargo-handling monopolies, all keep the cost of shipping
unnecessarily high and deter international trade. Bringing these barriers down
would help the world's economies grow even closer.
Which paragraph contains the following information?
1. a suggestion for improving trade in the future
2. the effects of the introduction of electronic delivery
3. the similar cost involved in transporting a product from abroad or from a local
supplier
4. the weakening relationship between the value of goods and the cost of their
delivery

Decide if these statements are true (T) or false (F) or not given (NG)
1. International trade is increasing at a greater rate than the world economy.
2. Cheap labor guarantees effective trade conditions.

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 3. Japan imports more meat and steel than France.
4. Most countries continue to prefer to trade with nearby nations.
5. Small computer components are manufactured in Germany
E. FOLLOW- UP
Students discuss in groups the following questions.

 Does your country have a trade surplus?

 Does it have a balance of payments surplus or deficit?
 What are its chief exports?
 Which industries or sectors are protected?
 Which do you think should be protected?
 Give example of Vietnam, which can apply the theory of comparative
advantage in importing and exporting?
 Does Vietnam gain or loss from trade? Give your explanation.

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 Unit 2. Foreign Direct Investment
A. Special terms

Foreign Portfolio Investment: The purchase of shares and long-term debt obligations
from a foreign entity. Portfolio investors do not aim to take control of a
corporation. They can liquidate their investment at market value any time.

Foreign Direct Investment: The establishment of a plant or distribution network

abroad. Investors can acquire part or all of the equity of an existing foreign
corporation either to control or share control over sales, production, and
research and development.

Strategic Approach: Foreign direct investment decisions based on business strategies.

Investors seek access to raw materials, markets, product efficiency, and “know-
how”.

Cash Flow: The total amount of cash that remains in a company after it has paid taxes
and other cash expenses.

Investment Incentives: benefits such as cash grants, tax credits, accelerated

depreciation, and low interest-bearing loans, which are sponsored by national or
local authorities to attract foreign investment.

Exclusive Distributor: An independent sales agent who is given the sols right, under
contract, to sell a foreign manufacturer’s products.

Multiple Distributor: A sales agent who represents more than on e manufacturer.

Royalty Payments: the payments made by a foreign manufacturer to a company that

has licensed the manufacturer to product its products.

Joint Venture: A subsidiary formed by two or more corporations.

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 B. Vocabulary Practice

1. Define foreign portfolio investment. How does it differ from foreign direct
investment?
2. Foreign direct investment decisions are normally based on clear business
strategies. Name at least three categories that companies are looking for.
3. Give some examples of investment incentives. What are they supposed to
achieve?
4. What is non-exclusive distributor called? What does this mean?
5. What are royalty payments?
6. Define joint venture.
C. Reading

Foreign Direct Investment

The decision to invest outside the home country is a major one that requires
careful analysis. Investments overseas can be portfolio investments, where investors
buy shares and debentures (long-term obligations) that can be liquidated at market
value any time. These investments can be made without leaving the home country
through an international investment broker or a banking institution. Foreign direct
investments are quite different. They usually involve the establishment of plants or
distribution networks abroad. Investors may acquire part or all of the equity of an
exciting foreign company with the objective of controlling or sharing control over
production, research and development, and sales. Contrary to portfolio investments,
foreign direct investments mean a long-term commitment where capital funds will be
tied up for a long time.

Multinational corporation usually take a strategic approach is to locate or

create markets for its present and future products. Markets for products are no longer
national in today’s world. The technological and cultural changes of the twentieth
century and particularly in the three decades after World War II, have created fairly
uniform world markets, with increasingly similar economic and social needs. All
countries in the world strive to full technological growth and the highest possible

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standard of living, regardless of their present stage of development. Consequently,
MNCs of all types and nationalities, large and small, have expanded with great vitality
abroad, often overshadowing their market shares at home. Such is the case, for
example, of the Swiss drug companies and the leading German, Japanese, and
American automobile manufacturers.

The typical MNC pools all its resources to achieve the highest possible
efficiency and obtain the maximum return on investments. Research and development,
raw materials, investment capital, and managerial skills are utilized for the benefit of
many world markets. For examples, an automobile originally designed in Japan is later
sold, assembled or manufactured, with minor changes, in the United States, Canada,
Brazil, Western Europe, and so on. The basis development costs, like research and
design, can be expected to be amortized on sales in many markets. Research may be
carried out in one country, parts made in another, then assembled and sold in a third
country.

Most American multinationals, already technologically advanced, do not have

to invest overseas to seek “know-how”. Many European and Japanese companies,
however, come to the United States to do just that. Their primary aim is to benefit from
American technology. For example, The British company, Plessey, made a $190
million bid to take over American Alloys Unlimited, before the bid. Plessey believed
that it would be less costly to pay a higher price for technical “know-how” than to do
research and development in the alloy field over a period of time.

Financial considerations are also the most important and sometimes decisive
factors. What is the expected return on an investment? What are the sources of
working capital? What are interest rates? What is the cash flow projection? – i.e,. the
amount of cash that remains after a company has paid taxes and other cash expenses?
Only when reliable access to outside financing is available can a project for foreign
direct investment be termed viable. A non-viable project is one where the expected
rate of return, or profits realized on assets employed, is likely to be lower than from a
comparable investment in the host country.

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 Local regulations or legislation is another factor that must be studied before an
investment is made. When Thomson, the French electronics group, set up a company
to produce military electronic devices in Chicago, it found out about the Buy American
Act only after the acquisition. This act prohibits the United States government form
purchasing foreign-made military equipment with the exception of components.
Subsequently, Thomson withdrew from the company at a substantial loss. United
States antitrust legislation prohibits corporations from dominating or monopolizing an
industry. When British Oxygen bought 35 percent of Airco, a major United States
producer of industrial gases, it was sued by the US federal government for violating
antitrust laws. Labor laws are still another important legislative factor. Before an
investment is made, it is important to consider right-to-work laws and the existence of
absence of labor unions.

The likelihood of government interference has to be studied. Despite France’s

efforts to attract foreign investment in the past companies to divest themselves of their
French subsidiaries. In 1976 International Telephone and Telegraph (ITT) sold its
interest in Le Matériel Téléphonique (producer of telephone equipment) to Thomson, a
French company, as a result of government pressure.

Investment incentives are still another consideration. These incentives are

usually of a monetary nature, such as cash grants, lower taxes, accelerated
depreciation, training allowances, research subsidiaries, and interest rebates on loans.
Incentives differ from country to country and region to region and are always highest
in a depressed area. In Belgium, where many coal mines have shut down, certain
regions experienced long periods of unemployment. These regions are likely to offer
incentives to foreign investors.

Prior to making a foreign investment, a corporation has usually had some form
of trade with the foreign nation. When a corporation starts to export for the first time,
it will usually engage distributors, who receive a commission on products sold.
Distributors are called exclusive if they are under contract to sell only the exporter’s
products. Otherwise, they are called multiple, representing other manufacturers as
well.

18
 When the foreign country becomes familiar with the products, the company might
not renew the contract with the distributors but rather will set up its own sales organization.
It will acquire its own network of dealers throughout the country, probably supervised by
various regional sales offices. Again, dealers can be exclusive or multiple.

Building up a dealer network is complicated and expensive. The exporter may

prefer to license a foreign manufacturer. The later is then authorized to manufacture
the product under license, using the original manufacturer’s brand name. In return, the
exporter will receive royalty payments. A drawback of licensing, as well as of
authorizing foreign distribution, is that the original manufacturer gives up control over
the product. If the licensed product lacks quality, the exporter’s reputation will suffer.
It may be very difficult to correct a distributor’s marketing mistakes if the exporter
eventually decided to handle the distribution.

Therefore, licensing and distributing are almost always of a temporary nature.

Sooner or later the exporter will be faced with the foreign direct investment question.
The basis decision is whether to set up a manufacturing plant or make an acquisition of
an existing one. Then there is the question of whether to create a joint venture or go it
alone. A joint venture is a subsidiary formed by two or more corporations. This form is
chosen when companies want to share capital outlay and “know-how”. In the long run,
it is often an unsatisfactory relationship, as the respective partners find it increasingly
difficult to share control. However, in some countries, such as Japan and Spain, a
foreign investor cannot own more than 50 percent of a corporation; that is, local
interests in the foreign venture must equal at least 50 percent.

In many countries, especially in parts of the Third World, there is resistance to

foreign direct consequence of criticism of multinational corporations. In the
industrialized nations, such as France and the United States, opposition is also
growing. Even in some quarters in the United States, foreign investment is seen as a
threat. The critics forget, however, that their countrymen invested six times as much
overseas in 1976 as did foreigners in the United States.

Some strategic industries (such as food, computers, nuclear reactors, and

energy) will find it increasingly difficult to expand abroad. Foreign investment will be

19
dependent on the power struggle between governments and multinational corporations.
But direct investment is likely to continue its adventurous course in many areas. The
economic integration of the United States, Europe, and Japan will stimulate its
development.
Discussion
1. When foreign direst investors acquire a company, what do they normally seek to
control?
2. In considering foreign investment, what is an MNC’s first strategic objective?
3. What are some financial considerations in making a foreign direct investment?
4. When is a foreign project said to be viable? What is a nonviable project?
5. Name two kinds of legislation that foreign investors study closely prior to making
an investment?
6. Why are investment incentives highest in a depressed area?
7. When a corporation starts to export for the first time, how will it organize its sales?
8. What is a drawback of licensing or authorizing foreign distribution?
9. If a company does not want complete manufacturing responsibility for a foreign
market, what ownership possibility remains?
Review
A. Fill in the blanks in the sentences below with the correct word or phrase.
1. When investors establish a plant overseas, this is called __________. If they buy
shares or long-term debt obligations, this is called ___________
2. The amount of cash that remains after a company has paid taxes and other cash
expenses is _____________.
3. Rate of return is often measured in terms of profits realized on ___________.
4. A cash grant is called an ________, whose purpose is to _____________.
5. Prior to making a foreign direct investment, exporters can make a contract with a
____________ or with a foreign manufacturer, who will be ____________ to
manufacture their products. For this, the foreign manufacturer pays __________.
B. Picture yourself as a corporation president who is about to decide on making a
foreign direct investment. What questions would you ask yourself?

20
 Unit 3. Foreign Exchange Trading
A. Special terms

Foreign Exchange: money or currency of a foreign country.

Gold Standard: A monetary system used in the nineteenth and early twentieth
centuries whereby the value of currencies could, on request of the owner
(holder), be converted in to gold at a country’s central bank. As all currencies
had a gold value, they also had a certain value in relation to each other. This
was the beginning of a foreign exchange system.

Central Bank: A country’s chief bank, which is government owned. It regulates the
commercial banks and holds gold and foreign currency reserves. It actively
intervenes by buying and selling its own currency in the foreign exchange
markets so that the currency will keep a certain value.

Fixed Exchange Rate: A system whereby central banks are required by international
agreements to maintain their currency at a relatively fixed value. This is
achieved by buying the currency when it reaches its low point and by selling
when it reaches its high point.

Floating Exchange Rate: A system in which currencies have no specific par value;
value is normally determined by supply and demand. Central banks are not
required to intervene, buy they often do to avoid wild fluctuations.

Spot Transaction: Currency bought or sold today with delivery two business days
later.

Forward Transaction: To buy or sell a currency in the future, with payment and
delivery at that future date.

Hedging: To offset a “buy” contract with a “sell” contract and vice versa, matching
the amounts and the time span exactly.

21
Speculation: When dealers do not offset a “buy” contract with a “sell” contract. This
means that their position is left open.

Premium: The additional amount it will cost to buy or sell a currency at a given future
date (relative to the spot or today’s price).

Discount: The lesser amount it will cost to buy or sell a currency at a given future date
(relative to the spot or today’s price).

Arbitrage: The transfer of funds from one currency to another to benefit from
currency differentials or disparities in interest rates. In arbitraging, at least two
markets are entered.

B. Vocabulary practice

1. What is foreign exchange?

2. Explain how the gold standard represented the beginning of a foreign exchange
system.
3. Name three functions of a country’s central bank. Who owns it?
4. Under a floating exchange rate system, what normally determined the value of
currencies?
5. Under what circumstances is an exchange rate system fixed?
6. What is a spot transaction? When does delivery take place?
7. On the forward transaction, when is the payment made? When is the delivery
of funds made?
8. Define hedging.
9. What does premium mean? How is it determined? What is the opposite of
premium?
10. What is involved in arbitraging? How many markets are entered?

22
 C. Reading

Foreign Exchange Trading

Without foreign exchange trading, international trade itself could not exist. In
former times trade was based on bartering – goods were exchanged for other goods.
The introduction of precious metals (i.e., gold and silver) to pay for goods can be
considered the forerunner of the foreign exchange market.

The Greeks and Romans commonly used gold as a medium of exchange. Most
world trade continued to be based on gold until the nineteenth century. By then
industrialization in Western Europe and the United States had boosted world trade to
such an extent that gold reserves were no longer adequate to meet the requirements.
Governments introduced a par value of their respective local currencies in gold. Thus,
the currencies were related to one another through a system called the gold standard.
The United States joined this system in 1879. The gold standard system determined the
value of all currencies based on gold. This meant the values of different currencies
could be compared in terms of one another.

The system worked well until World War I, when trade was interrupted. After the
war, currencies fluctuated widely in terms of gold and, thus, in relation to each other.
The value of currencies was meant to be regulated by supply and demand (the market
mechanism), buy speculators often interfered with this mechanism. So in an effort to
create more stable exchange markets, some countries, notably the United States,
England, and France, returned to the gold standard. Except for a brief period in the
early 1930s the United States stayed on the gold standard. Buy 1971 it was the only
country whose currency remained convertible into gold, and so, by declaring the dollar
inconvertible, the gold standard was finally abolished. The meant the holders of United
States dollars could no longer exchange their dollars for gold at par value.

In 1944 toward the end of World War II, the Western industrialized nations
realized that foreign trade would be necessary to quickly and effectively heal the
wounds of war. To create a calm and stable foreign exchange market, the United States
government called for a conference in the summer of 1944. It was held in Breton

23
Woods, New Hampshire. At this conference, both the International Monetary Fund
(IMF) and the International Bank for Reconstruction and Development were
established.

The Breton Woods Agreement stipulated that all member countries would
express the value of their currencies in gold. However, only the United States dollar
was convertible into gold, at the price of $35 an ounce.

Central banks of the member countries were required to intervene in the foreign
exchange markets to keep the value of their currencies within 1 percent of the par
value. This intervention was achieved by actively buying or selling foreign exchange
or gold. A given currency could, therefore, never rise above nor fall below fixed
points, which are called intervention points. There are the prices beyond which the
central bank intervenes. This is called the system of fixed exchange rates.

The system of fixed exchange rated worked well until the late 1960s and early
1970s. at that time a number of countries devalued their currencies. This meant that
their currencies were now worth less in terms of gold. England in 1967, France in
1969, and the United States in 1971 and 1973, devalued their currencies. This caused
an almost unprecedented turbulence in the foreign exchange markets. In addition,
countries such as West Germany and Holland revalued their currencies (increased the
par value of their currencies in terms of gold). Intervention by central banks became
very costly. Foreign currency and gold reserves were drained. Countries had to buy
their own currency with gold and foreign exchange in order to keep its value above the
minimum intervention point, as agreed at Bretton Woods.

It is not surprising, then, that the world saw a return to a floating exchange rate
system. Central banks were no longer required to support their own currencies.
England, France (only temporarily), Italy, Japan, and the United States all floated their
currencies. Western Europe, united in the Common market, moved to preserve the
fixed-rate system but allowed a widening of the intervention points to within 2.25
percent of the par value of the currencies. This system became known as the snake
since these currencies move up and down together against currencies outside the

24
snake. The British and the Italians, now members of the Common Market, are
expected to eventually join their currencies to the snake.

The foreign exchange market is the mechanism through which foreign currencies
are traded. It is not an actual marketplace but a system of telephone of telex
communications between banks, customers, and middlemen (foreign exchange
brokers, acting for a client vis-à-vis the bank).

Most banks have a special foreign exchange trading department, which consists
of foreign exchange dealers and an administrative staff. Customers trade with banks,
banks trade among themselves, and brokers often trade on behalf of banks or
corporations. Active participants in the foreign exchange market include tourists,
investors, exporters and importers, and governments, whose central banks intervened
in the markets to minimize fluctuations in the currencies.

The market consists of spot and forward transactions. When a French father
transfers money to his son in New York, a typical spot transaction occurs. The French
father buys the dollars spot – for immediate delivery – although business practice
allows two days for actual delivery. This permits sufficient time to consummate the
transaction. The French father, of course, pays for the dollars with his own currency,
that is French francs.

A forward transaction means that delivery of a currency if specified to take place

at a future date. Japanese exporters of Toyota cars to the United States know from the
sales contracts that they will receive a specified United States dollar amount in six
months. In order to protect themselves against fluctuating exchange sales, they can sell
the dollars forward six months to their bank in Japan in return for yen. Payment and
delivery are not required until six months later. The rate of exchange is fixed, however,
on the date of the contract. Forward rates are usually quoted on a 30-, 90-, or 180-day
basis, but major currencies can have any maturity up to a year and sometimes longer.

Dealers, having concluded a forward contract, should always hedge with an

offsetting contract, so as not to leave the position open. For example, if they buy
forward thirty days, they should immediately sell forward thirty days for the same

25
amount. Obviously, traders try to realize a profit margin between the two transactions.
If dealers do not equalize their position, they are said to speculate. If they buy
currency forward without selling forward at the same time, this position is known as
long; if they sell a currency forward without buying forward at the same time, this is
called short. Such behavior can be disastrous if the exchange rates change rapidly. For
instance, suppose that a French company concludes a contract with an American
importer, promising to deliver a certain commodity in six months valued at 1,000,000
French francs. At the exchange rate of 22 cents for one franc, the French company
expects to receive $220,000. If the franc rises to the dollar rate of 23 cents within six
months, and the French company does not sell dollars forward, only 956,521.72 francs
will be obtained. Since it cost 1,000,000 francs to deliver the original commodities, the
French company would lose 43,478.28 francs.

Forward rates can be quoted either outright or in terms of a premium or discount

on the spot rate. The following table of British pounds on July 6, 1976, shows outright quotations. A
bid is the price dealers will pay to acquire pounds. An offer is the price they will sell the pounds for.

July 6, 1976 Bid Offer

Spot $1.8020 $1.8030
One month forward $1.7895 $1.7915
Two months forward $1.7795 $1.7815
Three months forward $1.7695 $1.7715
Six months forward $1.7445 $1.7465
One year forward $1.7010 $1.7030
Arbitrage is the practice of transferring funds from one currency to another to
benefit from rate differentials. For instance, local supply and demand factors may
result in a dollar spot rate in London that differs from the rate in New York. If the spot
rate is higher in London, an arbitrage dealer would quickly buy dollars with pounds in
New York and sell the dollars in London for pounds. Such arbitraging makes sense
only if transaction costs (cable, paperwork, etc.) are covered and a small profit if
realized. Opportunities to realized big profits do not exist in this type of arbitraging,

26
since communication systems today make the price, and therefore profit opportunities,
available to everyone.

Another form of arbitrage is interest arbitrage. If interest rates in England are 2

percent higher than in the United States money market, a United States investor would
do well to change United States dollars into pounds sterling and then invest the sterling
at the English interest rate. However, the exchange rate discount of sterling is 1
percent. The investor will have to buy back dollars at a 1 percent premium, thus losing
1 percent. Still, the investor makes an overall gain of 1 percent. Of course, such
transactions can only be realized in the absence of foreign exchange regulations, such
as capital transfer limitations, which are sometimes imposed by governments. Such
restrictions serve to protect country’s foreign exchange and gold reserves and,
therefore, its balance of payments (as we have seen in Unit Two).

The foreign exchange market is an extremely valuable mechanism for world

trade. Its main function is to reduce the risk of fluctuating exchange rates or of a
change in the parity of currencies (devaluation or revaluation).

Discussion

1. Name a payment mechanism used in earlier times. What was it later replaced by?

2. Briefly describe the importance of the gold standard.

3. Under the gold standard, currencies were convertible into gold. This convertibility
was abolished for most currencies. Which currency remained convertible into gold
until 1971?

4. What is the system of fixed exchange rates? Which conference agreed upon this
system?

5. What does devaluation mean? Name the countries in the Western industrialized
world that devalued their currencies between 1967 and 1973.

6. Name two countries that revalued their currencies in the early 1970s.

7. Are intervention points applicable in a system of floating exchange rates? Explain

your answer.

27
8. What is the snake? Why is it called the snake and which Common Market members
are outside it?

9. Where and how does the foreign exchange market take place?

10. What is the function of a foreign exchange broker?

11. Name at least five active participants in the foreign exchange market.

12. Briefly describe spot and forward transactions. Give an example of each.

13. When does delivery of the foreign exchange take place in a spot transaction and
why>

14. When does payment and delivery of foreign exchange take place in a forward
transaction? At what point is the exchange rate determined?

15. What causes an open position?

16. An open position is either long or short. Describe both types.

17. What is the difference between a bid and an offer?

18. What is arbitrage? Is this usually a very profitable transaction for a bank?

19. Give an example of interest arbitrage. In which case is interest arbitrage not
possible?

Review

A. Complete the following statements with the appropriate word or phrase.

1. Bartering is based on the exchange of ____________ for goods.

2. The Bretton Woods Agreement stipulated that all members would express their
currencies in ____________.

3. When central banks intervene in the foreign exchange markets at the intervention
points, this is called the system of __________exchange rates. The opposite is called
the system of _____________exchange rates.

4. If dealers buy currencies forward but do not sell forward simultaneously, their
position is said to be _____________.

28
5. Dealers using two foreign exchange markets to benefit from rate differentials are
said to engage in ______________.

B. Review how foreign exchange trading developed through the years, how
international agreements today have shaped it, and what its main functions are.

29
 Unit 4. Payment in International Trade
Reading 1
Before you read
Discuss these questions.
1. What are some of the risks involved in trading internationally?
2. What payment methods do you know that are used when exporting or importing
goods?
3. What is the role of the banks in international trade?
Open Account
The goods, and relevant documents, are sent by the exporter directly to the overseas
buyer, who will have agreed to remit payment of the invoice back to the exporter upon
arrival of the documents or within a certain period after the invoice date. The exporter
loses all control of the goods, trusting that payment will be made by the importer in
accordance with the original sales contract.
Documentary Credit
Documentary Credit is often referred to as a Letter of Credit. This is an undertaking
issued by an overseas bank to a UK exporter through a bank in the UK, to pay for the
goods provided that the exporter complies fully with the conditions established by the
Documentary Credit.
Additional security can be obtained by obtaining the ‘confirmation’ of a UK bank 1 to
the transaction, thereby transferring the responsibility from the importer’s bank
overseas to a more familiar bank in the country of the exporter.
Very few risks arise for the exporter because the potential problem areas of the buyer
risk and country risk can be eliminated. However, the exporter must present the correct
documents and comply fully with the terms and conditions of the credit. Failure to do
so could result in the exporter losing the protection of the credit.
Bills for Collection
Trade collections are initiated when an exporter draws a bill of exchange on an
overseas buyer. This is forwarded by the exporter’s bank in the importer’s country.
Such collections may be either ‘documentary’ or ‘clean’ 2. A documentary collection is
one in which the commercial documents and, if appropriate, the documents of title to

30
 the goods are enclosed with the bill of exchange. These are sent by the exporter’s bank
to a bank in the importer’s country together with instructions to release the
documentation against either payment or acceptance of the bill.
The risks that the exporter has to face are that the importer fails to accept the bill of
exchange or dishonours an accepted bill3 upon maturity. This means that the exporter
may have to consider shipping the goods back to the UK, finding an alternative buyer
or even abandoning the consignment, all of which could be expensive.
In many areas of the world it is common practice to defer presentation 4, payment or
acceptance until arrival of the carrying vessel. Collection and remittance charges can
also be relatively high.
If the exporter retains control over the goods by remitting a full set of Bills of Lading 5
through the intermediary of the banking system, control of the goods will be handed
over to the importer only against payment or acceptance of the bill by the importer. If
the documents are released against the importer’s acceptance of the bill, control of the
goods is lost and the accepted bill of exchange may be dishonoured at maturity.
Advance Payment
Exporters receive payment from an overseas buyer in full, or in part, before the goods
are dispatched. This means that the exporter has no risks associated with non-payment.
1
This bank is then known as the confirming bank.
2
Clean means that no documents are involved.
3
The importer does not pay, although he had previously agreed to pay.
4
This means to delay passing the bill to the importer.
5
This means sending all the necessary shipping documents.
Reading tasks
A Understanding main points
Read the above text about payment methods for exporters and write the four methods
in the correct positions according to their risks for the exporter.
Least secure Payment method: …………….open account...……...

……………………………………….
Most secure
………………………………………

………………………………………

31
B Understanding details
Mark these statements T (true) or F (false) according to the information in the text.
Find the part of the text that gives the correct information.
Open account
1. The importer pays for the goods after receiving the documents. T
2. There is no contract involved.
3. The exporter must be able to trust the buyer.
Documentary credit
4. If a letter of credit is issued, the importer’s bank agrees to pay for the goods
without conditions.
5. If a letter of credit is confirmed, the exporter’s bank takes responsibility for
payment.
Bills for collection
6. Commercial documents and the document of title are always enclosed with a
bill of exchange.
7. Importers may not accept the bill of exchange until the goods arrive.
8. Exporters can keep control of goods by sending bills of lading through the
banking system.
9. Exporters reduce risk if documents are released against acceptance of the bill
rather than payment.
Advance payment
10. This means that the importer has to pay before any goods are dispatched.

Open account Exporters must comply with the conditions of the credit
C Informationcredit
Documentary search documents.
Matchfor
Bills thecollection
risks (a-g) with the payment methods.
Importers may delay payment.
Advance payment Importers may not pay at all.
It takes a long time to process payment in some countries.
Importers may not accept the bill of exchange.
Bank charges may be high.
32 take care to present the correct documents.
Exporters must
Vocabulary Tasks
A Key terms
Match these terms with their definitions. Example: 1 b

invoice document that shows details of goods being transported; it

clean collection entitles the receiver to collect the goods on arrival

documentary collection list of goods sold as a request for payment

bill of exchange bank that issues a letter of credit (i.e. the importer’s bank)
bank that receives payment of bills, etc. for their customer’s
bill of lading
account (i.e. the exporter’s bank)
document of title
document allowing someone to claim ownership of goods
issuing bank
payment by bill of exchange to which documents are not
collecting bank
attached
confirming bank
signed document that orders a person or organization to pay a
letter of credit fixed sum of money on demand or on a specified date
bank that confirms they will pay the exporter on evidence of
shipment of goods
method of financing overseas trade where payment is made by
a bank in return for delivery of commercial documents,
provided that the terms and conditions of the contract are met
B Word search
payment by bill of exchange to which commercial documents
Find a word or phrase in the(and
text that has a similar
sometimes meaning.
a document of title) are attached
1. promise or guarantee given to or by a bank (para 2)
u…………………..
2. load of goods sent to a customer (para 7)

33
 c……………………
3. person or company that acts as a middleman in a transaction (para 9)
i……………………
4. date when a bill of exchange is due for payment (para 9)
m………………………
C Complete the sentence
Use an appropriate form of the words in the box to complete the sentences which
describe the procedure for documentary collection.
Draw accept dishonour release remit forward dispatch present
present
1. The first step the exporter takes is to ask his bank to ….draw….. a bill of
exchange on the overseas buyer.
2. The exporter’s bank ………………. the bill of exchange, together with the
commercial documents, to the importer’s bank.
3. At the same time, the exporter…………………. the goods.
4. The exporter must take care to ………………….the correct documents to the
bank.
5. When the importer………………….the bill of exchange, the bank
will……………….the documents of title to the goods.
6. If the importer…………………..the bill, the exporter may have to find an
alternative buyer or ship the goods back again.
7. In some parts of the world, banks may be slow to
………………………..payment to the exporter’s bank.

D Further Discussion.
1. The above reading describes the risks of each payment method from the
exporter’s point of view. What are the risks for the importer? Which methods
will be secure and why?
2. Imagine you are a banker talking to one of your customers who has never
exported before. Explain how documentary credit works.
3. Prepare a list of recommendations for either exporters or importers.

34
Reading 2: How a letter of credit works
1 Read about the first four steps in a transaction involving a letter of credit, and
number the steps 1 to 4, using the diagram below to help you.
 The advising bank authenticates the letter of credit and sends the beneficiary
(the seller) the details. The seller examines the details of the letter of credit to
make sure that he or she can meet all the conditions. If necessary, he or she
contacts the buyer and asks for amendments to be made.
 The applicant (the buyer) completes a contract with the seller.
 The issuing bank (the buyer’s bank) approves the application and sends the
letter of credit details to the seller’s bank (the advising bank).
 The buyer fills in a letter of credit application form and sends it to his or her
bank for approval.

2 Now read about the next six steps, and number them 5 to 10 using the diagram
below.
 If the documents are in order, the advising bank sends them to the issuing bank
for payment or acceptance. If the details are not correct, the advising bank tells
the seller and waits for corrected documents or further instructions.
 The advising/confirming bank pays the seller and notifies him or her that the
payment has been made.
 The issuing bank advises the advising (or confirming) bank that the payment
has been made.
 The issuing bank (the buyer’s bank) examines the documents from the advising
bank. If they are in order, the bank releases the documents to the buyer, pays the

35
 money promised or agrees to pay it in the future, and advises the buyer about
the payment. (If the details are not correct, the issuing bank contacts the buyer
for authorization to pay or accept the documents.) The buyer collects the goods.
 The seller presents the documents to his or her bankers (the advising bank). The
advising bank examines these documents against the details of the letter of
credit and the International Chamber of Commerce rules.
 When the seller (beneficiary) is satisfied with the conditions of the letter of
credit, he or she ships the goods.

36
 Unit 5. Marketing

Discuss these questions:

- What is a definition of marketing?

- Can selling really become superflous, even if the customer is ready to buy?

The Centrality of Marketing

Most management and marketing writers now distinguish between selling and
marketing. The ‘selling concept’ assumes that resisting consumers have to be
persuaded by vigorous hard-selling techniques to buy non-essential goods or services.
Products are sold rather than bought. The ‘marketing concept’, on the contrary,
assumes that the producer’s task is to find wants and fill them. In other words, you
don’t sell what you make, you make what will be bought. As well as satisfying existing
needs, marketers can also anticipate and create new ones. The markets for the
Walkman, video recorders, video game consoles, CD players, personal computers, the
internet, mobile phones, mountain bikes, snowboard, and genetic engineering, to
choose some recent examples, were largely created rather than identified.

Marketers are consequently always looking for market opportunities- profitable

possibilities of filling unsatisfied needs or creating new ones in areas in which the
company is likely to enjoy a differential advantage due to its distinctive competencies
(the things it does particularly well). Market opportunities are generally isolated by
market segmentation. Once a target market has been identified, a company has to
decide what goods or service to offer. This means that much of the work of marketing
has been done before the final product or service comes into existence. It also means
that the marketing concept has to be understood throughout the company as much as in
the marketing department itself. The company must also take account of the existence
of competitors who always have to be identified, monitored and defeated in the
research for loyal customers.

Rather than risk launching a product or service solely on the basis of intuition or
guesswork, most companies undertake market research (GB) or marketing research
(US). They collect and analyse information about the size of potential market, about
consumers’ reactions to particular products or service features, and so on. Sale
representatives, who also talk to customers, are another source of information.

Once the basic offer, e.g. a product concept, has been established, the company has to
think about the marketing mix, i.e. all the various elements of a marketing program,
their integration, and the amount of effort that a company can expend on them in order

37
to influence the target market. The best-known classification of these elements is the
‘Four ps’: product, place, promotion and price. Aspects to be considered in marketing
products include quality, features (standard and optional), style, brand name, size,
packaging, services and guarantee. Place in a marketing mix includes such factors as
distribution channels, locations of point of sale, transport, inventory size, etc.
Promotion groups together advertising, publicity, sales promotion, and personal
selling, while price includes the basic list price, discounts, the length of the payment
period, possible credit terms, and so on. It is the job of product manager to look for
ways to increase sales by changing the marketing mix.

It must be remembered that quite apart from consumer markets (in which people buy
products for direct consumption) there exists an enormous producer or industrial or
business market, consisting of all the individuals and organizations that acquire goods
and services that are used in the production of other goods, or in the supply of services
to others. Few consumers realize that the producer market is actually larger than
consumer market, since it contains all the raw materials, manufactured parts and
components that go into consumer goods, plus capital equipment such as buildings and
machines, supplies such as energy and pens and paper, and services ranging from
cleaning to management consulting, all of which have to be marketed. There is
consequently more industrial than consumer marketing, even though ordinary
consumers are seldom exposed to it.

Reading comprehension tasks

1. Which of the following three paragraphs most accurately summarizes the text and
why?
First summary:
Marketing means that you don’t have to worry about selling your product, because you
know it satisfies a need. Companies have identified market opportunities by market
segmentation: doing market research, finding a target market, and introducing the
right product. Once a product concept has been established, marketers regularly
have to change the marketing mix – the product’s features, its distribution, the way
it is promoted, and its price – in order to increase sales. Industrial goods –
components and equipment for producers of other goods – have to be marketed as
well as consumer goods.
Second summary:
The marketing concept has now completely replaced the old-fashioned selling concept.
Companies have to identify and satisfy the needs of particular market segments. A
product’s features are often changed, as are its price, the places in which it is sold,
and the way in which it is promoted. More important than the marketing of
consumer goods is the marketing of industrial or producer goods.

38
Third summary:
The marketing concept is that a company’s choice of what goods and services to offer
should be based on the goal of satisfying consumer’s needs. Many companies limit
themselves to attempting to satisfy the needs of particular market segments. Their
choice of action is often the result of market research. A product’s features, the
methods of distributing and promoting it, and its price, can all be changed during
the course of its life, if necessary. Quite apart from the marketing of consumer
products, with which everybody is familiar, there is a great deal of marketing of
industrial goods.
2. Look at the following diagrams from Marketing Management by Philip Kotler.
According to text, which of these diagrams best illustrates a company that has adopted
the marketing concept?

Exercises
Exercise 1: Match the terms with their definition:

1. Distribution channel A. All the companies or individuals involved in

2. To launch a product moving a particular good or service from the
3. Market opportunities producer to the consumer
4. Market research B. An idea for a new product, which is tested
5. Market segmentation with target consumers before the actual
6. Packaging product is developed
7. Points of sale C. Attributes or characteristics of a product:
8. Product concept quality, price, reliability, etc.
9. Product feature D. Dividing a market into instinct group of

39
 10. Sales representative buyers who have different requirements or
buying habit
E. Places where goods are sold to the public-
shops, stores, kioshks, market, stalls, etc.
F. Possibilities of filling unsatisfied needs in
sectors in which a company can profitably
produce goods or services
G. Someone who contacts existing and potential
customers and tries to persuade them to buy
goods or services
H. Collecting, analysing and reporting data
relevant to a specific market situation ( such
as a proposed new product)
I. To intro duce a new product onto the market
J. Wrappers and containers in which product are
sold

Exercise 2: Categorize the following aspects of marketing according to the well-known “4P’s”
classification of the marketing mix – product, price, promotion and place.

Adverising After-sale service Brand name Cash discount

Commercials Credit terms Characteristics Distribution channels
Franchising Free sample going-rate Guarantee
Inventory Line-filling List price Mailings
Market coverage Market penetration Market skimming Media plan
Optional features Packaging Payment period Personal selling
Point of sales Poster Prestige pricing Production costs
Public relations Publicity Quality Quantity discounts
retailing Sizes Sponsorship Style
transportation Vending machines Warehousing Wholesaling

Exercise 3: Complete the eight sentences below, by adding an example from the
second box:

1. Conversional marketing is the difficult task of reversing negative demand,

2. Stimulational marketing is necessary where there’s no demand,
3. Developmental marketing involves developing a product or service for which
there is clearly a talent demand,
4. Remarketing involves revitalizing falling demand,
5. Synchromarketing involves altering the times pattern of irregular demand,
6. Maintenance marketing is a matter of retaining a current (may be full) level of
demand

40
 7. Demarketing is the attempt (by governments rather than private businesses) to
reduce overfull demand, permanently or temporarily.
8. Countermarkeing is the attempt to destroy unwholesome demand for products
that are considered undesirable,

a. eg. a non-polluting and fuel-efficient car.

b. eg. cigarettes, drugs, handguns, or extremist political parties.
c. eg. for churches, inner city areas, or ageing film stars.
d. eg. for some roads and bridges during rush hours.
e. eg. for public transport between rush hours, or for ski resorts in the summer.
f. eg. for dental work, or hiring disable people.
g. in the face of competition or changing tastes.
h. which often happens with new products and services.

Exercise 4: Match up these marketing actions with the eight tasks described
above:

i. Alter the pattern of demand through flexible pricing, promotion, and other
incentives.
j. Connect the benefits of the product with people’s needs and interests.
k. Find new target markets, change product features, develop more effective
communication.
l. Find out why people dislike the product, and redesign it, lower prices, and use
more positive promotion.
m. Increase prices, reduce availability, make people scared.
n. Keep up or improve quality and continually measure consumer satisfaction.
o. Measure the size of the potential market and develop the goods and services
that will satisfy it.
p. Raise prices, reduce promotion and the level of service.
Exercise 5: Complete the text with the words in the box:

Advertising budgets consumer tastes differentiate products

Early adopters making a loss reaches saturation
Similar offerings withdrawn from the market

The classic product life cycle is Introduction, Growth, Maturity and Decline. In the
introduction stage the product is promoted to create awareness. It has low sales and
will still be (1).......................................... If the product has few competitors, a
skimming price strategy can be used (a high price for (2)........................................
which is then gradually lowered). In the Growth phase sales are rising rapidly and
profits are high. However, competitors are attracted to the market with
(3)................................................ The market is characterized by alliances, joint
ventures and takeovers. (4)............................ are large and focus on building the brand.

41
In the Maturity phase sales growth slows and then stabilizes. Producers attempt to
(5)......................................... and brands are key to this. Price wars and competition
occur as the market (6)............................................ In the Decline phase there is a
downturn in the market. The product is starting to look old-fashioned or
(7) ..................................... have changed. There is intense price-cutting and many
products are (8) ................................

Exercise 6: Boston Matrix

- How useful do you think the Boston Matrix is?

- Can you think of a potential star product or service that your company
doesn’t make or offer?

42
 Unit 6. Transport
1 Modes of Transport

Transport costs represent a large proportion of the total costs of imported goods. The
importer who is well-informed about the various modes of transport available and their
relative advantages will be in a stronger position to control his costs.

The amount of control a buyer has over the transport of his consignment will depend
upon the terms of trade. If the importer buys his goods ex-works, he will be totally
responsible for moving them from the supplier’s factory to his own location. If the
terms are CIF, the seller will be responsible for the shipping contract and will add a
margin to his costs to allow for possible increase in fright or insurance costs. An
importer may often prefer FOB terms. He then has the option of handling the transport
himself or of instructing an agent to arrange things on his behalf.

About 75% of all goods in the world are carried by sea. Sea transport may be slow but
it is less expensive. It is particularly suitable for high volume and low value goods, for
products moved in bulk, like grain or oil and for cargoes of varying shapes and
weights. Nowadays, cargo is frequently packed into containers for quicker handling
and carried in container ships. However, suitable handling facilities must be available
at ports of destination.

Where speed is essential, air transport will be the answer. Fresh flowers, fashion goods
or urgently required spare parts or medical suppliers are normally sent by air. Air
freight charges are higher but the service is quicker. There is less risk of loss or
damage and insurance premiums may be lower.

Road transport is cheaper than air and can provide a door-to-door service. Whether this
is a viable option will depend upon the distances involved and the quality of roads.
Special trucks have been designed to carry a variety of bulk goods. Group shipments
(known as groupage) can be packed together in containers to be carried all the way by
road or part by road and part by sea on roll on/roll off (Ro-Ro) vessels.

Rail transport offers another alternative. Many railway companies now offer a
container service and there are special wagons for carrying bulk liquids and dry cargo.
In some places special rail on/rail off (Ra-Ra) ferries can take railway wagons by sea
for part of their journey.

Cargoes moving from internal points situated on navigable rivers or canals can be
carried by barge to deepwater ocean ports. Special barges exist which can be swung on
the decks of specially designed barge-carrying ships, LASH ships (lighter aboard

43
ship). At the port of destination they are lowered over the side to go for unloading at
the sea port or at a point further up an inland waterway.

A final option, suitable for small quantities, is to send goods by parcel post. The postal
service provides an easy but not inexpensive way of moving goods. It has the
advantage of having access to a vast international network and the documentation is
less complicated than for other forms of transport.

The whole question of transport is a complex and specialized business. While it is

important that importers should be aware of the options open to them, it is often
advisable, particularly for large orders to use the services of an expert. Freight
forwarders provide a range of services concerned with the packing, insuring and
transporting of goods. It may prove more economical in the long run to pay for this
specialized service.

2 Key words

Groupage - packing together more than one consignment

Barges - flat-bottomed freight boat for shallow waters

Bulk - loose, unpackaged cargo

Canal - man-made waterway

Navigable - allowing the passage of ships

Lighter - barge-type boat

3 Vocabulary Extension

Find words in the text which mean the opposite of the words listed

ill-informed

shallow

to lift

coastal

expensive

in the past

44
4 Comprehension

1)Give each paragraph a heading

2) What are some of the advantages and disadvantages of air transport?

3) Why do some buyers prefer FOB terms?

4) What is a) a Ro-Ro ship, b) a Ra-Ra ship, c) a LASH ship?

5) Explain the meaning of the following:

‘will be in a stronger position’

‘will add a margin to his costs’

‘suitable handling facilities’

‘the options open to them’

‘a viable option’

6) Write a 60 word summary of the text.

7)Discuss the transport options open to importers in your country.

5 Language function

Describing Uses and Applications

Types of Vessel

Ro/Ro vessels are designed to carry trailers and trucks – are designed to...

The LASH carrier has been developed for carrying barges – has been developed for –
ing

Ra/Ra ships are equipped to take railway wagons – are equipped to

Bulk carriers are suited to carrying solid materials in bulk – are suited to –ing

Tankers are used for carrying liquid cargo – are used for –ing

Oil-ore carriers are suitable for solids or liquids – are suitable for

45
6 Oral practice

What are they for?

Explain what these things are for/used for/ designed for (or to be)/suited for/ suitable
for/ developed for/ equipped to (or for):

Cranes sealed tanks crates

Holds tractors bags

Containers pallets hooks

Refrigerated vessels fork-lift trucks barges

7 Language Focus – Revision

Possible and improbable actions

Look at these two extracts from Paragraph 2 of the text:

Do they indicate possible or improbable actions?

If the importer buys his goods ex-works, Possible

he will be totally responsible for
moving them…

If the terms are CIF, the seller will be

responsible for the shipping contract
Improbable

Rewrite them in the box below, changing the verb in the ‘if clause’ to the simple past
tense and the verb in the main clause to the conditional ‘would’. Do these sentences
indicate possible or improbable actions?

Possible

Improbable

8 Language Drill

The prompt on the tape will give conditional sentences in the first conditional
suggesting possible courses of action. Change the tense of the verbs to make them into
improbable or unreal courses of action.

46
Prompt: If the goods are heavy, they will come by sea.

Response: If the goods were heavy, they would come by sea.

Check: If the goods were happy, they would come by sea.

(i.e. The goods probably aren’t heavy)

9 Order of Adjectives

We often use several adjectives to describe something or someone. This is the ‘most
comfortable’ order in which to put them:

No. Condition Colour Origin Material Purpose Noun

or size
Two 25,000 t - Korean Steel Container Ships
Six Modern White Danish Plastic Dining chairs

Re-arrange these words:

40 machines portable Japanese calculating

100 Spanish round bowls wooden salad

a fleet of cargo new British planes

a group of experts experienced Italian engineering

two eight-wheeled refrigerated Swedish large trucks

10 Which mode of transport?

Some major factors to consider:

NATURE OF THE GOODS

DIMENSIONS FRAGILITY
Bulk/shape/limits for air, road and rail Special packing. Special stowage
WEIGHT PERISHABILITY
Lifting gear available? Refrigerated ships/containers or speed
Limits for air
VALUE PILFERABILITY
Higher valued can be charged ‘ad Secure packaging. Few intermediate
valorem’ handlings.

47
 THE TIME FACTOR

Fast transport often: - reduces distribution costs

- Reduces cost of finance tied up in

FREIGHT RATES transit

Sea Freight Rates:

a)Liner Rates (Scheduled services)

- According to weight - more expensive than

or measurement sea freight
- Set rates for - charged by weight
commodities moved up to a certain
regularly volume
- stowage factor – - reduced rates ,
weight/bulk newspapers,
periodicals
- ad valorem – - surcharge for
especially for high valuable cargo

1)Voyage charter (contract per voyage)

11) Time charter (contract for period of time)

11 Oral Activity

In group of 4 discuss what mode of transport would be appropriate for each cargo
listed below. Discuss its characteristics, how urgently it might be required and whether
the cost might be higher/ lower by sea or air. Give as many reasons as you can.

Give Reasons for your decisions using: because, as, due to the fact that; since (used
like 'because')

Make Deductions about what might be or could be the situation.

48
Use conditional questions and statements - using 'if' or 'unless'

CARGO Transport mode Reasons

Regular deliveries of
10,000t scrap metal

(Darwin to Kobe)
2500 day -old chicks

(Antwerp to Algiers)
50 air-conditioning units

(Milan to New Delhi)

Materials for training
course

(London to Maputo)
1200t beef

(Auckland to Nairobi)
3 diesel locomotives

(Marseilles to Gabon)
2 kg platinum

(London to Riyadh)

Comparing Notes

Once your lists are complete, two students from each group join another group. Report
and quote your own group's decisions and discuss the reasons you gave.

12 Language Focus

The Future Continuous Tense

Future of 'to be' + present participle (-ing)

They will be unloading the bananas tomorrow

13 Oral activity

49
Imagine that this photograph is 'frozen' on a video screen; the 'pause' button has been
pressed. Discuss what will be happening on the screen in the next few minutes aft er
the 'pause' button is released.
They will be (un)loading the containers.....
Lifting the chassis
Lowering
Driving on/off
Swapping
Placing
14 Compare the use of the present continuous:
Eg. They are unloading the bananas tomorrow.
Use of the present in this way expresses intention. The time of the future action must
be given - tomorrow, in this case. Using the future continuous does not express
intention.
Transgabon rails laid

The booue-Franceville sectin of the Transgabonese Railway has been officlaly

openned by President Omar Bongo of the Republic of Gabon.

This 311 km single-track stratch, which will be opened to revenue traffic next August,
is the second and last stage of the 648 km trunk line designed to link the Atlantic port
of Owendo near the capital Librevill, with Franceville in the eastern part of the
country.

Construction of the Transgabonese, which represents the largest railway engineering

project launched on the continent of Africa in the last decade, started 13 years ago and
will have cost some 24 billion French Francs.

The new line which is one of the very few in Africa to be built to standard gauge
(1435 mm) is seen by the Public Authorities as a powerfull instrument in national
policy, since it will be only open up the eastern part of the country and encourage
settlements along the route, but will also facilitate transport of local raw materials
such as oil - the main resource - uranium and manganese.

About three million tonnes of freight will be handled each year on the new line.

Source: 'International Freighting Weekly', 19 Feb 1987

50
15 Comprehension:

1. What is the main Atlantic port of Gabon?

2. Which two places did the first stage of the railway link?

3. When will the third stage be built?

4. How much track has been laid in stage 2?

5. How does this track differ from many others in Africa?

6. Where is the country's capital in relation to the port?

7. What does the figure 1435 mm represent?

8. What main products will be carried on this railway?

9. What other social and economic benefits to Gabon are mentioned?

10. What is the railway designed to do?

16 Vocabulary extension
Tick the right meaning of thse words as they are used in the article in 14
1. Track- continuous line, line on a map, line of rails
2. Gauge - a measuring instrument, a distance between 2 rails, a standard measure
3. Settlement- places where people live, small houses, low lyding areas of land
4. Stretch- an expanded area, a section, a continuous expanse or path
5. Trunk line- a major route, a line for special vehicles, a freight route
6. Launched- started on a course, set afloat, commissioned
7. Powerful- strong, of great influence, having authority
8. Revenue- trade, commercial, income
17 Facts and Figures
Say these figures aloud. Then write the questions to which these are the answers. The
information is in 14
Allow (to) force (to) make it easier (to)
1) 13 2) 648km 3) 311 km
Enable (to) prevent (from) make it more difficult (to)
4) 24bn Ffr 5) 1435mm 6) 3,000,000 t
Encourage (to) save (from)

Discourage (from) stop (from)

18 Language Focus - 'Effect' verbs
Eg. Having the extended line will ) – allow goods to travel more easily

The new railway line will ) – save goods from being transshipped from Booue.
51
) – encourage people to live
Good and bad effects

Using some of the verbs in the list, discuss and then write sentences about some of the
effects the new line will have on:

1. The economy of Gabon

2. The speed of inland transport

3. The road transport business

4. The eastern part of Gabon

5. The development of new settlements

6. The transport of raw materials

7. The volume of business of the railway

8. The packaging of goods for import and export

9. Transshipping goods at Booue

A report

You have been asked by your Chief of Department to write a report on up-to-date
ways of transporting different types of cargo, either a)by sea or b) by air, with
particular reference to your own country’s imports. In your report you are expected
to make some recommendations for possible ways of speeding up unloading and
on-carrying procedures. Use the information in the chart as a guide.

Some notes to help you:

52
Opening paragraph The purpose of this report is to examine
….. with reference to cargoes coming by
sea/air.
Background - Existing situation. Main
categories of transported goods…

- Transported in bulk

- General cargo (unitized/ non-

unitized)

- Existing facilities

Recommendations - Eg. Improvements to handling

equipment/ speed of unloading/
transshipment.
Background to Recommendations - Reasons for recommendations.
Limitations of present system,
etc.
Action - What could be done as a first
step.

53
 Unit 7. Marine Insurance on Goods

I. Terms and definitions

1. Maritime insurance on goods: Bảo hiểm vận chuyển hàng hóa đường biển
2. Insurance premium: Phí bảo hiểm là khoản tiền mà bên mua bảo hiểm phải đóng
cho doanh nghiệp bảo hiểm theo thời hạn và phương thức do các bên thoả thuận trong
hợp đồng bảo hiểm.

3. Scope of insurance: Phạm vi bảo hiểm

4. Insurer: Người bảo hiểm là doanh nghiệp được thành lập, tổ chức và hoạt động theo
quy định của Luật kinh doanh bảo hiểm và các quy định khác của pháp luật có liên
quan để kinh doanh bảo hiểm, tái bảo hiểm.
5. The insured goods: Hàng hóa được bảo hiểm
6. Loss of the insured goods caused by: Tổn thất hàng hóa được bảo hiểm gây ra
bởi(do các nguyên nhân)
7. Gerneral average sacrifice: Hy sinh tổn thất chung là những hy sinh hoặc chi phí bất
thường được thực hiện một cách có ý thức và hợp lý vì sự an toàn chung nhằm cứu
tàu, hàng hóa, tiền cước vận chuyển hàng hóa, tiền công vận chuyển hành khách thoát
khỏi hiểm họa chung
8. Total loss: Tổn thất toàn bộ > < Partial loss: Tổn thất bộ phận
9. Salvage charge: Chi phí cứu hộ
10. Reasonable expenses incurred for surveying and asscertaining loss: Chi phí hợp lý
phát sinh cho việc giám định và đánh giá tổn thất
11. To cover extraneous risk: bảo hiểm cho rủi ro phu
12. Exclusion: Loại trừ bảo hiểm => excluded cause: nguyên nhân bị loại trừ
13. Commencement and termination of insurance: bắt đầu và kết thúc trách nhiệm bảo
hiểm
14. Amount of insurance(Insured amount, sum insured): Số tiền bảo hiểm
15. Settlement of claim: Giải quyết khiếu nại
16. Insurance Policy: Đơn bảo hiểm
17. Certificate of Insurance (Shedule): Giấy chứng nhận bảo hiểm

54
18. Application Form: Giấy yêu cầu bảo hiểm
19. Endorsement: Sửa đổi bổ sung
20. Double insurance: Bảo hiểm trùng là trường hợp bên mua bảo hiểm giao kết hợp
đồng bảo hiểm với hai doanh nghiệp bảo hiểm trở lên để bảo hiểm cho cùng một đối
tượng, với cùng điều kiện và sự kiện bảo hiểm.
21. Average Bond: Cam kết tổn thất chung
22. Bailees: Người nhận ủy thác hàng hóa
23. Port of call: Cảng dọc đường
24. Port of refuge: Cảng lánh nạn
25. Contract of affreightment: Hợp đồng vận chuyển
26. Name of vessel: Tên tàu biển
27. Kind of conveyance: Loại phương tiện vận chuyển
28. Place of dispatch: Nơi bắt đầu vận chuyển
29. Transshipment: Chuyển tải
30. The aggregate of the invoice value of the goods: bao gồm giá trị hàng hóa trên hóa
đơn

II. Some articles of Marine Insurance On Goods

Chapter 1: General provisions
Article 1
The present conditions shall apply to maritime insurance on goods and also anticipated
profit, insurance premium, freight and expenses connected with the carriage of goods
by sea, including incidental transit by land, inland waterways or by air.
Chapter 2: Scope of insurance
Article 2
1. An insurance contract may be concluded on one of the following conditions:
CONDITION A
THE INSURER shall under this condition be liable for all risks of loss of or damage to
the insured goods except as provided in Article 6 and Article 7 below.

55
CONDITION B
THE INSURER shall under this condition be liable for, except as provided in Chapter
III below:
a) Loss of or damage to the insured goods reasonably attributable to: Fire,
explosion, ext.
b) Loss of or damage to the insured goods caused by: General average sacrifice,
jettison, ext.
c) Total loss of any package lost overboard or dropped whilst loading on to, or
unloading from vessel or craft.
d) Loss of the insured goods in consequence of the carrying vessel or
conveyance being missing.
CONDITION C
The Insurer shall under this condition be liable for, except as in Chapter III below:
a) Loss of or damage to the insured goods reasonably attributable to: Fire,
explosion, ext.
b) Loss of or damage to the insured goods caused by: General average sacrifice,
jettison, ext.
c) Loss of the insured goods in consequence of the carrying vessel or
conveyance being missing.

2. Whether the goods are insured on Condition “A” , “B” or “C” the Insurer shall, in
each case, be liable for the following losses and expenses:
a) General average and salvage charges, adjusted or determined according to
the contract of affreightment and/or the governing law and practice,
incurred to avoid or in connection with the avoidance of the loss from any
cause except those excluded in Chapter III or elsewhere in the insurance
contract. In case of General Average, however, THE INSURER should
always be consulted before filling up and signing the Average Bond.
b) Reasonable expenses and costs incurred by the Assured and his servants and
agents in adverting or minimising loss of or damage to the insured goods, or
pursuing recovery from and institute legal proceedings against carriers,
bailees or other third parties, provided that such expenses and costs shall be
limited to those as are in respect of loss or damage for which THE
INSURER is to be liable.

56
 c) Charges for unloading, storing and forwarding the insured goods that were
properly and reasonably incurred at an intermediate port of call or port of
refuge as a result of the operation of a risk covered by the insurance
contract.
d) Reasonable expenses incurred for surveying and ascertaining loss or
damage for which THE INSURER is to be liable.
e) Such proportion of liability under the contract of affreightment “Both to
Blame Collision” Clause as is in respect of a loss for which THE INSURER
is to be liable. In the event of any claim by shipowners under the said
Clause the Assured agrees to notify THE INSURER who shall have the
right, at his own cost and expense to defend the Assured against such claim.
Article 3
In case the goods are insured on Condition “B” or “C” THE INSURER may, upon the
request of the Assured and subject to an additional premium to be agreed, extend to
cover one or more of the following extraneous risks: Theft, pilferage and/or Non-
delivery, ext.
Chapter 3: Exclusions
Article 6
Unless otherwise agreed, THE INSURER shall not be liable for loss, damage or
expense caused by : War, revolution, rebellion, ext.
Chapter IV: Commencement and termination of insurance
Article 9
1. The liability under the insurance contract attaches from the time the insured
goods leave the warehouse or place of storage at the place named in the
insurance contract for the commencement of the transit, continues during the
ordinary course of transit and terminates either
a) On delivery to the Consignees’ or other final warehouse or place of storage
at the destination named in the insurance contract;
b) On delivery to any other warehouse or place of storage, whether prior to or
at the destination named in the insurance contract, which the Assured elects
to use either
(i) for allocation or distribution, or
(ii) for storage other than in the ordinary course of transit, or

57
 c) On the expiry of 60 (sixty) days after completion of discharge overside of
the goods hereby insured from the oversea vessel at the final port of
discharge.
Whichever shall first occur.
2. If, after discharge overside from the oversea vessel at the final port of discharge,
but prior to termination of this insurance, the goods are to be forwarded to a
destination other than that to which they are insured hereunder, this insurance,
whilst remaining subject to termination as provided for above, shall not extend
beyond the commencement of transit to such other destination.
3. This insurance shall remain in force (subject to termination as provided for
above and to the provisions of Article 10 below) during delay beyond the
control of the Assured, any deviation, forced discharge, reshipment or
transshipment and during any variation of the adventure arising from the
exercise of a liberty granted to shipowners or chatterers under the contract of
affreightment
Chapter V: Conclusion of insurance contract
Article 13
1. The Applicant shall, when apply for insurance, fill in an application form
specifying the following items:
a) Name of the Assured;
b) Name of the goods to be insured;
c) Nature and type of packing, marks of the goods to be insured;
d) Weight or quantity of the goods to be insured;
e) Name of vessel or kind of conveyance;
f) Manner of the shipping of the goods to be insured (under/on deck, in bulk
etc);
g) Place of dispatch, transshipment and destination of the goods to be insured;
h) Date of departure of the conveyance or vessel;
i) Value of the goods to be insured and amount of insurance;
j) Conditions of insurance;
k) Place of settlement of claims.

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 The Applicant shall in addition disclose to THE INSURER any further material
circumstances know to him for the judgment of the risks by THE INSURER. If
the applicant can not, when concluding the insurance contract, furnish complete
information as required herein, he is bound to supplement forthwith to THE
INSURER the missing details upon being aware thereof.

2. An insurance contract shall be deemed to be concluded when THE INSURER

accepts the insurance in writing. THE INSURER shall issue an Insurance Policy
or a Certificate of Insurance on the basis of the Application Form.

3. Unless otherwise agreed in writing, the Assured shall pay the insurance
premium to THE INSURER at the time of receipt of the Insurance Policy or
Certificate of Insurance. THE INSURER shall only be liable for any loss or
damage incurred after the insurance premium was paid.

4. If after the conclusion of the insurance contract there occurs any change in the
insured risk especially if the extent of risk is thereby increased, the Assured
shall be bound to give immediate notice to THE INSURER of such change or
occurrence upon being aware thereof.

THE INSURER shall, upon receipt of such notice, issue an Endorsement and
may on the extent of such change or occurrence, require an additional premium.
Tv

Chapter VI: Insurable value and insured amount

Article 17

The insured amount of the insured goods shall be the value declared by the Assured.

If the Assured fails to declare the insured amount, the insurable value shall be
applicable and computed as follows:

The insurable value of the insured goods shall under these conditions be the aggregate
of the invoice value of the goods hereby insured (or actual value at the place of
shipment if there is no invoice), freight and insurance premium.

59
Chapter VII: Double insurance and increased value insurance

Article 20

Where the same goods are insured with several insurers and where the aggregate of the
insured amounts exceeds the insurable value, the liability of all the Insurers shall be
limited to the insurable value with each insurer liable for such proportion part as the
respective insured amount bears to the aggregate of the insured amounts.

If the insurance liability has not commenced, the Assured may require the cancellation
of the insurance contract or a reduction of the insured amount and the return of an
appropriate insurance premium, provided that THE INSURER shall have the right to
receive charges for the cancellation.

V. Review

Question 1: Why do we have to buy Marine Insurance on Goods?

Answer 1: The Insurer shall be liable for all risks or some risks of loss to the insured
goods under Marine Insurance on Goods. In another way, the insured will be
compensated under Marine Insurance on Goods when risk of loss to the insured goods
happens.

Question 2: Give some examples of loss which are within scope of insurance for each
condition A, B or C.
Answer 2: Some examples of loss:
Condition A: Ship sinks resulting in damage to goods, explosion of ship causes to loss
of goods, ext.
Condition B: Goods is on fire, total loss of any package is lost overboard, ext.
Condition C: Loss of the insured goods is caused by general average sacrifice, loss of
the insured goods in consequence of the carrying vessel being missing, ext.

Question 3: What does “exclusion” means?

Answer 3: The Insurer shall not be liable for loss to the insured goods by risk on
exclusion. In another way, the insured will not be compensated when loss to the
insured goods happens by risk on exclusion.

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Question 4: Name the items of insurance contract only relating to goods
Answer 4: Name of the items are only relates to goods:
b) Name of the goods to be insured;
c) Nature and type of packing, marks of the goods to be insured;
d) Weight or quantity of the goods to be insured;
i) Value of the goods to be insured;
Question 5: The insured amount is 900,000 USD and goods is covered with three
insurance companies. If total loss happens, how much will each insurance company be
liable for?
Answer 5: Article 20 of Marine Insurance on Goods provides as follows: “the liability
of all the Insurers shall be limited to the insurable value with each insurer liable for
such proportion part as the respective insured amount bears to the aggregate of the
insured amounts”. Each insurance company will indemnify 300,000 USD

61
 Unit 8. Multinationals
Big foreign companies – like Coca-Cola and Ford – have set up subsidiaries in many
developing countries. How can the subsidiaries benefit these countries? Is this kind of
investment always useful? Explain your answer.

Multinationals are large international companies which produce goods in several

countries. Some well-known ones are Ford, Shell, Coca-Cola, Sony, Akzo and
Unilever. Their turnover is huge, being greater in some cases than the national income
of countries such as Switzerland or the Netherlands. Because they are so big they
attract a lot of attention. Usually their business methods are carefully watched by
foreign governments.

People are particularly interested in their activities in poor and developing countries.
They ask the question: How have multinationals improved the economies of these
countries? In reply, a manager working in a multinational will say something like this:

‘Well, for a start, we provide the capital which poor countries need for their economic
growth. The point I’m trying to make is that our capital, together with local savings,
finances their industries. Another thing, we share our technology with local business –
we introduce our scientific and technical methods to them. And they increase the
productivity of their workers.

Don’t forget also that we produce a wide variety of goods. And let’s face it, we employ
thousands of people all over the world. No one can accuse us of not paying good
wages. So, I think you’ll agree, we’re responsible for raising living standards.’

Critics of multinationals do not accept such arguments. They say that the big
corporations are not major suppliers of capital. In Latin America, for example,
multinationals have mostly used capital provided by local banks and investors, and
have not brought in capital from the United States and Europe. Because of this, there is
a shortage of money to finance local businesses. Foreign firms have taken the lion’s
share of the available capital.

The critics agree that multinationals introduce new technology. However, it is often
unsuitable for developing countries. The imported technology is too expensive and
complicated. It has been developed for industrial societies, not for poor countries. In
agriculture, for instance, most countries do not need tractors, which are expensive to
buy and operate. They need better hoes and ox-ploughs.

Another disadvantage of the new technology is that it will probably reduce jobs.
Generally it is labour saving. This is because it comes from the United States and

62
Europe where wage costs are high. Poor countries can do without such technology –
they have large numbers of workers looking for employment.

Two examples prove this point. The building industry used to provide many jobs in the
Third World. Now it employs fewer new workers because cranes, bulldozers and other
labour-saving machinery are replacing them. And in Latin America bigger farms are
using imported machinery to increase production – but employing fewer and fewer
workers.

A. Comprehension

1. Which fact in the first paragraph emphasizes the size of multinationals?

2. According to the multinationals, they bring certain benefits to poor and

developing countries. What, briefly, are those benefits?

3. What criticism of Latin American banks is made in the paragraph 5?

4. Agricultural workers in the Third World often find their condition is made
worse by the actions of multinationals. Explain this statement.

5. What are the following tools or machines used for?

a) a hoe

b) an ox-plough

c) a tractor

d) a crane

e) a bulldozer

B. Vocabulary

1. Complete this passage by using the word in italics.

attitude equity incentives investors levels prosperity

dominate employ train set up bring out

Countries in the Third World have different approaches to foreign investment. Some
welcome foreign firms, encouraging them to (1)…………………… subsidiaries by
offering them tax (2)………………. or cheap loans. These countries believe that the
foreign firms will provide jobs, pay good wages, (3)…………………. local workers,
bring new technology, and contribute to their (4)……………….

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Other countries have a different (5)………………… to foreign investment. They
know that they need the multinationals, but they do not want these firms (6)
………………… important sectors of their economies. Therefore, they (7)
……………….. laws which force foreign companies to sell shares to local (8)
……………….. They insist that local businessmen own a certain percentage of the
foreign firm’s (9)………………. Some governments also make the foreign firm (10)
………………. a certain percentage of local workers at all (11)……………… in the
company.

2. Find an appropriate word for each blank space. In all sections the initial
letter of each word is provided.

a) Most multinational companies are vast enterprises with networks of

(1)s………………… or (2)a……………… throughout the world. Originally,
they expanded overseas because trade barriers such as (3)t……………… and
(4)q……………….. had been set up against their goods.

b) When incomes are rising and business is thriving, in other words, when there is
an (5)e………………. (6)b…………….. in a country, a multinational may
decide to establish a subsidiary there. Later, however, the government of the
country may only allow the company to operate on a (7)j……………….
(8)v…………….. basis, in which case it will compel the company to reduce its
(9)s………………. to a fixed percentage. It could even restrict the subsidiary
by allowing only a fixed proportion of profits to be (10)r……………….

c) The OECD code gave (11)g……………….. on how multinationals should

behave. None of its provisions were (12)l………………. (13)e………………
and therefore some say it lacked legal teeth.

d) A factory whose production resources are not being fully utilized is said to be
suffered from (14)o………………

3. Complete each sentence using an appropriate form of the word in italics.

a) enterprise What we need at the moment is an …………… manager.

b) differ The two products look, taste and feel the same. It is
impossible to

………………. between them.

c) basis She needs more experience, but ………….. she is a first

class buyer.

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 d) tension When I asked for an increase in salary, the atmosphere her
became

somewhat ……………..

e) threaten The leaking of the results of our market survey poses a

serious ……………

to company security.

f) rich The oil …………… of certain Arab states are known to

all.

g) market Our sales director doubts whether this ingenious but

complex toy is

really …………....

h) worry The lack of job opportunities for young people is very

……………….

i) decision Hesitant! Vacillating! Never making up his mind! What an

…………

chairman.

j) remote It is not …………… possible that I shall become head of

this department.

k) intrusion A good chairman in a meeting should not be too

……………

l) involve Unfortunately, our ………….. in this deal has now

become public knowledge.

m) strategy This area is of great …………. importance in our

promotional campaign.

Text 2.

A. Before you read: Discuss these questions

1. Can there be such a thing as a ’world car’? Or should cars be designed to

suit the tastes of different markets? What are the financial and marketing
implications?

65
 2. Which do you think is better for an international company – strong central
control of international operations or decentralized decision-making? Does
it depend on the business the company is in?

FINANCIAL TIMES WEDNESDAY OCTOBER 15

Case study: Ford and Honda

Haig Simonian on two car groups’ different routes to the global market

Rising costs and the worldwide spread of shared tastes in car styling have prompted
the industry’s giants to exploit global economies of scale. But rivals such as Ford and
Honda have approached the task very differently.

Ford is one of the world’s earliest multinationals. Its first foreign production unit was
set up in Canada in 1904 – just a year after the creation of the US parent. For years
Ford operated on a regional basis. Individual countries or areas had a large degree of
autonomy from the headquarters. That meant products differed sharply, depending on
local executives’ views of regional requirements. In Europe the company built
different cars in the UK and Germany until the late 1960s.

Honda, by contrast, is much younger company, which grew rapidly from making
motorcycles in the 1950s. In contrast to Ford, Honda was run very firmly out of Japan.
Until well into the 1980s, its vehicles were designed, engineered and built in Japan for
sale around the world.

Significantly, however, Honda tended to be more flexible than Ford in developing new
products. Rather than having a structure based on independent functional departments,
such as bodywork or engines, all Japan’s car makers preferred multi-disciplinary
teams. That allowed development work to take place simultaneously, rather than being
passed between departments. It also allowed much greater responsiveness to change.

In the 1990s both companies started to amend their organizational structures to exploit
the perceived strengths of the other. At Ford, Alex Trotman, the newly appointed
chairman, tore up the company’s rulebook in 1993 to create a new organization. The
Ford 2000 restructuring program threw out the old functional departments and
replaced them with multi-disciplinary product teams.

The teams were based on five (now three) vehicle centres, responsible for different
types of vehicles. Small and medium-sized cars, for example, are handled by a
European teams split between the UK and Germany. The development teams comprise
staff from many backgrounds. Each takes charge of one area of the process, whether
technical, financial, or marketing-based.

66
Honda, by contrast, has decentralized in recent years. While its cars have much the
same names around the world, they are becoming less, rather than more, standardized.
‘Glocalisation’ – a global strategy with local management – is the watchword.
Eventually the group expects its structure will comprise four regions – Japan, the US,
Europe and Asia-Pacific – which will become increasingly self-sufficient.

Two reasons explain Honda’s new approach. Shifting to production overseas in the
past decade has made the company more attuned to regional tastes. About 1m of
Honda’s 2.1m worldwide car sales last year were produced in the US. A further
104,000 were made in the UK. No other manufacturer has such a high proportion of
foreign output.

Honda engineers also reckon they can now devise basic engineering structures which
are common enough to allow significant economies of scale, but sufficiently flexible to
be altered to suit regional variations. The US Accord, for example, is longer and wider
than the Japanese version. The European one may have the same dimensions as the
Japanese model, but has different styling and suspension settings.

Both Ford and Honda argue their new structures represent a correct response to the
demands of the global market. Much of what they have done is similar, but
intriguingly, a lot remains different.

FINANCIAL TIMES

World business news

I. Reading task

A. Understanding the main points

1. Read the text about two car companies’ global strategies and say which of
these statements apply to Ford and which to Honda.

a) now has a strategy of decentralization.

b) now works in multi-disciplinary teams for car design and development

c) has always worked in multi-disciplinary teams

d) produces more cars abroad than in its home country

e) used to be very decentralized

f) used to be very centralised

g) has divided the world into four regions

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 h) designs and develops all its small cars in Europe

i) has always been flexible and able to respond to change

2. According to the ideas in the text, why do car companies now need to have a
global strategy?

3. How did the two companies change their strategies?

B. How the text is organized: These phrases summarize the main idea of each
paragraph of the text. Match each phrase with the correct paragraph.

a) one reason for changes in Honda’s strategy

b) Honda’s original strategy

c) Ford’s new strategy

d) Conclusion

e) Honda’s new strategy

f) Ford’s original strategy

g) The advantage of Honda’s original strategy

h) Introduction

i) Ford’s new strategy in detail

j) Another reason for Honda’s new strategy

II. Vocabulary tasks

A. Synonyms

1. The word ‘headquarters’ (line 7) is used to describe the central, controlling part
of a large, international company. What other word is used in the same
paragraph with a similar meaning?

2. Honda and Ford manufacture cars. What other phrase is used to describe what
they do?

3. Honda produces both cars and motorcycles. What is a general word for both of
these?

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B. Word search: Find a word or phrase in the text that has a similar meaning.

1. When a company makes a product in big volumes to reduce costs (paras 1

and 9)

2. Factory in which cars are produced (para 2)

3. Independence (para 2)

4. Needs or demands (para 20

5. Head of a company responsible for strategy rather than day-to-day

management (para 5)

6. Consist of or be made up of (para 6and 7)

7. Financially independent (para 7)

8. Total of a company’s production (para 8)

C. Complete the sentence: Use an appropriate word or phrase from Exercise B

to complete each sentence.

1. The company ……………… three divisions- cars, trucks and commercial

vehicles.

2. Each division has a lot of ……………… to decide its own strategy.

3. Companies seem to change their ……………… every few years in response

to changing economic and market conditions.

4. Our total ……………… of cars from all our factories in Europe went down
last year.

5. We need to develop products that meet the ……………. of the market.

6. Big car makers now produce different models based on the same platform in
order to achieve ………………

7. All the main Japanese car makers have …………………. In Europe.

D. Expressing degrees of meaning: Complete these sentences with the adverb or

phrase used in the text.

1. For many years Ford’s products differed ………………... from region to

region.

2. Individual countries had ………………. Of autonomy.

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 3. Honda grew …………….. from its early days as a motorcycle manufacturer.

4. For many years Honda was run very ……………….. out of Japan.

5. The use of multi-disciplinary teams allowed development work at Honda to

take place ………………. In different parts of the company.

6. Honda expects its four regions to become ………………. Self-sufficient.

7. No other car maker has ……………… of foreign output as Honda.

III. Over to you

1. You have been asked by the board of a multinational car maker to present the
case for a ‘glocalisation’ strategy, as described in the article. Prepare a
presentation or write a report to give your arguments in favor of this.

2. You are members of the global strategy team of US Motors, an American

multinational car maker. The company currently has production units in the
UK, Germany, France and Spain for the European market. But with the
opening up of the markets in Central and Eastern Europe, you are
considering whether to set up a production unit in Poland. Hold a meeting to
discuss the advantages and disadvantages of this strategy, and try to come to
a decision.

70
 Unit 9. Mergers and acquisitions
1 + 1 = 3???
Before you read
Discuss these questions.
1 What is a merger?
2 What is a takeover?
3 Why do companies merge?
4 Why do companies buy other companies?
5 Think of recent merger or takeover that was reported in the press: what
were the reasons behind it?

A Successful companies generally want to diversify; to introduce new products or

services, and enter new markets. Yet entering new markets with new brands is usually
a slow, expensive and risky process, so buying another company with existing
products and customers is often cheaper and safer. If a company is too big to acquire,
another possibility is to merge with it, forming a new company out of the tow old ones.
Apart from diversifying, reasons for acquiring companies include getting stronger
position in a market and a larger market share, reducing competition, benefiting from
economies of scale, and making use of plant and equipment.
B There are two ways to acquire a company: a raid or a takeover bid. A raid simply
involves buying as many of a company’s stocks as possible on the stock market. Of
course if there is more demand for stock than there are sellers, this increases the stock
price. A takeover bid is a public offer to a company’s stockholders to buy their stocks
at a certain price (higher than the current market price) during a limited period of time.
This can be much more expensive than a raid, because if all the stockholders accept
the bid, the buyer has to purchase 100% of the company’s stocks, even though they
only need 50% plus one to gain control of a company. (In fact they often need much
less, a many stockholders do not vote at stockholders’ meetings.) If stockholders
accept a bid, but receive stocks in the other company instead of cash, it is not always
clear if the operation is a takeover or a merger – journalists sometimes use both terms.
Companies are sometimes encouraged to take over other ones by investment banks, if
C researchers in their Mergers and Acquisitions departments consider that the target
companies are undervalued. Banks can earn high fees for advising on takeovers.
Yet there are also a number of good arguments against takeovers. Diversification can
D damage a company’s image, goodwill and shared values (e.g. quality, good service,
innovation). After a hostile takeovers (where the managers of a company do not want
it to be taken over), the top executives of the newly acquired company are often
replaced or choose to leave. This is a problem if what made the company special was
its staff (or ‘human capital’) rather than its products and customer base. Furthermore, a
company’s optimum size or market share can be quite small, and large conglomerates
can become unmanageable an inefficient. Takeovers do not always result in synergy. In
fact, statistics show that most mergers and acquisitions reduce rather than increase the

71
 company’s value.

E Consequently, corporate raider and private equity companies look for large
conglomerates (formed by a serious of takeovers) which have become inefficient, and
so are undervalued. In other words, their market capitalization (the price of all their
stocks) is less than the value of their total assets, including land, buildings and –
unfortunately – pension funds. Raiders can borrow money, usually by issuing bond,
and buy the companies. They then split them up or sell off the assets, and then pay
back the bonds while making a large profit. Until the law was changed, they were also
able to appropriate the pension funds. This is known as asset-stripping, and such
takeovers are called leveraged buyouts or LBOs. If a company’s own managers buy its
stocks, this is a management buyout of MBO.

Reading comprehension tasks

1. Understanding main points

Read the text and match the titles (1- 5) to the paragraphs (A-E).
1 Disadvantages of takeovers
2 Raiders and assets-stripping
3 Raids and bids
4 The ‘make-or-buy’ decision
5 The role of banks
2. Understanding details
Find words or phrases in the text that mean the following:
Adding new and different products or services
1
A company’s sales expressed as a percentage of the total sales
2
in a market
Reductions in costs resulting from increased production
3
Money paid to investment banks for work done
4
All the individuals or organizations that regularly or
5
occasionally purchase goods or services from a company
6 Best, perfect or idea (adjective)
Combined production or productivity that is greater than the
7
sum of the separate parts
People or companies that try to buy and sell other companies
8
to make a profit
Large corporation or groups of companies offering a number
9
of different products or services
10 Buying a company in order to sell its most valuable assets at
a profit

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 More Exercises

Background
Horizontal
Two companies making the same product combined. Aims:
- To reduce completion and increase market share
- To gain access to new markets
TYPES OF MERGERS

- To acquire additional plants and equipment

- To achieve synergy and economies of scale.
Vertical
A company either acquires or merges with another company in an
immediately-related stage of production and distribution. This may be a
supplier or immediate customer. Aims:
- To guarantee the supply and cost of raw materials and components.
- To be closer to the customer, by cutting out the wholesaler for example,
and dealing directly with the retail trade.
Diversification
A company acquires another company in an entirely different sphere. Aim:
- To move into a sector which promises greater growth or profits.

You are going to read about the merger between Daimler-Benz and the American
car manufacturer Chrysler

MERGER MOST FOUL

Mega-mergers are the celebrity weddings of the corporate world, and all too often
the shareholders are left heartbroken.
Last week another marriage appeared to be in trouble when Daimler-Chrysler
announced thousands of job costs. Will it join the 83% of corporate tie-ups that end in
failure? According to work by consultancy KPMG they should have known it was
unlikely they would be able to deliver on their promises.
It found that 83% of mergers failed to produce any benefits or shareholders and more
than half actually destroyed value. The seeds of a merger’s destruction are often sown
before it is even completed, with management too optimistic about prospects for the
enlarged group and too confident they can overcome cultural barriers. Both
accusations can be made at the £25 billion merger of US car group Chrysler with
German giant Daimler-Benz.
John Thorp, head of finance and accounting at European Business School in London
said, ‘There was a total clash of cultures and they were not good at communicating
their strategy.’ The clashes led to many of the US executives quitting after cashing in
millions of share options. More damaging to shareholders were over confident
financial targets that were not met and which resulted in a steady decline in the share
price. The result is that the company is now worth less than Daimler-Benz alone was
worth before the deal. Jobs are being cut and there numerous of a takeover bid.

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Investment strategist James Montier said that over-optimism by management was a
major reason why merged companies failed to perform well. John Kelly, UK head of
KPMG’s Merger and Acquisition Integration said, ‘About 75% of mergers failed
because of the ways the companies were integrated.’
Daimler-Chrysler enjoyed about six months of improved share price before the
problems started. This is common for mergers where shareholders give companies a
short breathing space to prove themselves. With the evidence so strong against
mergers succeeding, it is astounding that last year; corporation worldwide spent more
than £2 billion on mergers and acquisitions.
If everyone knows the marriage is doomed why do they have the nuptials? According
to Thorp, ‘It is about survival. Businesses cannot afford to be static these days. In the
car industry, for example, economies of scale are vital as is access to an increased
number of markets. Daimler-Benz believed its link with Chrysler would allow it to sell
more Mercedes in the US.’ KPMG’s Kelly said, ‘The key strategic rationale at the
moment for mergers is “What happens if we don’t?”.’ A lot of mergers are defensive in
nature. He added that companies are worried that if they do not get together for
mutual protection, they would either be taken over or lose customers to more powerful
rivals.
A less justifiable reason is management egos and the endless desire of advisers to earn
fees. KPMG is about to publish research following its initial study of 700 cross-border
deals. It will show that the 17% of mergers it had found had succeeded did so
spectacularly and shares in the new groups began to outperform the stock market and
their peers. Montier says, ‘Successful mergers tend to between companies with similar
businesses that can produce ongoing cost efficiencies rather than one-off savings.’
One glowing example has been BP. Its share price has grown from strength to strength
following its merger with US rival Amoco two years ago. Though successes are rare,
the few that prosper prove that not all corporate celebrity marriages are doomed at
the altar.
Financial Mail on Sunday
Exercise 1: Reading comprehension
Read the first two paragraphs of the article. According to the Consultancy KPMG’s
research about mergers:
a. How many are successful/
b. What effect do they have on the value of a company?
c. What are two key reasons for their failure?

Read the rest of the article. Who believes:

d. That mergers fail because of:
- The way the two companies are combined?
- Differences in culture?
- Unrealistic expectations about the future success of the new company?
e. That companies merger essentially:
- From fear of competition?
- To ensure their survival in a global market place?

74
Read the text again and answer the questions.
f. Why is the writer so surprised at the money spent on mergers?
g. What motivated Daimler- Benz to merge with Chrysler?
h. What were the direct consequences of the culture clash?
i. How important are individual personalities in mergers?
j. Why has the BP Amoco merger succeed when others have failed?

Exercise 2: Vocabulary
The writer uses idiomatic language throughout the text.
1. Find examples of words and expressions which are related to marriage. Why do
you think the writer uses this metaphor?
2. Take a word from box A and combine it with word from box B to form
collocations.

A
cost share job stock investment
financial share takeover
B
options cuts target market price
efficiency strategy bid

Exercise 3: Summary and Presentation

Make a few notes under each heading to summarize the article:
- Reasons for mergers
- Problems with mergers
- Types of mergers

Exercise 4: Internet searching

Now use the notes to present a brief summary answering these questions:
- What problems can occur with mergers?
- If the risks are so great, why do companies merge?
Support your ideas with specific examples from Internet.

75
Exercise 5: Language focus
Here are some linking words and expressions that can be used to describe cause and
effect:
so
to bring about
to lead to
CAUSE to result in EFFECT
to cause
to mean

as a result of
because
to result from
EFFECT to arise from CAUSE
to be due to
to be caused by

Examples:
I was offered a better job in a bank so I left the insurance company.
Deregulation brought about major changes in the financial industry.
Major changes have arisen from the deregulation of the financial industry.

Look at the sentences about Procter and Gamble and Gillette, and make new
sentences describing cause and effect.

28 January 2005: Procter and Gamble announces that it is going to buy Gillette for
$57 billion.
28 January 2005: Gillette rises nearly 13% on Wall Street, while P&G drop 2.1%.
P&G predicts cost savings of between $14 billion and $16 billion from economies of
scale and restructuring of the two companies. The combined companies’ sales will be
over $60 billion a year.
10 April 2005: The US Federal Trade Commission (FTC) approves the acquisition, as
long as the companies divest some overlapping product lines, so as to restore
competition in the market.
July 2005: Shareholders of both companies approve the proposed merger.
July 2005: The European Union approves the merger, as long as P&G sells its line of
battery-operated toothbrushes.
1 October 2005: The purchase is finalized. P&G exchanges its common stock for
Gillette stock. Gillette shareholders get an 18% premium on the closing share prices of
27 January 2005.
The Gillette Company ceases to exist and its stocks are no longer traded.
P&G becomes the world’s biggest household goods maker.
6,000 people, 4% of the combined workforce of 140,000, lose their jobs because of
overlaps in management and business support functions.
January 2006: P&G announces a 27% increase in sales and a 29% in net earnings.

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 Unit 10. Arbitration
Arbitration is a procedure for the resolution of disputes on a private basis through the
appointment of an arbitrator, an independent, neutral third person who hears and
considers the merits of the dispute and renders a final and binding decision called an
award.

Before you read

Discuss these questions.

6 Have you ever been in dispute with another person over an agreement
or a contract? What was the problem?
7 What steps can you take, apart from going to court, to settle a commercial
disagreement?

Resolution in a neutral forum

Arbitration settles international commercial cases, says Jeremy Winter

You have been in a conference room in your lawyer's office for the whole day,
negotiating a crucial international contract. Term by term, detail by detail, the lawyers
have argued it out. Someone says: 'What are we going to put in for dispute resolution?'
When you started the negotiations you thought that the deal was a certain money-
spinner for both parties, so no disputes could arise. Now you are not so sure. So what
do you say? What do your lawyers advise? Ideally, you might want to be able to have
recourse to the courts in your own country: the other party would probably like to do
the same in its home country. Neither is acceptable to the other, for fear of home-team
advantage or even local bias. The answer is to opt for arbitration. This is not really a
difficult decision, and that is why arbitration is the recognised way of resolving
international commercial disputes.

For at least a century, it has been the dominant force in dispute resolution in areas such
as shipping, commodities and construction. You can opt for a neutral forum and have a
panel of three arbitrators, one chosen by each party, and the third (the chairman)
chosen either by the parties or the two party-appointed arbitrators. In addition, you can
keep your disputes away from the public eye, because arbitration takes place in
private, unlike litigation in the court. The main centres for international arbitration are:
Paris, London, Geneva, Stockholm, New York, Hong Kong and Singapore. Which is
used depends on the background and businesses of the parties. Stockholm, for

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example, was always the place for arbitrating east-west trade disputes, London for
shipping and commodities. Singapore looks set for a busy time in the coming months
and years after the Asian financial crisis. These locations, and the arbitration centres
and lawyers working there, compete intensely. Arbitration bodies try hard to get their
standard arbitration clause put into people's contracts, so they have a captive market
once disputes arise. They do this by publicising their activities and their rules.

What they are looking for is 'name recognition'. In Europe, Paris (home of the
International Chamber of Commerce and its rules) probably has the best name
recognition, followed by London (home of the London Court of International
Arbitration), and Geneva. What people look for in an arbitration is speed, cost
effectiveness, confidentiality and reliability of the arbitrators and hence their decisions.
The choice of venue involves a so complex balancing of a number of factors:

- The availability of good experienced arbitrators

- The availability of good experienced arbitration lawyers, and expert witnesses

such as accountants and engineers

- The cost of these people

- The support or otherwise that the local legal system gives to arbitration. (For
example, if the arbitration gets bogged down as a result of delaying tactics by one
party, what powers does the arbitrator, or court, have to speed things up? Will the
courts readily interfere or overturn arbitrators' decisions?)

- Accessibility - basic things like flight access, good facilities (some of the best
are now in the Gulf States), administrative back-up, good telecommunications, IT sup-
port and even climate.

National legislation also has to lend its support to such an important economic activity
as arbitration. England has taken steps to improve English arbitration law in no the
form of the Arbitration Act 1996, which came into force at the beginning of 1997.

Reading comprehension tasks

1. Understanding main points

Read the text on the opposite page about how international disputes between
companies are resolved and answer these questions.
1. Why might you prefer not to go to court in the country of your business
partner?
2. What are the three main business areas which have traditionally been resolved
by arbitration?

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 3. How is a forum made up for a neutral arbitration?
4. What is the main difference between arbitration and litigation, according to the
text?
5. Which are the main arbitration centres?
6. In which city would you choose to arbitrate an east-west trading dispute?
7. Which specific aspects of a contract are named in the text?
8. What do clients look for from an arbitration service?
9. What examples of expert witnesses are given in the text?
10. Do all the venues share the same arbitration rules?
2. Understanding details
Mark these statements T (true) or F (false) according to the information in the
text. Find the part of the text that gives the correct information.
1. Disputes only arise in commercial transactions.
2. Commodities are things traders buy and sell, usually raw materials, like coffee,
wool or copper.
3. A neutral forum has a balanced composition to ensure fairness to both parties.
4. New York is the only American arbitration venue named in the text.
5. Arbitration is a business in itself, for lawyers and their associates.
6. Name recognition for arbitration is like brand awareness for consumer goods.
7. International business depends on rapid resolution of contractual disagreements.
8. The courts of law in each country are less powerful than arbitration panels.
Exercises
Exercise 1
Match these terms with their definitions.

1. dispute resolution a) unfair treatment

2. a money-spinner
3. have recourse to the courts
4. home-team advantage
5. local bias
6. financial crisis
7. delaying tactics
8. speed things up
9. interfere
10. overturn decisions
11. take steps
12. come into force
b) accelerate
c) reverse something already decided
d) settling disagreements
e) make use of the legal system
f) benefit from being local or on home
ground
g) meddle or get involved with
h) something that makes profits for everyone
i) ways of making things take a long time
j) become operational
k) serious money problems
l) institute action

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Exercise 2: Terms of disagreement and dispute
Use an appropriate word or phrase from the box to complete each sentence

resolve resolution dispute settle arbitrate arbitration

arbitrator agree disagree delaying tactics

1. There is a serious problem we must try to resolve

2. He was a distinguished lawyer who was an expert …………………………
3. The process took far longer than the parties had
expected…………………………
4. This was due to the…………………. employed by one of the companies
involved.
5. The question is: how are we going to ……………………………… this
dilemma?
6. When the goods arrived in poor condition, a ……………………. …..arose
over whose
fault this was, and who should bear the cost
7. The best way is not to go to court, which is public and costly, but to
……….…………… an agreement.
8. I believe you are wrong on that point – we ………………………. on the
interpretation.
9. There is always an answer if you try hard to find it: every difficulty has a
…………….
10. You cannot assume he will ……………………….. to those terms: you must check
with him first.

Exercise 3: Parties to an agreement

In law, it is important to distinguish between the parties involved in a transaction or

an action. Complete the sentences below, using words from the box. Not all the
words will be needed.

signatories buyer/seller borrower/lender

supplier/producer wholesalers/retailers lawyer/client
teacher/student plaintiff/defendant licensee/licensor
franchiser/franchisees undersigned parties to the agreement

1. Everyone promises to obey the treaty-all major countries are signatories to it.
2. In the civil case, the ...................brought an action against the …………….. for
damaging his car on purpose.
3. The price was negotiated between the ……………………. and the
…………………

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 of the house, in a private sale.

1. The bank agreed that the ………………… should pay 12% on the loan, so the
…………… …….. made a fair profit!

2. Manufacturers sell their goods to.......……… and in turn, ………………….buy

from them.

3. The relationship between a ………………….. and……………… is bound by

confidentiality.
4. The beer can be produced under licence but the.................……….. must fulfil
all the requirements imposed by the..................................
5. Some clothes companies sell their products on a franchise basis: each
country has a main ………………………………..., with numerous
people working as
.....................…………………………..
6. A letter was sent to the manager complaining about working conditions. All the
members wrote their names. The letter read: 'We, the…….…………………….,
strongly protest about conditions at work.'
10 Many projects require the cooperation of various partners. If they all agree to work
together, they become………………

Exercise 4:

Recently there was a case of a mail-order company selling televisions over the
Internet where the price of a top-line television was shown as $3 instead of $300.
The web page was seen in many countries and several customers placed orders for
the 'cheap TV', but the company said they had no obligation to supply as the price
was a mistake. What do you think? Should the company honour the orders? Was it a
contract? If it was, where was it made - in the country of origin or where the
customer lives and ordered the goods? Is this a case for arbitration?

Exercise 5:
Complete the following text about arbitration with words from the box.

adjudication arbitration arbitrator decision-maker

dispute documentation duration expensive expert

forum hearing litigation needs submissions

The process is similar to the litigation process as it involves (1)____________

However, the parties choose their and the manner in which the (2)________ will
proceed. For example, if the (3)____________is fairly straightforward and does

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not involve any factual questions, the parties may agree to waive a formal and
provide the arbitrator with written and only, called a documents only arbitration.

However, in other cases the parties may wish a full hearing.

Therefore, the parties create their own adjudicatory (4)______________________

which is tailor-made to the particular (5)______________of the parties and the

nature of the dispute.

The advantages of arbitration over court adjudication can include the following:

• Expertise of the (6)_______________: The parties can choose an arbitrator who

has_____________________________knowledge of the law, business or trade in
which the dispute has arisen.

• Low cost: Arbitration is not (7) _______________ if the process is kept simple.

• Speed: Arbitration can be arranged within days, weeks or months.

• (8)______________: Arbitration does not take as long as litigation.

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