Assignment Code: IBO-01 / TMA / 2021 - 2022

Course Code: IBO-01

Assignment Name: International Business Environment

Year: 2021 - 2022

Verification Status: Verified by Professor

Attempt all the questions:

Q 1. Do you think that study of international business environment is relevant for the Managers? Give your arguments and explain the Technological and Socio-cultural environment of international business.  (20)

Ans) In the performance of commercial activities, the environment is extremely important. Environment is especially important in international business since no two nations have the same environment and require various business strategies to deal with varied business situations. Because the environment has an impact on a company's strategic and tactical actions, it is critical for the company to have a thorough understanding of the domestic, international, and global surroundings.

It is critical because, as a client, supplier, licensee, collaborator, or investor, all firms are today touched by the global environment. This course will provide you with the analytical skills necessary to comprehend the global environment and make decisions in response to environmental changes.

Consider the following:

1. The modern economy is increasingly interconnected on a worldwide scale. A crucial strategic aspect is weighing the benefits and drawbacks of foreign growth.

2. In international business, the multinational enterprise ( MNE ) is the most important actor. MNEs may currently be found in almost every sector.

3. Worldwide concentration, global synergy, and other strategic global objectives are all entry strategies for multinational enterprises.

4. Organizations should address economic, technological, legal, socio-cultural, and environmental considerations given the complexity of international operating settings.

5. A significant component of global financial management is weighing the risks and possible rewards and calculating a needed rate of return for a worldwide growth.

External Factors Affecting Expansion:

Expanding internationally may be a costly and time-consuming process. Management must examine the external variables that will affect performance during a worldwide transition before contemplating such a big strategic shift. These are some of them:

Socio-cultural: A region's social environment can have a substantial influence on its success. This has a big influence on food firms since different cultures enjoy different meals.

Geographic/Environmental : Skiing equipment, for example, may not perform effectively in areas where there is no snow or mountains. Only resource-rich regions can supply oil to oil corporations.

Legal/Political - Some nations have significant entrance hurdles, complicated tax rates, and/or ambiguous legislation. The ease of conducting business is crucial in this situation.

Economic - Because the level of life varies by area, understanding the worth of a specific market in terms of spending power, currency, and market size is essential when determining whether or not to expand.

Technological: If the organisational activities rely on simple access to the internet, power, clean water, and a range of other technological dependencies, they must be evaluated prior to entrance.

However, one should be aware that scanning and comprehending the environment is a 24-hour-a-day job, as global complexity modifies the environment on a regular basis.

Conclusion: Marketing managers are at the crossroads of business and society. They are responsible for not only creating a competitive marketing strategy, but also for sensitising company to the social as well as product need of society' in this role.

2. a) Describe the functioning of Bretton Woods System with examples. (10+10)

Ans) Functions of Bretton Woods System

International Monetary Funds (IMF) functions can be broadly classified into three main categories. These are:

1. to formulate and administer a code of conduct regarding exchange rate policies and restrictions on payments for current account transactions.

2. to provide members with financial resources to enable them to observe the code of conduct while they were correcting or avoiding payment imbalances.

3. to provide a forum in which the IMF could consult with one another and collaborate on international monetary matters.

Bretton Wood system and its working

Thus, it seemed clear at the Bretton Woods that neither a policy of fixed exchange rates nor of fully fluctuating rates is conducive to the balanced growth of international trade. Hence, under the Agreement implemented in 1946, every member country required to:

1. establish a par value for her currency either directly in terms of gold or indirectly in terms of the gold content of the US dollar of July 1, 1944 (i.e. 888671 grams of fine gold or $ 35 = 1 oz. of fine gold),

2. maintain the market rate within 1 per cent on either side of parity,

3. change the par value only, after consultations with IMF and, only to correct fundamental disequilibrium,

4. avoid discriminatory currency practices and restrictions on payments.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold; and the ability of the IMF to bridge temporary imbalances of payments. Members of the Bretton Woods system agreed to avoid trade wars.

For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies.

However, in the sixties, cracks in the Bretton Woods System were clearly visible. Periodic exchange crises arose when governments failed to make necessary adjustments to their economic policies. In principle, the stability of exchange rates removed a great deal of uncertainty from international trade and investment transactions, thus promoting their growth for the benefit of all the participants. However, the functioning of system imposed a degree of discipline on the participating nations economic policies.

For example, a country when faced with a fundamental disequilibrium, would find its reserves including borrows from TMF totally inadequate. The reduction in money supply and the adoption of restrictive policies could reduce the country's inflation (thus bringing it in the with the rest of the world.)

Q 2. b) Explain various International Commodity Agreements.

Ans) Commodity agreements have been devised by economists and policy makers to remove excessive instability. Since 1920, there has been international interest in stabilizing commodity prices to achieve orderly marketing. It was not until after World War 11 that an international mechanism was formally instituted via the United Nations through which such inter-governmental agreements could be negotiated, ratified and implemented.

In 1947, the Economic and Social Council (ECOSOC) of the UN established a special branch, the Interim Coordinating Committee on International Commodity Agreements (ICCICA) to deal specifically with commodity agreements. Later, in 1965, the United Nations Conference on Trade and Development was set up to deal with the commodity problems of developing countries.

The international commodity agreements are expected to have the following components depending on commodities. A general discussion of these components will be in order.

1. A successful international commodity agreement can be negotiated when 90 per cent of producers and 90 per cent of consumers participate.

2. Objectives of agreements must be well spelt out,

3. Buffer stock operation has been considered very effective in stabilizing some commodity prices and volume traded. Buffer stock is built by the agreement parties to perform an interventionist role. The agreement seeks to constrain the price between a 'floor' and a 'ceiling'. Normally, the buffer stock manager must sell at 'ceiling' and buy at 'floor' price. Maintenance of the buffer stock is expected to be financed by the parties to the agreement. A number of questions arise while operating the buffer stock.

1. The commodity must be amenable to buffer stock operation. Commodities lose their original quality soon.

2. Determination of 'floor' and 'ceiling' prices must be well calculated.

3. When the buffer stock authority should operate must also be well studied and the necessary procedures built up.

Export Control Agreements

Export Control Agreements operate by attempting to force a balance between supply and demand by controls on supply. In principle, supply reduction may be met either by reduction in production, any national stockpiling of excess production or by disposal of excess production. Which of these courses is adopted is largely dependent on the characteristics of a particular commodity? It is difficult to significantly affect production of crop commodities within the harvest year and so here stockpiling or disposal is the normal course. On the other hand, there is a greater flexibility in metal production and in general it is cheaper to store it underground. Export Control Agreements are considered cheaper because they do not entail foreign exchange costs.

Updating Support Price

From time to time, it will become necessary to update the price support range of a buffer stock agreement. The same applies to the production or export control price trigger in a control agreement. Factors which might be considered for updating are:

1. changes in exchange rate.

2. changes in the general level of prices.

3. changes in conditions in taste and technology.

4. commodity price; and

5. level of the stock held by the buffer stock.

6. authority.

Q 3. Distinguish between: (4X5)

Q 3. a) Void agreements and void contract

Ans) Void Agreements: As defined under Sec.2(g) void agreement is an agreement not enforceable by law. It does not create any legal right or obligations. It is void ab initio (right from the beginning) it is a nullity and destitute of all legal effects. An agreement with a minor or with a lunatic or without consideration, or with an unlawful object is void.

Void Contract: According to Sec 2 (j) a contract which ceases to be enforceable by law becomes void. A contract valid in the beginning becomes void, firstly, due to subsequent impossibility or illegality Sec 56 (2) or contingent contracts to do or not to do something if an uncertain future event happens becomes void if the event becomes impossible. (Sec 32). For example, A and  B agreed to marry each other on a particular date. A became mad before the appointed date of marriage - contract becomes void according to Sec 32 and 56 (2). A contract to import goods from a foreign country becomes void subsequently due to illegality if war breaks out between the importing and exporting country. Secondly, a contract when ~ultimately avoided by the affected party under sec I9 and 19A as said earlier becomes void which means voidable contracts become void ultimately.

Q 3. b) Utilitarianism and Formalism

Ans) Utilitarianism and Formalism - Illustrations of Contrast: These two important approaches differ in their perspectives while facing ethical decision making situations. Some examples of these differences are listed below.

1. While describing a business executive's action, the utilitarian sees it from the perspective of its being good or bad but the formalist views it from the angle of being right or wrong,

2. For a utilitarian the consideration behind an ethical decision is executive’s needs, wants and desires, however, for a formalist it is the question of the executive's conscience,

3. For a utilitarian the solutions to ethical problems are not easily definable, it is exactly opposite as far as the formalist is concerned.

4. The telling of lies is considered wrong by both, but for different reasons. For an utilitarian speaking lies is wrong because it can lead to attendant problems, in the formalist views it is wrong because it is not correct for anybody to lie.

5. The role of law is viewed differently, It is the belief of utilitarian that through benevolent legislation, everybody's life can be improved but for the formalists it is a important to apply law fairly and impartially.

Q 3. c) Absolute advantage and comparative advantage of trade

Ans) Absolute advantage and comparative advantage are two important concepts in economics and international trade. They largely influence how and why nations and businesses devote resources to the production of particular goods. In isolation, absolute advantage describes a scenario in which one entity can manufacture a product at a higher quality and a faster rate for a greater profit than another competing business or country can accomplish.

Comparative advantage differs in that it takes into consideration the opportunity costs involved when choosing to manufacture multiple types of goods with limited resources.

Absolute Advantage:

The differentiation between the varying abilities of companies and nations to produce goods efficiently is the basis for the concept of absolute advantage. Absolute advantage looks at the efficiency of producing a single product.

Comparative Advantage:

Comparative advantage takes a more holistic view, with the perspective that a country or business has the resources to produce a variety of goods. The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison.

This analysis helps countries avoid the production of products that would yield little or no demand, leading to losses. A country’s absolute advantage, or disadvantage, in a particular industry, can play an important role in the types of goods it chooses to produce.

Q 3. d) GATT and WTO

Ans) There are six major differences between GATT and the WTO.

1. Whereas the GATT framework allowed for the existence of a number of important side agreements negotiated and concluded by certain GATT contracting parties in the framework of the various GATT Rounds, the WTO administers a unified package of agreements to which all members are committed.

2. The WTO has considerably expanded the role of GATT by including Trade in Services and IPR within the multilateral trading system. In addition, the environment becomes a major agenda item for the first time.

3. The WTO contains an improved version of the original GATT rules – GATT 1994, which restate and strengthen the original GATT rules concerning trade in goods.

4. GATT trade opt-out agreements, such as those governing the clothing and textiles and agriculture sectors are to be gradually overturned and so-called 'grey area' measures including voluntary arrangements and export restraints are to be phased out. Virtually, all trade in goods will from now on be subject to GATT / WTO rules.

5. The potential membership of the WTO of some 150 countries is far wider than under the GATT. This fact undoubtedly serves to strengthen the arm of the WTO; and

6. WTO members cannot block decisions arrived at under the dispute settlement mechanism. Under the GATT, dispute panel findings were often blocked.

4. Comment on the following: (4X5)

Q 4. a) Geographic environment does not affect demand pattern of the people living in the country.

Ans) Geography is an important component of the foreign environment and refers to a country's climate, topography, natural resources and people. Everyone engaged in international business must have some knowledge of geographic features of the Foreign country as these influence the nature and characteristics of a society. It also affect demand pattern of the people living in the country. Geography is a major contributory factor to the development of business systems, trade centres and routes.

Different climatic conditions give rise to demand for different types of products. It is hugely due to climatic differences that people differ in their housing, clothing, food and medical and recreational needs. Geographic conditions also affect a firm's plant location decision. A firm prefers to set up its manufacturing plant in a country which has favourable climatic conditions, possesses suitable topography (i.e., surface features such as hills, plains, river and sea) and where raw materials, energy and labour are cheaply and abundantly available. Firms' distribution and logistic strategies are directly influenced by geographic conditions in the foreign markets.

Q 4. b) When goods are bought by description from a seller, there is no implied condition that goods shall be of merchantable quality.

Ans) Implied Condition as to Merchantable Quality: When goods are bought by description from a seller who deals in goods of that description whether he is the manufacturer or not, there is an implied condition that goods shall be of merchantable quality. Merchantable quality signifies that the goods must have use and exchange va1ue.i.e., it should be usable and commercially saleable at their full value. For example, a watch that does not keep time and a pen which does not write cannot be regarded as merchantable.

The implied condition as to merchantable quality also applies to patented or trademark goods. The implied condition as to merchantable quality applies when there is a latent defect in the _ goods even if the buyer has examined the goods. But this implied condition will not be applicable for any patent defects in goods if the buyer has the opportunity to examine and he has thoroughly examined the goods.

Q 4. c) Arbitration is not preferred by the parties involved in international business.

Ans) Above statement is incorrect. In view of the growing complexities of international business, the businessmen intend and try their best to avoid disputes. But whenever some disputes or differences arise, the issues are left to be decided by a judge or an arbitrator mainly because they are preoccupied, unable to agree and are content to have their differences/disputes settled by an outsider. They desire to abide by the decision of the court or arbitrator without affecting their good commercial. relationship. Many commercial. disputes are settled not by litigation. but by arbitration. It is said that the lawyers prefer litigation while the businessmen prefer arbitration and their preferences for arbitration predominates in international contracts.

There are many limitations of court litigation. In view of the limitations of court litigation, the arbitration is preferred by businessmen mostly for its advantages which can be stated as follows:

1. Arbitration proceedings can be commenced and completed within a specified time limit depending on the nature of the dispute. Arbitration is therefore, quicker than litigation.

2. The costs and expenses of arbitration are less compared to court litigation.

3. Arbitration promotes goodwill and better trade relations between the parties.

4. In arbitration, the parties can avail of the services of experts who are experienced and more knowledgeable which is not possible in a court litigation.

5. Arbitration ensures privacy and secrecy as the proceedings are private and the award given by the arbitrators is also not published.

6. The arbitration proceedings are less formal and more flexible than litigation.

Q 4. d) Free trade is always better than no trade.

Ans) Many economists have pointed out that free trade is the best method to ensure that developing countries are enabled to absorb the most recent technologies and production methods which are cleaner and far more efficient. The major task before the global policy makers is how to reconcile the interests of the trade economists on the one-hand and the environmental lobby on the other and determine the extent of changes needed to be made in the new WTO trade regime.

"Free trade is always better than no trade, and we need to ensure … that it is inclusive and the benefits are shared," the chairman told "Worldwide Exchange." "If you ask people who are against free trade, they will never tell you that they are against the benefits from trade. They will tell you that they are against some of the negative consequences that some parts of society are suffering," Frenkel said.

The countries will not trade with each other unless trade makes them better off. If trade is free, there are no tariffs or quotas or any other kind of restriction on the movement of goods between the two countries, then four markets get integrated into two markets. Thus, free trade benefits both countries who tend to specialise completely in the goods in which they have comparative advantage.

5. Write short notes on the following: (4X5)

Q 5. a) Code of Ethics for International Marketing

Ans) A review of various pressures on major player in international trade shows the need to

clearly lay down guidelines, in form of code ethics, for their employees. Such code of ethics

should lay down guidelines for operating in various markets, particularly focussing on

places where unethical behaviour is more common. However, as the player have been more

concerned with growth and development of their business, the code of conduct has been

emphasised and laid down by outside agencies such as OECD, International Chamber of

commerce, International Labour Organisation and UN Committee on Transnational

Corporations.

Apart from conforming to general ethical behaviour, the ethical codes of the companies active in international trade should ensure the following.

1. Need to respect laws and regulations of the host countries and do nothing to compromise with the health and safety of consumers. US laws on product liability, a big litigation issue, is an extreme case that affects the development of new products, especially the pharmaceuticals. Such legislation makes small firms reluctant to export to USA due to prohibitive cost of litigation.

2. Firms should not exploit the weakness in legislation in host countries such as selling products in these markets that are banned elsewhere.

3. The firms can be proactive and assist the governments in preventing marketing of unsafe products. However, the close relationship developed by firm with the local government, should not be misused such as gaining competitive advantage through adaptation of company's product specification, taking advantage of local lack of expertise in a particular area.

   
   

Q 5. b) Current Account and Capital Account of Balance of Payments

Ans) The two main components of the Balance of payments are current account and capital  account.

Current Account

The current account records all transactions related to exports, imports, and unilateral transfers. Therefore, the current account includes:

1. Import and export of goods: Import is a positive entry that includes receipt of money (credit). Import is a minus sign (debit). The balance of trade is also known as net export of goods. [A trade surplus is defined as when export earnings exceed import payments. A trade imbalance occurs when export earnings are fewer than import payments.

2. Services are exported and imported.

3. Gifts, contributions, and remittances are examples of unilateral or "one-way" transfers. Receipt of unilateral transfers from the rest of the world is recorded as a credit (positive entry), whereas unilateral transfers to the rest of the world are recorded as a debit (negative entry).

4. Investment income comes in the form of interest, dividends, rents, and profits. On the positive side, income is shown, and on the negative side, income is paid.

Capital Account

The capital account records all transactions which cause a change in the assets or liabilities of the residents/ Government. It includes:

1. Foreign direct investment (FDI): FDI inwards is a positive entry and FDI outwards is a negative entry.

2. Foreign institutional investment (FII)

3. Borrowings and lending’s to and from abroad

4. Change in foreign exchange (FOREX) reserves: Increase in FOREX is a negative entry and decrease is a positive entry.

The Balance of payment must always be in balance. The deficit in the current account is financed by a surplus in the capital account.

Q 5. c) Essential Elements of a Valid Contract

Ans) All contracts are agreements but all agreements are not contracts. The law of contract enforces only those agreements which graduate to contract. The agreements in order to be enforceable by the law of contract must graduate to a contract. For the purpose the agreement must fulfil certain essential conditions or elements. In the absence of one or more of these elements the agreement is void ab initio (right from the beginning) and destitute of all legal effects. In view of this the agreement must have the following essential elements as contained in Sec 10 of the Indian Contract Act 1872.

1. Parties: The agreement must be made between two or more parties / persons as one person cannot form an agreement.

2. Offer and Acceptance: There must be a valid offer and valid acceptance of the offer. As such the terms of the offer must be definite and certain and communicated to the person to whom the offer is made, and offer must be made with an intention to create legal obligations. The acceptance of the offer must be absolute and unconditional and according to the mode prescribed and must be communicated to the offeror.

3. Intention to Create Legal Obligations: The parties must have the intention to create legally binding obligations. Obligation should be commercial and not social or domestic.

4. Competency or capacity of the parties (Secs 11 and 12) : The agreement must be between parties who are competent or capable to contract. For the purpose parties should nor be minors or persons of unsound mind or disqualified from contracting by any law to which they are subject.

5. Genuine consent (Sec-13) :'consent is the foundation of an agreement. As such, there must be consensus ad idem for the validity of the agreement which means consent given by the parties to the agreement must be real and genuine and it should not be vitiated by mutual or common mistakes. The parties must understand and agree the same thing (subject matter) in the same sense (terms). Lack of consensus renders the agreement void ab initio.

6. Consideration (Sec-25) : The agreement must be supported by consideration. If consideration (some thing in return or something for something) is lacking, the agreement is only a 'nudum pactum' (naked promise) and void ab initio.

7. Lawful object and consideration (Secs 23 & 24) : The object as well as the consideration must be lawful. In other words, the object and consideration of the agreement should not be unlawful, illegal, immoral or opposed to public policy (public good).

8. Certainty (Sec-29) : The agreement must be certain and not vague or indefinite. If the terms of the agreement are uncertain the agreement is void ab initio.

9. Possibility of performance (Sec 56(i)) : The agreement must not be entered into to do an act impossible in itself i.e. the act must be capable of performance. If the terms are not capable of performance the agreement is void ab initio.

10. Agreement not declared void (Sec 26-30) : The agreement must not have been expressly declared void by any law in force in the country. In view of this the agreements against public policy which have been declared to be void by the Contract Act cannot become contracts to be enforceable.

Q 5. d) Strategic Alliances and Technology Transfer

Ans) Strategic Alliances and Technology Transfer:

High risks and rising R&D costs (especially in the area of new technologies) and the rapid obsolescence of new products have forced many TNCs to form technology-related strategic alliances to share development costs, acquire new technologies and make better use of scarce qualified personnel. The substantial number of strategic alliances in existence now is a relatively new phenomenon. here are indications, and Forces however, of an emerging trend towards a very high proportion of agreements involving the development of and access to technologies. The alliances of IBM with several other corporations for the purpose of developing its personal computer are an example: the Lotus Corporation provided the application software, and Microsoft wrote the operating system, for a micro-processor that was produced by Intel. IBM (traditionally reluctant to conclude alliances) has now created alliances with more than 40 partners around the world, pooling technology and customer bases in the telecommunications and related fields.

Technological alliances can be viewed as a way of providing collective protection to technological advances among a few partners. The increasing incidence of such alliances combined with the current pace and cost of technological development makes it more difficult for developing countries to acquire technology through traditional non-equity arrangements. Many alliances also involve common actions for setting international standards that increase the barriers to entry (including, for new products from developing countries) in the international market. Some developing countries, have the potential and capability, however, to become partners in technology alliances.