nonetheless, even those nations advancing streamlined commerce vigorously finance certain enterprises, like agribusiness and steel. Exchange obstructions are frequently reprimanded for the impact they have on the creating scene. Since rich-country players set exchange approaches, merchandise, for example, rural items that agricultural nations are best at creating face high hindrances. Exchange boundaries, for example, charges on food imports or sponsorships for ranchers in created economies, lead to overproduction and unloading on world business sectors, in this way bringing down costs and harming poor-country ranchers. Levies likewise will in general be hostile to the poor, with low rates for crude wares and high rates for work concentrated prepared merchandise. The Commitment to Development Index estimates the impact that rich nation exchange arrangements have on the creating scene. Another negative part of exchange obstructions is that it would cause a restricted selection of items and, accordingly, would compel clients to follow through on greater expenses and acknowledge sub-par quality. As a rule, for a given degree of insurance, standard-like limitations convey a more prominent potential for decreasing government assistance than do duties. Levies, portions, and non-levy hindrances lead excessively not many of the economy's assets being utilized to create tradable products. A fare appropriation can likewise be utilized to give a benefit to a local maker over a foreign maker. Fare sponsorships will in general have an especially solid negative impact because as well as mutilating asset designation, they diminish the economy's terms of exchange. As opposed to levies, send out appropriations lead to an over the designation of the economy's assets to the creation of tradable merchandise. Ethical Barriers Notwithstanding global exchanging laws and affirmations, nations keep on confronting difficulties around moral exchanging and strategic approaches. Global exchange is the trading of products and enterprises across public boundaries. In many nations, it addresses a critical piece of (GDP). The ascent of industrialization, globalization, and mechanical advancement has expanded the significance of worldwide exchange, just as its monetary, social, and political impacts on the nations in question. Universally perceived moral practices, for example, the UN Global Compact have been initiated to encourage common participation and advantage between governments, organizations, and public establishments. All things considered, nations keep on confronting difficulties around moral exchanging and strategic approaches, particularly concerning financial disparities and common freedoms infringement. Arguments against International Trade Capital business sectors include collecting and putting cash in different investments. Albeit some contend that the expanding coordination of these monetary business sectors between 51 CU IDOL SELF LEARNING MATERIAL (SLM)
nations prompts more predictable and consistent exchanging rehearses, others call attention to that capital streams will in general support the capital proprietors more than some other gathering. Moreover, proprietors and labourers in explicit areas in capital-spending out nations bear a large part of the weight of acclimating to expanded development of capital. The monetary strains and inevitable difficulties that outcome from these conditions lead to political divisions about whether to empower or expand the mix of worldwide exchange markets. Also, pundits contend that pay aberrations between the rich and poor are exacerbated, and industrialized countries fill in influence on the detriment of under-promoted nations. Anti-Globalization Movements The counter globalization development is an overall extremist development that is reproachful of the globalization of the free enterprise. Hostile to globalization activists are especially disparaging of the undemocratic idea of entrepreneur globalization and the advancement of neo-liberalism by worldwide organizations like the International Monetary Fund (IMF) and the World Bank. Other normal focuses against corporate and hostile to globalization developments incorporate the Organization for Economic Co-activity and Development (OECD), the WTO, and deregulation deals like the North American Free Trade Agreement (NAFTA), Free Trade Area of the Americas (FTAA), the Multilateral Agreement on Investment (MAI), and the General Agreement on Trade in Services (GATS). Gatherings of such bodies are frequently met with solid fights, as demonstrators endeavour to focus on the regularly annihilating impacts of worldwide capital on domestic conditions. On November 30, 1999, near 50,000 individuals assembled to fight the WTO gatherings in Seattle, Washington. Work, financial, and ecological activists prevailing with regards to disturbing and shutting the gatherings because they were dissatisfied with regards to corporate globalization. This occasion came to represent the expanded discussion and developing clash around the moral inquiries on a worldwide exchange, globalization, and capitalization. Cultural Barriers These barriers make it more difficult to do business abroad. Culture and Global Business It is regularly harder to work together in a foreign country than in one's nation of origin, particularly in the beginning phases when a firm is thinking about either actual interest in or item development to another country. Extension arranging requires a top to bottom information on existing business sector channels and providers, purchaser inclinations and current buy conduct, and local and foreign standards and guidelines. Language and social obstructions present impressive difficulties, just as institutional contrasts among nations. 52 CU IDOL SELF LEARNING MATERIAL (SLM)
With the interaction of globalization and expanding worldwide exchange, it is unavoidable that various societies will meet, clash, and mix. Individuals from various societies think that it's difficult to convey because of language obstructions as well as a result of social contrasts. In a study of Texas farming sending out firms, Hollon (1989) found that from a firm service point of view, the underlying passage into trade markets was essentially more troublesome than either the treatment of progressing send out exercises or the thought of development to new fare product offerings or markets. From a rundown of 38 things in three classifications (information holes, promoting viewpoints, and monetary perspectives) throughout three-time skylines (fire up, progressing, and development), the three issues evaluated most troublesome were all beginning up stage advertising things: Paucity of information on emerging/profitable markets. Problem of clarity on marketing mix and distribution for entering a foreign market. Difficulties due to bureaucracy and documentation requirements. Tools for Understanding Cultural Deviations in Business Successful business leaders recognize the cultural differences among various markets. There are models that highlight this aspect. The most popular model in this aspect is Gert Hofstede’s Cultural Dimensions Theory. This theory represents six deviations in cultures most relevant for cross border trade. This model can be represented as follows: Figure 3.2: Hofstede’s Cultural Dimensions 53 CU IDOL SELF LEARNING MATERIAL (SLM)
Hofstede's cultural dimensions: The above figure illustrates the category wise differences in perspective with the help of six underlying dimensions. In this process two or more countries are compared in terms of impact of cultural differences on business practices. Following is a brief about each of the dimensions: IDV (individualism) represents the degree of focus on individual Vis a Vis groups. PDI rating represents the degree to which authority is accepted Ina particular culture. MAS are a scale that represents materialism, aggressiveness, competitiveness as one extreme and focus on relationships/quality of life as the other extreme. UAI exhibits the risk appetite. A higher rating represents lower propensity to risk taking. IVR represents the degree to which spendthrift nature is commonplace in a particular culture. LTO is related to propensity to plan for long term vs. short term planning. Technological Barriers These barriers relate to the difference in the standards used for trade in different countries. Principles related exchange measures referred to in WTO speech as specialized boundaries to exchange assume a basic part in forming worldwide exchange. U.S. organizations, ranchers, farmers, and makers progressively experience non-levy exchange hindrances in the type of item guidelines, testing prerequisites, and other specialized necessities as they look to sell items and services throughout the planet. As tax hindrances to mechanical and agrarian exchange have fallen, norms related to proportions of this sort have arisen as a key concern. Governments, market members, and different substances can utilize norms-related measures as a compelling and proficient method for accomplishing real business and strategy destinations. In any case, when norms-related measures are obsolete, excessively troublesome, oppressive, or in any case improper, these actions can lessen rivalry, smother advancement, and make superfluous specialized hindrances to exchange. These sorts of measures can represent a specific issue for little and medium-sized undertakings (SMEs), which frequently don't have the assets to address these issues all alone. Huge foreign exchange hindrances the type of item principles, specialized guidelines and testing, certificate, and different methods are associated with deciding if items adjust to norms and specialized guidelines. 54 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.3: Members of World Trade Organization These norms related to exchange measures, known in World Trade Organization (WTO) speech as \"specialized hindrances to exchange,\" assume a basic part in moulding the progression of worldwide exchange. Norms-related estimates serve a significant capacity in encouraging worldwide exchange, including empowering more noteworthy admittance to global business sectors by SMEs. Principles related estimates likewise empower governments to seek after genuine targets, like securing human wellbeing and the climate and forestalling misleading practices. However, norms-related estimates that are non-straightforward, biased, or in any case outlandish can go about as huge boundaries to U.S. exchange. These sorts of measures can represent a specific issue for SMEs, which regularly don't have the assets to address these issues all alone. The Argument for Barriers Some contend that imports from nations with low wages have squeezed the wages of Americans and consequently we ought to have exchange obstructions. It is stated that exchange has made positions for foreign specialists to the detriment of American labourers. It is more exact to say that exchange both makes and annihilates occupations in the economy under market influences. The economy-wide exchange makes occupations in investments that have the relative benefit and annihilates occupations in businesses that have a near inconvenience. All the while, the economy's piece of work changes; however, as per financial hypothesis, there is no total deficit of occupations because of exchange. Throughout the last monetary development, from 1992 to 2000, U.S. imports expanded almost 240%. Over that equivalent period, the absolute 55 CU IDOL SELF LEARNING MATERIAL (SLM)
business developed by 22 million jobs, and the joblessness rate tumbled from 7.5% to 4.0% (the least joblessness rate in over 30 years.). Foreign re-appropriating by American firms, which has been the object of much late consideration, is a type of bringing in and makes and annihilates occupations, leaving the general degree of work unaltered. There is no rejecting that with worldwide exchange there will be a short-run difficulty for a few, however financial analysts keep up the entire economy's expectation for everyday comforts is raised by such trade. They see these unfavourable impacts as subjectively equivalent to those initiated by absolutely local disturbances, for example, moving shopper interest or mechanical change. In that unique circumstance, financial analysts contend that facilitating the change of those hurt is monetarily more productive than insurance given the net monetary advantage of exchange to the all-out economy. Numerous individuals accept that imports from nations with low wages have squeezed the wages of Americans. There is no uncertainty that global exchange can have solid impacts, great and awful, on the wages of American specialists. The situation of the specialist unfavourably influenced by imports comes rapidly to mind. In any case, it is likewise obvious that specialists in send out businesses profit in terms of professional career. Besides, all specialists are customers and advantage from the extended market decisions and lower costs that exchange brings. However, simultaneous with the enormous extension of exchange in recent years, genuine wages (i.e., swelling changed wages) of American specialists developed more gradually than in the previous post-war time frame, and the disparity of wages between the gifted and less talented labourers rose strongly. Was exchange the power behind this weakening pay execution? A few enterprises, or possibly segments of certain investments, are imperative to public safety and potentially may be protected from the changes of global market influences. This assurance should be presented on a defence-by-case premise since the case is made by some who don't meet public safety standards. Such measures may likewise differ from one case to another. It is likewise evident that public safety could be undermined by the fare of certain double-use items that, while business in nature, could likewise be utilized to deliver items that may give a military benefit to U.S. foes. Controlling such fares is legitimized from a public safety stance; however, it comes at the expense of lost fare deals and a financial misfortune to the country. Limiting the financial government assistance misfortune from such fare controls depends on an all-around centred recognizable proof and standard re-assessment of the subset of merchandise with critical public safety potential that ought to be liable to control. The Argument against Barriers Business analysts for the most part concur that exchange boundaries are impeding and decline generally speaking financial proficiency. 56 CU IDOL SELF LEARNING MATERIAL (SLM)
Most exchange boundaries work on a similar guideline: the burden of a type of cost on the exchange that raises the cost of the exchanged items. If at least two countries more than once use exchange hindrances against one another, an exchange war results. Exchange hindrances are frequently censured for the impact they have on the creating scene. Since rich-country players call the majority of the shots and set exchange approaches, products, for example, crops those non-industrial nations are best at delivering still face high hindrances. Exchange obstructions, for example, charges on food imports or endowments for ranchers in created economies, lead to overproduction and unloading on world business sectors, along these lines bringing down costs and harming poor-country ranchers. Duties likewise will in general be against the poor, with low rates for crude products and high rates for work seriously prepared merchandise. If a worldwide exchange is monetarily enhancing, forcing boundaries to such trades will keep the country from completely understanding the financial additions from the exchange and should decrease government assistance. Insurance of import-contending businesses with levies, portions, and non-tax obstructions can prompt an over-allotment of the country's scant assets in the ensured areas and an under-distribution of assets in the unprotected tradable merchandise investments. In the particulars of the relationship of exchange as a more effective profitable cycle utilized above, diminishing the progression of imports will likewise lessen the progression of fares. Fewer yields require less information. Unmistakably, the trading area should lose as the ensured import-contending exercises acquire. Yet, more significantly, from this viewpoint the general economy that burned-through the imported merchandise should likewise lose, because the more proficient creation measure worldwide exchange can't be utilized to the ideal degree, and, subsequently, will have commonly expanded the cost and decreased the variety of products accessible to the purchaser. Accordingly, a definitive financial expense of the exchange obstruction isn't an exchange of prosperity between areas, yet a perpetual overall deficit to the entire economy emerging from the boundaries contortion toward the less productive utilization of the economy's scant assets. Financial analysts for the most part concur that exchange hindrances are hindering and decline in general monetary effectiveness; this can be clarified by the hypothesis of similar benefit. In principle, streamlined commerce includes the expulsion of every such obstruction, except for maybe those thoughts about fundamental for wellbeing or public safety. Practically speaking, nonetheless, even those nations advancing streamlined commerce vigorously sponsor certain enterprises, like agribusiness and steel. 57 CU IDOL SELF LEARNING MATERIAL (SLM)
3.3.2 Non-tariff Barriers Non-levy obstructions are exchange boundaries that confine the import or fare of merchandise through implies other than levies. The World Trade Organization (WTO) recognizes different non-levy obstructions to exchange, including import permitting, pre- shipment assessments, rules of the beginning, custom delayers, and different components that forestall or limit exchange. Figure 3.4:Non-Tariff Barriers Developed countries use non-tariff barriers as an economic strategy to control the level of trade they conduct with other countries. When making decisions on the non-tariff barriers to implement in international trade, countries base the barriers on the availability of goods and services for import and export, as well as the existing political alliances with other trade partners. Developed countries may elect to release other countries from being subjected to additional taxes on imported or exported goods, and instead create other non-tariff barriers with a different monetary effect. Origin of Non-Tariff Barriers During the formation of nation-states, countries had to devise ways of raising money to finance local projects and pay recurrent expenditures. One of these ways was the introduction of tariffs, which placed restrictions on imported and exported goods and services. However, industrialized countries transitioned from tariff barriers to non-tariff barriers since they had built other sources of funding. Most developing nations still rely on tariff barriers as a way of raising revenues to finance national projects while regulating international trade with other countries. Later, the industrialized countries switched from tariff to non-tariff barriers for several reasons. One reason was to regulate international trade, even in the absence of tariff barriers. 58 CU IDOL SELF LEARNING MATERIAL (SLM)
It exempts certain countries from paying additional taxes on goods, and instead, created other meaningful non-traffic barriers. A second reason for introducing non-tariff barriers is to support weak industries that have been affected by the reduction or withdrawal of tariff barriers. A final reason is that non-tariff barriers are an avenue for interest groups to influence trade regulation in the absence of trade tariffs. Types of Non-Tariff Barriers: Non-tariff barriers may take the following forms: Protectionist Barriers Protectionist barriers are designed to protect certain sectors of domestic industries at the expense of other countries. The restrictions make it difficult for other countries to compete favourably with locally produced goods and services. The barriers may take the form of licensing requirements, allocation of quotas, antidumping duties, import deposits, etc. Assistive Policies Although assistive policies are designed to protect domestic companies and enterprises, they do not directly restrict trade with other countries, but they implement actions that can impede free trade with other countries. Examples of assistive barriers include custom procedures, packaging and labelling requirements, technical standards and norms, sanitary standards, etc. International companies must meet the requirements before they can be allowed to export or import certain goods into the market. The governments also help domestic companies by providing subsidies and bailouts so that they can be competitive in the domestic and international markets. Non-Protectionist Policies Non-protectionist policies are not designed to directly restrict the import or export of goods and services, but the overall outcomes may lead to free trade restrictions. The policies are primarily designed to protect the health and safety of people and animals while maintaining the integrity of the environment. Examples of non-protectionist policies include licensing, packaging and labelling requirements, plant and animal inspections, import bans for specific fishing or harvesting methods, sanitary rules, etc. Examples of Non-Tariff Barriers Licenses Licenses are one of the most common instruments that countries use to regulate the importation of goods. A license system allows authorized companies to import specific commodities that are included in the list of licensed goods. 59 CU IDOL SELF LEARNING MATERIAL (SLM)
Product licenses can either be a general license or a one-time license. The general license allows importation and exportation of permitted goods for a specified period. The one-time license allows a specific product importer to import a specified quantity of the product, and it specifies the cost, country of origin, and the customs point through which the importation will be carried out. Quotas Quotas are quantitative restrictions that are imposed on imports and exports of a specific product for a specified period. Countries use quotas as direct forms of administrative regulation of foreign trade, and it narrows down the range of countries where firms can trade certain commodities. It caps the number of goods that can be imported or exported at any given time. Embargoes Embargoes are total bans of trade on specific commodities and may be imposed on imports or exports of specific goods that are supplied to or from specific countries. They are considered legal barriers to trade, and governments may implement such measures to achieve specific economic and political goals. Import Deposit Import deposit is a form of foreign trade regulation that requires importers to pay the central bank of the country a specified sum of money for a definite period. The amount paid should be equal to the cost of imported goods. 3.4 QUOTAS A quota is a limit to the quantity coming into a country. 60 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.5: Equilibrium Point With no trade, equilibrium market price in the country will exist at the price which equates domestic demand and domestic supply, at P, and with output at Q. However, the world price is likely to be lower, at P1, than the price in a country that does not trade. If the country is opened up to free trade from the rest of the world, the world supply curve will be perfectly elastic at the world price, P1. The new equilibrium price is P1, and output is Q1. The domestic share of output is now Q2, compared with Q, the self-sufficient quantity. The amount imported is the distance Q2 to Q1. Imposing a Quota For protecting domestic producers, import quotas may be applied from Q2 to Q3. 61 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.6: Quota Imposed on Imports As a result of this the output from seating producers rises from 0 to Q2 and also added values of Q3 to Q4. 62 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.7: Domestic Share of Output Prices increase to P2 due to shortage created by the quota. With decline in total output to Q4, the ported amount falls to quota level. A key difference between tariffs and quotas are that quotas do not lead to revenue for the government. Hence, quotas are less frequently in use. Types of Quotas There are two fundamental sorts of import standards: 1. Absolute Quota - This sets the limit for the quantity that can be imported in a certain time. This over all quotas can also be split country wise for a particular commodity. This benchmark is generally set at a global level. 2. Tariff Rate Quota- In this system, there is no limit on the import quantity, but the tariff rate increases with the quantity slab. Reasons to Implement Quotas Quotas are trade barriers that are implemented to protect domestic producers and the local employment. It also helps give space for new enterprises to stabilize. Protect domestic industries and employment: By decreasing the number of imported products, local providers should deliver more to fulfil the local need. By delivering more, the 63 CU IDOL SELF LEARNING MATERIAL (SLM)
providers should recruit more local labourers, expanding work. Moreover, setting quantities to lessen foreign rivalry permits local \"infant industries,\" or youthful, little enterprises, to develop and develop to a serious level. Protect against unfair trade practices: Dumping is setting a quantity shields a local economy from out of line exchange practices like unloading, the valuing of imports beneath creation cost. By confining imports, standards limit the effect of such exercises. Protect national security: Quotas help avoid foreign dependence for sensitive area like defence sector which directly impact national security. Consequences of Quotas There can be many consequences related to the implementation of quotas. Restricting foreign goods can lead to paucity of choice for the consumer (consumer surplus) and an increase in producer surplus. In most cases this leads to an overall loss in the economy. In order to bypass quotas, some trade participants might use illegal practices like bribery and smuggling to enter the market. 3.5 TARIFFS This is one of the oldest forms of trade barriers wherein a fee is levied as a percentage over and above the price of the imported goods in ad valorem format. 3.5.1 Implications of Tariffs Following are the implications of applying tariffs. Higher Prices Tariffs lead to elevation in prices that can lead to low consumer surplus and high producer surplus. As domestic producers are protected from cheaper imports. This might add up to an overall loss in welfare. Without trade, the domestic price and quantity are P & Q. If a country opens up to world supply, price falls to P1, and output increases from Q to Q2. As a result, domestic producers’ share falls to Q1 and imports now dominate, with the quantity imported Q1 to Q2. 64 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.8: Implication of Tariffs The supply curve shifts to a sum of World Supply and Tariff. The price rises to P2, and the new output is at Q3. Domestic producers share of the market rise to Q4, and imports fall to Q4 to Q3. The result is that domestic producers have been protected from cheaper imports from the rest of the World. Increase in producer surplus also increases domestic jobs as production needs to be increased to meet domestic demand and also for higher gains (due to higher prices) for the domestic producer. Welfare Loss However, the reduction in consumer surplus is greater than the increase in producer surplus. Even when adding the tariff revenue (area K, L, M, N) there is still a net loss. The net welfare loss is represented by the triangles X and Y. 65 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.9: Welfare Loss Distortion Tariffs distort the comparative advantage built by a country by way of specialization. Retaliation Trade war is another possibility as fallout of imposing tariffs. However, this is a faint possibility. Mostly tariffs bring about benefits to the domestic economy like protection of new industries, jobs, sensitive goods, reduction in trade deficit and conservation of non-renewable natural resources. Types of Tariffs Tariffs can be categorized basis what they are applied on: Export Tariffs: these aids in increasing revenue by taxing goods that leave a country. 66 CU IDOL SELF LEARNING MATERIAL (SLM)
Import Tariffs: These are more common than export tariffs and are applied on goods coming into a country. Tariffs can also be categorized basis the end purpose: Revenue Tariffs: These tariffs act as the revenue channel for governments. Protective Tariffs: These tariffs act as trade barriers to protect domestic producers. Tariffs can moreover be categorized based on the value of the duty levied: Ad Valorem Tariffs: This mode of tax calculation computes the amount as a percentage of the item value. Specific Tariffs: In this mode tariff is levied at a flat rate. Compound Tariffs: This mode is a hybrid of the ad valorem and specific mode of computation. For example, the tariff will have a fixed component and an ad valorem component. 3.6 SUMMARY International trade theory is a sub-field of economics which analyses the patterns of international trade, its origins, and its welfare implications. International trade theory and economics itself have developed as means to evaluate the effects of trade policies. Mercantilism recommends that a country’s best interest is to maintain a trade surplus Mercantilism advocates government intervention to achieve a surplus in the balance of trade Mercantilism observes trade as a zero-sum game - in which a gain by one country results in a loss by another Mercantilism stands in contrast to the theory of free. Absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Heckscher–Ohlin theorem: In the two-factor case, it states: \"A capital-abundant country will export the capital-intensive good, while the labour-abundant country will export the labour-intensive good.\" The key underlying assumption for this model is that the two countries in consideration have differences only in the resources they possess. Else all other aspects are the same. Customers face losses due to rise in product prices on applying import tariffs. 67 CU IDOL SELF LEARNING MATERIAL (SLM)
Subsidies reduce costs and help domestic producers stay competitive and also to export. They are also able to compete against low-cost imports. Countries can restrict the quantity of imported goods coming in by applying import quotas. Exports can be com times constrained by applying export restraints. Requirement of a local content mention the quantity that need to be produced locally. 3.7 KEYWORDS Mercantilism: It is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. Non-tariff Barriers: These barriers to trade arise due to restrictions that are not direct tariffs like product testing, licensing, production impediments, etc. Quota Restrictions: These are the stimulated quantities which are used to cap quantities of imports and exports within a particular time period. Tariff Barriers: Initially designed as a means to increase government revenue, nowadays these are used to restrict imports to protect domestic producers. And also, to keep a check on exports. World Trade Organization (WTO): This organization came into being post formation of GATT more specifically on successful completion of the Uruguay round of GATT. 3.8 LEARNING ACTIVITY Business in China From 1949 to 1979 China had an almost autarkic economy and precluded foreign investment and confined foreign exchange. Even though its image of socialism focused on non- interference, China's strategy additionally mirrored its chronicled conviction that contact with outsiders would in general ruin its governmental issues and damage its way of life. Notwithstanding, expecting that it was falling farther behind different nations financially, China established the Law on Joint Investments utilizing Chinese and Foreign Investment in 1979. From that point forward, China has encountered a sensational ascent in FDI. It has become the biggest beneficiary of FDI among every non-industrial nation, and since 1993, it has positioned second to the United States for FDI inflows among all nations. By mid-2002, absolute FDI in China had surpassed $700 billion and was put resources into almost 400,000 endeavours. Japan, Taiwan, and the United States are China's most significant wellsprings of FDI. 68 CU IDOL SELF LEARNING MATERIAL (SLM)
While China consistently embraced the standards of streamlined commerce, it changed its useful perspectives. Notes when in doubt, China confined imports and foreign organizations discovered FDI to be a more practical approach to serve the Chinese market. Besides, while China let foreign financial backers propose their favoured method of passage, it applied tough standards through a broad survey measure. In particular, the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC) or commonplace level specialists with purview over specific sorts of investments investigated each foreign investment application to decide if the investment was to the greatest advantage of China, for example regardless of whether it helped capital development, advanced fares, made positions or moved innovation. Chinese authorities haggled with every possible financial backer to attempt to improve its likely commitments. The Chinese dismissed numerous propositions that offered deficient advantages. Foreign organizations would bear extended dealings (regularly traversing quite a while) with Chinese organizations and common specialists before introducing an application to MOFTEC. The development of FDI in China despite the relentless passage measure vouched for organizations' craving to work in China. Questions: 1. Profile the evolution of the Chinese business environment. Does this evolution strike you as predictable or unpredictable? Why would its degree of predictability matter to foreign investors? ………………………………………………………………………………………………….. …………………………………………………………………………………………………. 2. Do you think the benefits of operating in China outweigh the risks? …………………………………………………………………………………………………. …………………………………………………………………………………………………. 3.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Write short notes on a) Absolute Cost Advantage b) Theory of Mercantilism 2. Explain types of non-tariff barriers. 3. Explain international trade environment. 4. Explain general equilibrium theory. 5. Explain product life cycle theory. 69 CU IDOL SELF LEARNING MATERIAL (SLM)
Long Questions 70 1. List different classical and modern trade theories. 2. Explain quotas and types of quotas. 3. Explain implications of tariffs. 4. Explain non-tariff barriers. 5. Explain mercantilism in classical trade theories? B. Multiple Choice Questions 1. Father of Economics___________________. a) Adam Smith b) Eli Hecksher c) Bertil Ohlin d) None of these 2. The imposition of tariffs leads to_________________. a) Higher prices b) Welfare loss c) Retaliation d) All of these 3. Non-tariff barriers are ________________________. a) Licenses b) Quotas c) Embargoes d) All of these 4. Model factors in the diamond theory are ________________. a) Factor Condition b) Demand Conditions c) Related and Supporting Industries d) All of these 5. Product life cycle theory stages are ____________________. a) New product stage b) Maturing product stage c) Standardized product stage d) All of these Answers: CU IDOL SELF LEARNING MATERIAL (SLM)
1. (a) 2. (d) 3. (d) 4. (d) 5. (d) 3.10 REFERENCES Textbook Hufbauer, G. 1966. Synthetic Materials and International Trade. Cambridge, MA: HarvardUniversity Press. Helleiner, G. 1992. Trade Policy and Industrialization in Turbulent Times. London:Routledge. Myrdal, G. 1957. Economic Theory and Underdeveloped Regions. London: Duckworth Smith, A. 1986 [1776]. The Wealth of Nations. London: Penguin Books. Reference Books Krugman, P. 1981. “Trade, Accumulation, and Uneven Development.” Journal of Development Economics 8: 149–61 Sen, S. 1982. “From Import Substitution to Export Promotion.” Economic and Political Weekly 17: 14–16. Reprinted in Sunanda Sen (2000) Trade and Dependence: Essays on Indian Economy. New Delhi: SageIndia. Websites https://www.researchgate.net/ https://corporatefinanceinstitute.com/ https://www.investopedia.com/ 71 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 4: TYPES OF AGREEMENTS Structure 4.0 Learning Objectives 4.1 Introduction 4.2International Institution Systems 4.2.1 World Trade Organization 4.2.2 International Monetary Fund 4.2.3 United Nations Conference on Trade and Development 4.3 General Agreement on Tariffs and Trade (GATT) 4.4 India’s Role in International Trade Theories 4.5 Summary 4.6 Keywords 4.7 Learning activity 4.8 Unit End Questions 4.9 References 4.0 LEARNING OBJECTIVES After studying this unit, student will be able to: Explain decision support system. Describe sub systems, attribute and characteristics of DSS. Explain DSS designing and building process. Explain applications of DSS. 4.1 INTRODUCTION Trade agreements occur when two or more nations agree on the terms of trade between them. Trade agreements outline the export and import the tariffs/duties to be levied. Hence, these have a profound impact on international trade. Definition 72 CU IDOL SELF LEARNING MATERIAL (SLM)
Imports are goods and services produced in a foreign country and bought by domestic residents. That includes anything shipped into the country even if it's by the foreign subsidiary of a domestic firm. If the consumer is inside the countries boundaries and the provider is outside, then the good or service is an import. Exports are goods and services that are made in a country and sold outside its borders. That includes anything shipped from a domestic company to its foreign affiliate or branch. The following figure illustrates the most important trade agreements across the world in 2018. Largest Free Trade Agreements in the World Countries are grouped by agreement: the European Union (EU), the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), and countries with a standalone Free Trade Agreement (FTA) with the US. Hover over each country for specific breakdowns. Figure 4.1: Countries Grouped by Agreement Types of Trade Agreements These can be unilateral, bilateral or multilateral. Unilateral Trade Agreement These happen when a nation forces exchange limitations and no other nation responds. A nation can likewise singularly extricate exchange limitations, yet that once in a while happens because it would put the country in a difficult spot. The United States and other created nations just do this as a kind of foreign guide to assist developing business sectors with 73 CU IDOL SELF LEARNING MATERIAL (SLM)
fortifying vital enterprises that are too little to ever be a danger. It helps the developing business sector's economy develop, making new business sectors for U.S. exporters. Bilateral Trade Agreements Two-sided arrangements include two nations. The two nations consent to relax exchange limitations to grow business openings between them. They lower taxes and give favoured exchange status to one another. The staying point ordinarily revolves around key secured or government-sponsored local investments. For most nations, these are in the car, oil, or food creation enterprises. The Obama organization was arranging the world's biggest two-sided understanding, the Transatlantic Trade and Investment Partnership with the European Union, however, this slowed down under the Trump organization. Multilateral Trade Agreements These arrangements among three nations or more are the hardest to arrange. The more prominent the number of members, the more troublesome the dealings are. Ordinarily, they are more perplexing than reciprocal arrangements, as every nation has its necessities and solicitations. When arranged, multilateral arrangements are extremely amazing. They cover a bigger geographic territory, which gives a more prominent upper hand on the signatories. All nations likewise give each other the most-supported country status—allowing the best-shared exchange terms and least duty. Note: The biggest multilateral understanding is the United States-Mexico-Canada Agreement (USMCA, once in the past the North American Free Trade Agreement or NAFTA) between the United States, Canada, and Mexico. Ridiculous initial twenty years, provincial exchange expanded from generally $290 billion of every 1993 to more than $1.1 trillion by 2016. Pundits differ about the net effect on the U.S. economy, yet a few evaluations put the net local occupation misfortunes because of the understanding at 15,000 every year. The United States has one other multilateral territorial economic deal: the Dominican Republic-Central America FTA (CAFTA-DR). This game plan with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua wiped out levies on over 80% of U.S. non-textile produced products trades. The Trans-Pacific Partnership would have supplanted the USMCA as the world's biggest understanding. In 2017, President Donald Trump pulled out the United States from the understanding. Normally, President Biden may endeavour to arrange a route for the U.S. to re-join. All told, the U.S. as of now has 14 economic accords including 20 distinct nations. 74 CU IDOL SELF LEARNING MATERIAL (SLM)
4.2 INTERNATIONAL INSTITUTION SYSTEMS Pretty much every nation fares and imports items to profit from the developing global exchange. The development of worldwide exchange can be expanded, if the nations observe a typical arrangement of rules, guidelines, and principles identified with import and fare. These normal standards and guidelines are set by different global financial foundations. These foundations expect to give a level battleground to every one of the nations and create monetary participation. These organizations likewise help in settling the cash issues among nations identified with balancing out the trade rates. There are three significant worldwide financial organizations, to be specific, WTO, IMF, and UNCTAD. 4.2.1 World Trade Organization WTO was framed in 1995 to supplant the General Agreement on Tariffs and Trade (GATT), which was begun in 1948. GATT was supplanted by WTO since GATT was one-sided for created nations. WTO was framed as a worldwide global association managing the guidelines of worldwide exchange among nations. The fundamental goal of WTO is to assist worldwide associations with leading their organizations. WTO settled in Geneva, Switzerland, comprises 153 individuals and addresses over 97% of the world's exchange. The principal destinations of WTO are as per the following: Enhancing the way of life and pay, advancing full business, growing creation, exchange, and ideal use of world's assets. Introducing a supportable turn of events, an idea that visualizes that improvement and climate can go together. Taking positive strides to guarantee that non-industrial nations, particularly the most un-created ones, secure a superior offer in world exchange. Functions of the WTO The WTO's capacities can be comprehensively isolated into the accompanying classifications: Trade Negotiations The WTO encourages exchange dealings among nations by giving a system to structure the arrangements, just as giving contest goal instruments. It makes a global lawful structure that guarantees the smooth trade of merchandise and investments among the part nations. Implementation and Monitoring 75 CU IDOL SELF LEARNING MATERIAL (SLM)
When the arrangements are arranged, the work of the WTO is to guarantee that the signatory nations cling to their responsibilities by and by. It likewise creates research dependent on the effect of the concurrences on the economies of the nations in question. Dispute Settlement The WTO additionally goes about as a contest settlement body when there is an exchange struggle between its part states. The individuals from the WTO can document grievances against other part states if they feel the exchange and monetary strategies of a nation are disparate from their responsibilities under one of the arrangements of the WTO. Following the grievance, there are formal hearings like a court until a settlement is reached. Building Trade Capacity The WTO shows uncommon projects to help non-industrial nations to assist them with building the ability to take an interest in streamlined commerce with more created nations. It additionally gives concessions under specific arrangements to low-advancement nations to slide them into deregulation with different nations. Expanding Trade Outreach At last, the WTO does campaign and effort across the world as a piece of its bigger targets to advance deregulation. They attempt to convince governments to lessen obstructions to exchange to free, reasonable and open business sectors throughout the planet. Provides More Choice to Customers Encouragement of international trade makes a variety of goods available to customers which otherwise would not have been accessible in international markets. Stimulates Economic Growth Job market and wealth creation are important positive consequences of international trade that is encouraged by WTO. Creates Good Governance WTO through its involvement in international trade keeps corruption in check by discouraging formulation of unwise government policies. WTO has the accompanying benefits: Promoting harmony inside nations: Leads to fewer exchange questions. WTO helps in making global participation, harmony, and thriving among countries. 76 CU IDOL SELF LEARNING MATERIAL (SLM)
Handling the questions constructively: Helps in lesser exchange clashes. At the point when the worldwide exchange grows, the odds of questions additionally increment. WTO helps in diminishing these exchange questions and pressures among countries. Helping purchasers by giving choices: Implies that by advancing worldwide exchange, WTO helps customers in accessing countless items. Encouraging great service: Accelerates the development of a country. The principles defined by WTO support great service and debilitate the rash arrangements that lead to debasement in a country. Stimulating financial growth: Leads to more positions and expansion in pay. The arrangements of WTO centre on diminishing exchange obstructions among countries to build the quantum of import and fare. 4.2.2 International Monetary Fund IMF, set up in 1945, comprises 187-part nations. It attempts to get monetary security, create worldwide financial participation, encourage global exchange, and diminish neediness and keep up practical financial development throughout the planet. Its base camp is in Washington, D.C., United States. The destinations of IMF are as per the following: Helping in expanding business and genuine pay of individuals Solving the worldwide money related issues that contort to the monetary improvement of various countries Maintaining solidness in the worldwide trade rates Strengthening the financial uprightness of the countries Providing assets to the part countries as and when required Monitoring the monetary and financial arrangements of part countries Assisting low created nations in successfully dealing with their economies. WTO and IMF have absolute 150 normal individuals. Along these lines, the two of them cooperate where the focal point of WTO is on the worldwide exchange and of IMF is on the global money related and monetary framework. These associations together guarantee a sound arrangement of worldwide exchange and monetary dependability on the planet. 77 CU IDOL SELF LEARNING MATERIAL (SLM)
4.2.3 United Nations Conference on Trade and Development UNCTAD, set up in 1964, is the main organ of the United Nations General Assembly. It gives a gathering where the non-industrial nations can examine the issues identified with the monetary turn of events. UNCTAD is settled in Geneva, Switzerland, and has 193-part nations. The gathering of these part nations is held after at regular intervals. UNCTAD was made because the current organizations, for example, GATT, IMF, and World Bank were not worried about the issue of non-industrial nations. UNCTAD's primary target is to detail the approaches identified with regions of advancement, like an exchange, money, transport, and innovation. The primary goals of UNCTAD are as per the following: Eliminating exchange obstructions that go about as requirements for non-industrial nations. Promoting worldwide exchange for accelerating the financial turn of events. Formulating standards and approaches identified with worldwide exchange. Negotiating the global economic accords. Providing specialized help to agricultural nations uniquely low created nations. It is critical to take note that UNCTAD is an essential accomplice of WTO. Both the associations guarantee that worldwide exchange helps the low created and non-industrial nations in speeding up their speed of development. On sixteenth April 2003, WTO and UNCTAD additionally marked a Memorandum of Understanding (MoU), which distinguishes the fields for participation to encourage the joint exercises between them. Regional Economic Integration Along with organizations like WTO and IMF, UNCTAD works to bring about economic integration regionally. This is achieved by removing trade barriers and coordinating country level trade policies. Reasons for the need for Economic Integration at a regional level are as follows: Cultural Similarities: Similarity in cultural aspects like customs, religions, and languages of countries in a particular region encourages exchange of goods. Moreover, these similarities make communication easy. Colonisation: Colonisation in the past has sown the seeds of cultural similarities in certain regions. For instance, because of colonisation by the British, India and neighbouring regions got introduced to the English language. 78 CU IDOL SELF LEARNING MATERIAL (SLM)
Regional closeness: Shared borders makes transportation easier and hence stimulates trade in geographically close regions. Trade blocs are agreements that facilitate Regional economic integration. This is illustrated in Figure 4.2: Types of Trade The Following Section Describes These Agreements in Details Customs Union: This is a group of countries in a particular geographical region who mutually agree to conduct trade within this group without levying any tariffs or custom duties. This free trade zone levies a common tariff structure for the rest of the countries. Common Market: As per this arrangement, the participants remove both physical (borders) and fiscal (taxes) barriers to facilitate free exchange of goods, capital and labour. Major advantages of common markets are the availability of more jobs and benefits of economies of scale which translate into lower costs, customer surplus and high profitability. Objectives of common market are as follows: i. Facilitating Development of the participating economies that is sustainable. Attaining sustainable development of the participating nations. ii. Encouraging adoption of policies that help elevate the standard of living in the participating economies. iii. Creating an environment of peace, cooperation and stability in the region. iv. Building strong relations between the region and the rest of the world. 4.3 GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) The General Agreement on Tariffs and Trade (GATT) was never intended to be an independent understanding. All things considered; it was intended to be only one piece of a lot more extensive consent to build up an International Trade Organization (ITO). The ITO was proposed to advance exchange progression by setting up rules or decides that part nations would consent to embrace. The ITO was imagined during the Bretton Woods meeting went to by the fundamentally united nations in New Hampshire in 1944 and was viewed as integral to 79 CU IDOL SELF LEARNING MATERIAL (SLM)
two different associations likewise considered there: The International Monetary Fund (IMF) and the World Bank. The IMF would screen and manage the worldwide fixed conversion standard framework, the World Bank would help with credits for recreation and improvement, and the ITO would direct globally exchange. The ITO never appeared, nonetheless. Albeit a contract was drawn, the U.S. Congress never endorsed it. The fundamental concern was that the arrangement would compel unwanted local strategy changes, particularly regarding compensation and business strategies. Since the United States would not take an interest, different nations had minimal motivator to take part. In any case, the United States, Britain, and other associated nations kept a solid obligation to decrease duties on made merchandise. Levies stayed high in the outcome of the Depression- period increments. Hence, as conversations over the ITO sanction continued, the GATT segment was finished early and endorsed by 23 nations in 1948 as a method of kicking off the exchange advancement measure. The GATT comprises a bunch of guarantees or responsibilities that nations make to one another concerning their exchange arrangements. The objective of the GATT is to make the exchange more liberated (i.e., to advance exchange progression), and in this manner, the guarantees nations cause must include decreases in exchange boundaries. Nations that make these responsibilities and consent to the arrangement are called signatory nations. The conversations held before the responsibilities are chosen are called arranging adjusts. Each round is by and large given a name tied either to the area of the gatherings or to a noticeable figure. There were eight rounds of exchange under the GATT: the Geneva Round (1948), the Annecy Round (1950), the Torquay Round (1951), the Geneva II Round (1956), the Dillon Round (1962), the Kennedy Round (1967), the Tokyo Round (1979), and the Uruguay Round (1994). Above all, the arrangements are reached by agreement. A round completes just when each arranging nation is happy with the guarantees it and the entirety of its arranging accomplices are making. The trademark in some cases utilized \"Isn't anything is Agreed until Everything Is Agreed.\" The guarantees, or responsibilities, nations make under the GATT take two structures. To start with, there are nation explicit and item explicit guarantees. For instance, a nation (say, the United States) may consent to diminish the greatest duty charged on a specific thing (say, cooler imports) to a specific rate (say, 10%). This most extreme rate is known as a duty restricting, or a bound levy rate. In each round, each taking part country offers concessions, which include a rundown of new duty ties—one for each imported item. To accomplish exchange advancement, the tax ties should be lower than they were beforehand. Notwithstanding, it is essential to take note that there is no harmonization of levy ties. Toward the finish of a round, signatory nations don't wind up with similar tax rates. 80 CU IDOL SELF LEARNING MATERIAL (SLM)
All things being equal, every nation enters around with an interesting duty set on each thing. By and large, from its underlying levels. Hence, if Country An enters the conversations with a 10 percent tax on fridge imports, while Country B has a 50 percent levy, at that point, an average result to the round may have A bringing its duty restricting down to 7 percent, while B brings it is down to 35 percent—30% decreases in the tax restricting. The two nations have changed exchange, yet the GATT has not expected them to cling to a similar exchange approach. A few nations, particularly non-industrial nations, keep up genuinely high bound levies yet have chosen to decrease the real levy to a level beneath the bound rate. This levy is known as the applied tax. Bringing down levies singularly is admissible under the GATT, as is raising the applied rate to the bond rate. There is a second type of guarantee that GATT nations make that is fit. These guarantees include acknowledgment of specific standards of conduct as for global exchange strategies. Here, as well, there are two kinds of guarantees: the first includes centre standards in regard to non-discrimination and the second includes admissible exemptions for these standards. Non-discrimination One of the critical standards of the GATT, one that signatory nations consent to stick to, is the non-discriminatory treatment of exchanged products. This implies nations guarantee that their local guidelines won't influence one country's merchandise pretty much well than other countries and won't treat their products better than imported products. There are two uses of non-discrimination: most-supported country and public treatment. India’s trade Agreement- Overview Regional trade agreements (RTAs) have gotten progressively predominant since the mid- 1990s. RTAs cover the greater part of worldwide exchange and work close by worldwide multilateral arrangements under the World Trade Organization (WTO). The initial eleven years (1995-2005) of the WTO were resembled by a significant increase of RTAs from 58 to 188. Presently, 455 RTAs are in power internationally. 14 RTAs are in power in India with twelve more under the arrangement. Provincial Trade Agreements today go past tax cuts in exchange products and fuse different parts like advancement in services, investment, and so forth the primary RTA of which India turned into a part was the Bangkok Agreement in 1975. In 2005, this provincial activity between creating economies was re-manifested as Asia Pacific Trade Agreement (APTA). India's first respective FTA with Sri Lanka (ISFTA) became effective in March 2000. In the previous decade, India's exchange strategy has seen a checked move towards regionalism. Covering RTAs are an outcome of their expansion. For instance, India has an 81 CU IDOL SELF LEARNING MATERIAL (SLM)
RTA with Malaysia and Singapore independently while they are additionally an individual from India ASEAN CECA. Another intriguing model in Sri Lanka wherein an Indian broker can utilize two of the four RTAs for exchanging with Sri Lanka. The variety of RTA's may prompt irregularities. 4.4 INDIA’S ROLE IN INTERNATIONAL TRADE THEORIES Developments of India’s international trade can be broadly divided and studied through three different phases as under. Pre- Independence Phase. Post - Independence Phase. Post Trade -Liberalization Phase. Following paragraphs briefly take overview of these three phases. Pre-Independence Phase India has a global trading background for past many centuries. Even in the years before the birth of Christ, India was trading with the different countries of Europe in the West and the lands to the East up to China. India was carrying out trade with far-off lands in West Asia and beyond, well before 1500 BC. During this period India had trade surplus with whole world which used to be settled by inflow of gold^. During Mughal period from 1526 to 1707 AD, there was economic and cultural revival in India as also satisfactory progress of trade and industry. From 1780-1860, India transformed to an exporter of raw materials and importer of finished foods from being an exporter of processed items and earning in bullion. In the 1750s, India used to export silk and cotton to Asia, Africa and Europe. By the second quarter of the 19th century, India’s exports were mainly of raw materials like raw cotton, opium, and indigo. The 25 years’ time span from 1800 to 1825 saw China rise as the largest economy in the world followed by India and then France. The GDP was almost 50% of China’s GDP in 1825.British cotton exports reached 3 per cent of the Indian market by 1825. From the late 18th century British cotton mill industry began to lobby the government to both tax Indian imports and allow them access to markets in India. Starting in the 1830s, British textiles began to appear in the Indian markets, with the value of the textile imports growing from £5.2 million 1850 to £18.4 million in 1896. The British colonial rule created an institutional environment that stabilized the law-and-order situation to a large extent. The British foreign policies however stifled the trade with rest of the world. They created a well-developed system of railways, telegraphs and a modem legal system. The 82 CU IDOL SELF LEARNING MATERIAL (SLM)
infrastructure the British created was mainly geared towards the exploitation of resources in the world. In the British era, India’s trade included heavy exports of textiles and heavy imports of bullion into India through the East India Company. The foreign trade of India had settled down to a typical colonial pattern by the end of the British rule. After British rule, India’s international trade was concentrated in the countries of British Empire. This trade was mostly handled by British and European houses and foreign exchange was controlled by foreign banks. Before 2nd world war India was exporting more than imports on account of unilateral transfer of payments to Britain, to arrange for salaries and pensions of British officers. Second World War changed nature of India’s foreign trade. The British Government commandeered from poverty-stricken people of India large supplies of foodstuffs, leather-ware besides iron and steel. During this period India had a positive trade balance with Britain. World trade and economy was severely affected by world war, the great depression period 1929-1934 and world war. Between 1919- 1939, both imports and exports of India declined. During 2nd world war exports increased substantially while imports remained at same level. Systematic planning was started in India after independence. This was necessary to achieve various goals like achieving an all-around economic self-sufficiency transforming the backward agrarian economy into an industrial nation as well as ensuring its huge population a better quality of life after independence. Post-Independence Phase During the 2nd world war, Government of India had imposed controls on imports and exports of some items which were extended even after the war. In 1947, “Import and Export (Control) Act” was passed which was continued for next forty-five years. India’s foreign trade has followed the pattern of ups and downs of the economic growth and the development of the country. During the first decade and a half after independence India’s export earnings remained stagnant. Exports as a percentage of world exports declined sharply from 2.5% in 1947 to 0.9% in 1966. This lack of performance on the export front was policy induced and not due to independent external factors beyond India’s control®. During fifties and early sixties international trade was dominated by imports. The average export performance during the Third Five Year Plan (1962-66) improved significantly over the average for the Second Five Year Plan. The characteristic of this period was that besides continuing export of traditional products like oil cakes and meals, iron ore, cashew kernel, coffee and jute manufacture, export of new products like engineering goods and chemical and allied products was also started. The devaluation of 1966, together with import liberalization was expected to start a new era of export-oriented growth. However, this did not happen because the deduction and accompanying policy measures proved abortive due to variety of reasons. The stagnation in exports from the 83 CU IDOL SELF LEARNING MATERIAL (SLM)
country continued till the early 1970’s, followed by significant growth in the rest of the decade. The period of mid-sixties to mid-seventies was marked by both exports and import-substitution efforts. The exports growth 14 was not sustained in the early 1980’s. Importance of exports was well recognized in early eighties. By this time, importance of exports for providing the crucial foreign exchange resources and contribution towards greater efficiency in resource use, better technology, and better quality was well understood. It was also agreed that imports had a developmental role to play. From 1985- 86, export growth picked up significantly and continued till 1989-90, however it was reduced during the economic crisis of 1991 to 1993. From 1959-60 to 1990-91 India’ trade balance is negative except two years viz. 1972-73 and 1976-77 when exports were more than imports. In early eighties yearly trade deficit was averaging Rs.5700 Crs. which increased to average Rs. 7500 Crs. after mid-eighties. Post-Liberalization Phase India initiated series of economic reforms in 1991 aimed at establishing macro-economic balance, economic growth and regain external credit worthiness. At a macroeconomic level, these reforms yielded great dividend. From 1992 to 1998, the real GDP for India grew at an annualized rate of 6.4% and indicated an economic recovery. Before 1991, India was seen one of the most complex and protectionist regimes internationally. The very first step taken by India towards trade liberalization was reduction in tariffs rates on an average from 128% in 1991 to 34% in 2009.The trade-weighted tariffs declined from 87 percent in 1991 to around 30 percent by 2000, while the maximum tariff rate fell to 45 percent in 1997, having hovered at 355 percent m 1991. More precisely, India’s trade liberalization efforts can be broadly divided into two periods. The first five years from 1991 to 1996 was a period of intense liberalization as tariffs fell dramatically. The era post mid 1990s can be mentioned as a period of consolidation and a period that saw average tariff rates remaining unchanged. While simple average tariff rates remained unchanged, there was a marginal increase in the trade-weighted tariffs from 25 percent in 1996 to 30 percent by 2000. What is interesting is that this corresponds exactly to the downward trend in economic growth in the latter half of the 1990s compared with the first five years since the crisis of 1991. In 1991-92 there was sharp decline in trade deficit over 1990-91, due to growth of 35.3% in exports over previous year. Even though exports are growing continuously from 1991-92, trade deficit was also continuously increasing on account of rising imports. In 1992, “Import and Export (Control) Act” was superseded by the “Foreign Trade (Development and Regulation) Act, which addressed new liberalized export and import policy of the Government. In March 1992, government also announced a five-year Export and Import Policy. Trade reforms were aimed at reducing import duties over a period. India has been able to gradually increase its share in global merchandise 84 CU IDOL SELF LEARNING MATERIAL (SLM)
trade and exports from 0.58 percent and 0.44 percent in 1980 to 0.74 percent and 0.69 percent, respectively, in 1999. At first, this does not seem like an astonishing growth trajectory but when seen with the backdrop that India’s share in international trade was on a decline during early 1990s, this seems spectacular. Between 1990 and 1999 India’s merchandise trade and exports grew at an annual compound average of 8.2 percent and 9.0 percent, respectively. The vision and the roadmap provided by the Foreign Trade Policy (2004-09) for a five-year period with clearly enunciated objectives and strategies has been instrumental in putting exports on a higher growth trajectory. The rapid pace at which exports have been growing is a direct result of government efforts focused on reducing transaction costs. The export growth in India in the recent years is partly on account of a favourable international environment resulting from a sustained growth in average world real GDP by more than 5 per cent and world trade by more than 9 per cent since 2004. As fallout, international trade markets have seen a spike in trade volumes. However, we cannot get full clarity on India’s export growth just by considering this as a factor. In the recent years, Government has made focused efforts to reduce transaction costs substantially and aid trade activities. Accordingly, India’s export volumes have grown. Indian exports of merchandise touched Rs. 845534 Crs during2009-10, a meagre 0.57% higher in contrast to 28.19% in the previous year. Despite a slow growth trend in 2009-2010, export sector in India has shown a good growth trajectory in recent times. India’s merchandise exports grew at a CAGR of 22.0 per cent during 2004-05 to 2008-09 while in the preceding five years export trade grew by only a CAGR of 14.0 per cent. Data issued by WTO in 2009 shows that the growth in India’s market share for international trade grew to 1.3 per cent in 2008 from 0.8 percent in 2004. This also coincided with India’s world ranking as lead exporter improving to 21st in 2009 as compared to 30th in 2004.This is even more significant as Indian exports have remained u=unharmed due to the global slowdown while other economies have got impacted. The Government had set an export target of US $175 Bn. for 2009- 10. With merchandise exports reaching US $178.7 Bn. in 2009-10, the actual exports exceeded the target by 2.1 per cent which is a remarkable achievement during a period of recession in India’s major export destinations. Imports during 2009-10 were Rs. 1363736 Crs. as against Rs. 1374436 Crs. thus, showing a slowdown in 2008-09.With a slight export recovery and marginal slowdown in imports, trade deficit dipped slightly in 2009-10. . The trade deficit in 2009-10 was Rs.518202 Crs., which was lower than the deficit of Rs. 533680 Crs. during 2008-09. 4.5 SUMMARY There are different categories of business contracts based on type, distinguished from each other by one or more distinctive elements. 85 CU IDOL SELF LEARNING MATERIAL (SLM)
Trading agreements are treaties that are signed by a group of two or more countries to enable free exchange of goods and services across their borders. There are set of regulations to be followed by the member nations which are different from that applicable for non-member countries. Rules on international trade aid stability across the globe. Both stakeholders in trade i.e., producers and consumers feel secure knowing that there is enough choice both at the supply(raw materials) and demand side(end products and services) .And also producers/exporters are assuring of access to foreign markets. The World Trade Organization came into being in 1995. One of the youngest of the international organizations, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT). The GATT and the WTO have been strong contributors towards creating unprecedented growth in international trade. WTO members operate a non- discriminatory trading system that spells out their rights and their obligations. Each member receives guarantees that its exports will be treated fairly and consistently in other members’ markets. GATT as a forum created rules to avoid discrimination and also negotiated terms for lowering trade barriers. 10. The WTO’s conflict resolution system plays a very important role in ensuring smooth trade flows. 11. The needs of developing nations are looked at by a dedicated WTO committee for Trade and Development. It also organises cooperation missions in technology to these countries. 98% of World trade volume or 164 countries are members of WTO with 22 memberships under negotiation. 4.6 KEYWORDS General Agreement on Tariffs and Trade: GATT - The General Agreement on Tariffs and Trade signed on October 30, 1947, by 23 countries, was a legal agreement minimizing barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies while preserving significant regulations. International Monetary Fund: With 190 members, IMF works towards international financial stability and facilitates international trade. Thus, reducing poverty by raising wages and employment levels internationally. United Nations Conference on Trade and Development: The United Nations Conference on Trade and Development was established in 1964 as a permanent 86 CU IDOL SELF LEARNING MATERIAL (SLM)
intergovernmental body. UNCTAD is the part of the United Nations Secretariat dealing with trade, investment, and development issues. Foreign Trade (Development and Regulation) Act: An Act to provide for the development and regulation of foreign trade by facilitating imports into, and augmenting exports from, India and for matters connected therewith or incidental thereto. Macroeconomic: It is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole. For example, using interest rates, taxes and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies. 4.7 LEARNING ACTIVITY 1. Discuss the strengths and weaknesses of Microsoft and recommend a marketing strategy which would help them in retaining their leadership position. ……………………………………………………………………………………………. ……………………………………………………………………………………………. 2. Compare Microsoft and Apple marketing strategy. ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ 4.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain functions of the World Trade Organization. 2. Explain main objectives of UNCTAD. 3. Describe advantages of World Trade Organization. 4. Explain Non-discrimination in GATT. 5. Explain types of Trade agreements. Long Questions 1. Can you describe World Trade Organization: what it is and what it does? 2. Describe the limitation of GATT and how Dunkel’s proposals led to the formation of World Trade Organization. 3. Describe the organization structure of World Trade Organization. Explain World Trade Organization’s role in liberalization of global trade in goods and services. 4. Describe international monetary fund. 87 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Explain India’s role in international trade theories. B. Multiple Choice Questions 1. When did the World Trade Organization come into effect? a) March 6, 1996 b) April 8, 1994 c) February 5, 1994 d) January 1, 1995 2. Which of these institutions is not a part of the World Bank community? a) IFC b) IDA c) WTO d) IBRD 3. Along with the World Bank and ———————– WTO is the third economic pillar of world-wide dimensions. a) International Economic Association (IEA) b) International Monetary Fund (IMF) c) International Development Bank (IDB) d) International Funding Organisation (IFO) 4. The GATT agreement had been signed by governments known as _____________. a) Member countries b) Trade members c) MFN d) Contracting Parties 5. GATT agreements as modified by the agreement _______________. a) WTO b) ITO c) Uruguay Round d) Bretton wood Answers: 1. (d) 2. (c) 3. (b) 4. (d) 5. (c) 4.9 REFERENCES Textbooks Maskus, K. E. (2000) Intellectual Property Rights in the Global Economy, Washington D.C.: Institute for International Economics (IIE). 88 CU IDOL SELF LEARNING MATERIAL (SLM)
Krishna, K. and Kruger, A. (1995) ‘Implementing free trade areas: rules of origin and hidden protection‘, in Levinsohn, J., Deardorff, A. and Stern, R. (eds) New Directions in Trade Theory, Ann Arbor: University of Michigan Press. Ghosh, M., Perroni, C. and Whalley, J. (2003) ‘Developing-Country Benefits from MFN Relative to Regional/Bilateral Trade Arrangements’, Review of International Economics 11, 4: 712-728. Reference Books Pauwelyn, J. (2001) ‘the Role of Public International Law in the WTO: How Far Can We Go?’ American Journal of International Law 95, 3: 535-78. Textbook Maskus, K. E. (2000) Intellectual Property Rights in the Global Economy, Washington D.C.: Institute for International Economics (IIE). Krishna, K. and Kruger, A. (1995) ‘Implementing free trade areas: rules of origin and hidden protection‘, in Levinsohn, J., Deardorff, A. and Stern, R. (eds) New Directions in Trade Theory, Ann Arbor: University of Michigan Press. Ghosh, M., Perroni, C. and Whalley, J. (2003) ‘Developing-Country Benefits from MFN Relative to Regional/Bilateral Trade Arrangements’, Review of International Economics 11, 4: 712-728. Pauwelyn, J. (2001) ‘the Role of Public International Law in the WTO: How Far Can We Go?’ American Journal of International Law 95, 3: 535-78. Websites https://www.ukessays.com/essays http://www.fao.org/ https://www.wto.org/ 89 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 5: INTERNATIONAL MARKET ENTRY STRATEGIES Structure 5.0 Learning Objectives 5.1 Introduction 5.2Theories on International Market Entry Strategies 5.3 Different Entry Modes and Market Entry Strategies 5.3.1 Joint Investments 5.3.2 Strategic Alliances 5.4Direct Investment 5.4.1 Merger 5.4.2 Acquisition 5.5Licensing and Franchising 5.6 Contract Manufacturing and Outsourcing 5.7 Summary 5.8 Keywords 5.9 Learning Activity 5.10 Unit End Questions 5.11 References 5.0 LEARNING OBJECTIVES After studying this unit, student will be able to: Explain different market entry modes and entry strategies. Explain merger and acquisition. Explain licensing and franchising. Explain manufacturing and outsourcing. 90 CU IDOL SELF LEARNING MATERIAL (SLM)
5.1 INTRODUCTION In the previous twenty years, globalization has become the standard and organizations have understood that to develop hugely, it is purposeless to take a gander at an internal looking strategy however needs to investigate worldwide market definition. Regardless of the quick advances in innovation, satellite correspondences, and quicker transportation through air and ocean, organizations need to do a lot of foundation spadework before entering the global promoting ideas. As per Lauren Maillian Bias, CEO of Luxury Market Branding, essential advertising, and marking consultancy, it is vital to comprehend the particular nation's way of life, customs, needs, and implicit guidelines before entering those worldwide marketing ideas. Something else, the organization could confront difficulties, face even legitimate issues, and accordingly loses every one of the investments and put forth the attempt go to squander. The Vodafone charge issue in India, Amway's issues with administrative issues identified with network advertising, so additionally Coca Cola's ecological issues in India. Lauren Maillian Bias called attention to that there are five things to be taken into consideration off before investigating the worldwide market definition and the majority of them have nothing to do with the market except for understanding the general public, shows, customs, habits, and customs. Understand the Culture Every nation has its way of life and custom and as an outsider, you need to acknowledge and give due regard to it. It reaches out from how you welcome somebody, holding conferences, eating decorum, in any event, shaking hands or hello by uniting two hands as in Indian Namaste. In Japan, you may need to marginally do homage show regard. Seeing such social contrasts and valuing them is vital to set up long-haul connections. Social affectability is driven by two factor-compassion and objectivity. Having compassion implies your capacity to perceive and acknowledge contrasts that show in friendly circumstances. There is a famous saying when in Rome do as the Romans do. Not appropriately understanding the social, language contrasts, phonetic contrasts can bring about your marking exercise blowing up completely. One must be cautious with the language and little errors can hurt connections. One should be cautious about the manly and female sexes. 'The' in French is either ‘le’ (manly) or 'la' female. On the off chance that there is a goof and use la for le accidentally, it very well may be deciphered as obliviousness or freshness on your part and consequently hurt business arrangements. 91 CU IDOL SELF LEARNING MATERIAL (SLM)
In business exchanges as well, there are social contracts. In Japan, it is hostile to say 'no' however in the US each arrangement is tied in with arriving at a resolution of yes or no. Understand Currency Fluctuations In the local market, it is chiefly request, supply, and rivalry from different firms in the business that matters most. Notwithstanding, while working together in different nations, you should have a point-by-point examination of cash developments, authentic patterns and have the option to foresee its conduct. Agreements are arranged a very long time ahead of time and in the middle of cash trade esteems may have changed which might be unfavourable in your arrangement. It is smarter to secure cash rates and conveyance dates and evade hypotheses. There are presently product trades where exporters and those doing abroad business can fence their danger in different monetary forms. Programming, pharma, fabricating, agro-items are generally powerless to cash hazard. Understanding Laws and Conventions It is vital to comprehend a nation's constitution, laws in regard to business, business, and global relations. Laws could vary from one country to another, region to area, and the law of agreement, organization laws, and mechanical laws could have unobtrusive contrasts, and henceforth care ought to be taken from the beginning stage when the organization is fused. Expense laws must be followed and the inability to do so could have genuine monetary repercussions. It is smarter to have domestic lawyers to give lawful insight. It could help another businessperson from abroad to explore any unanticipated hindrances and clarify all agreement arrangements and phrasing. It is essential to comprehend the laws and legal jargon of the ward that administers your agreement before it turns out to be legitimately restricting. Understand Competition It is regularly a decent exercise to comprehend what the contenders have done as far as advertising methodology, dissemination, and what target crowd or socioeconomics they have obliged. Understanding the Demographics Understanding the social contrasts and custom additionally implies understanding the socioeconomics of the country the age gatherings, occupations, religion, pay, and economic wellbeing of target classification and tuning the techniques suitably. 92 CU IDOL SELF LEARNING MATERIAL (SLM)
5.2 THEORIES ON INTERNATIONAL MARKET ENTRY STRATEGIES Worldwide marketing centres after utilizing an organization's resources, experience, and items internationally\", as indicated by Keegan (2002), which in the business world today, is obvious as globalization impacts the board choices, strategies, and the way of life of the business. It has never been simpler to investment into foreign business sectors today, which can be confirmed through the receptiveness to it because of progression and liberation. Through an ascent in innovation, with correspondences constantly expanding all around the world, it is without question that singular economies have converged into the worldwide picture. Economies which were some time ago disconnected from one another are currently moulded more by one another's developments and systems, and the circumstance in the worldwide business sectors which can in this way assist them with shaping their strategy dealings. What's more, a glance at the proper figures, for instance, The World Development Report by the World Bank, obviously shows that the world is getting logically reliant for its monetary advancement. Shown through 1954, in America, imports were just a single percent of GNP, yet in 1984 they had ascended to 10%. The consciousness of market section mode decision gets from the hypothesis of the worldwide investment. It was considered as an issue with a particular element, degree, structure, and example of worldwide creation (Southard 1931; Hymer 1960; Caves 1971 and 1974; Dunning 1958 and 1977). At that point, it was analysed as a basic subject in international marketing by numerous financial analysts and promoting experts. Wind and Perlmutter (1977) contemplated that the decision of market section mode has an extreme bearing on global tasks and can be held as \"a wilderness issue\" in worldwide advertising. Root (1994) declared that the decision of market section mode can be supposed to be perhaps the most basic vital choices for global investments and organizations to make. It concerns approaching choices and execution in foreign business sectors and it requires an attending level of asset affirmation which is trying to move to start with one then onto the next; especially from undeniable level to low level. Kumar and Subramaniam (1997) featured that the decision of market passage mode is a basic key choice for organizations intending to direct business abroad. As investigated by Meyer, Estrin, Bhaumik, and Peng (2008), an organization cans investment into a foreign market by utilization of the accompanying techniques: trading, permitting, joint endeavour, or direct investment. The passage mode that a global organization picks has suggestions; as Zekiri and Angelova (2011) investigated, for instance, how much assets the organization should focus on its foreign tasks, the danger that the 93 CU IDOL SELF LEARNING MATERIAL (SLM)
business should endure just as the level of control that the organization can practice over the procedure on the new market. The strategy for 'sending out' is regularly utilized by organizations; aberrant or direct. As numerous nations neglect to introduce a sufficient measure of freedom to help nearby creation they use sending out as it allows an organization to fabricate its items midway for various business sectors and along these lines to acquire economies of scale. Invensys Energy Systems (NZ) Ltd. Is an illustration of a firm guided by sending out? This is a common instance of a little too medium measured particular business in a little locally situated market (New Zealand) and promoting specialty items all around the world. Backhanded trading is the point at which a firm collaborates with foreign business sectors through a locally found go-between. The critical benefit for utilizing a local go-between is through that element's schooling of foreign market conditions. Transcendently for organizations with slight or no involvement with trading; utilization of local middle person offers the exporter with available ability. The most well-known types of go-betweens are representatives, mixed trade chiefs, and makers' fare specialists. Browne and Dreyfus function as the market association, as needs are circulating sending out abilities for certain minor organizations that think that it's tricky to maintain their trading organizations. Notwithstanding their viability for little organizations, roundabout exporters address a little piece of the general worldwide advertising. Direct trading alludes to when a firm uses a mediator situated in a foreign market. An exporter should convey and associate with an enormous number of foreign contacts, possibly at least one for each enterprise means to enter. Pacific world corporate; a little maker, situated in California, of counterfeit fingernails and nail care items. The organization began to send out its items in 1992. Even though the organization is still little, with just 35 workers, the brand is presently one of the best generally circulated fake nail brands on the planet. With send out 15% of deals and expanding quickly, it is said that the fare share is projected to arrive at 25% throughout the following not many years. The business accepted that it was effective by framing long-haul associations with wholesalers, specialists, and different partners. 5.3 DIFFERENT ENTRY MODES AND MARKET ENTRY STRATEGIES 5.3.1 Joint Investments A Joint Investment is a cooperative arrangement between two or more independent entities that results in an entity that is different from the parents. Joint investment is marked by the presence of decision-making powers for the participants. This is despite the level of stakes 94 CU IDOL SELF LEARNING MATERIAL (SLM)
each participant might have in the combined entity. By way of a Joint Investment businesses can address regulations that favour only local companies. These investments also help companies to enter new markets at lower risk by transferring technological knowhow and by exploiting synergies. Sometimes, a Joint Investment is the only route to enter a new foreign market where the laws encourage local businesses but allow foreign business to enter only by way of forming Joint Investments. JVs can help minimize economic as well as political risks to a great extent. Apart for easing entry, Joint Investments also take care of the subtle issues of cultural differences and legal framework differences .In terms of ownership, in a JV usually the foreign company holds equity stake anywhere between 25% to 75%.While as per norms, this range can be between 10% to 90%. Joint Investments are frequently used by Indian companies to expand their business and enter foreign markets. Pharmaceuticals giants like Lupin, Ranbaxy have successfully implemented this as a growth strategy. There are many more examples of Indian companies reaping benefits in the form of both stabilization of their domestic business and expansion into new foreign markets. Gujarat based Esser has gotten into Joint Investments in Bangladesh and Indonesia. This has helped the company in two ways – by creating an assured domestic market for its HR (Hot Rolled) coil and also expansion into the new markets. Companies also circumvent the high transportation costs by setting up complementary production facilities in the foreign market. This strategy has greatly benefitted business expansion for Essel Packaging. Policy liberalization is providing the needed push for creation of many joint investments by Indian companies. Not only businesses are entering into more and more Joint Investments, but they are also entering more and more new countries. Thus, expanding both the breadth and depth of Joint Investments. This can be fuelled further by more radical reforms like increasing the investment limit for automatic clearance. Characteristics of Joint Investment Presence of Driving Factors: Certain factors make the alliance a necessity. In the absence of which there is no catalyst leading to formation of the Joint Investment. Strategic Synergy: The combination should result in value higher than the sum of the parts. Cooperation: There should be an environment of trust where companies cooperate for better efficiencies. Win-Win: The alliance must fairly distribute the risk and rewards to avoid internal dissent. Operational Integration: Apart from the strategy angle, the operational efficiencies should be taken care of to realise value. 95 CU IDOL SELF LEARNING MATERIAL (SLM)
Growth Opportunity: The goal of the alliance should be to put the investment as the market leader or to enter a new product line or acquire new technical knowhow. Focus: When the alliance focuses on clear objectives, the chances of success are higher. Managerial Commitment: The investment cannot be successful without commitment from the management team. Reasons for Joint Investments Cost Saving: A key reason for a joint investment can be to achieve synergies by way of consolidating costs for production, research etc. The partners in Joint Investments can achieve substantial cost saving by sharing the investments for heads like personnel, Research and Development, fixed costs like capital investments, etc. These synergies help sectors like telecom, defence, pharma, etc to grow wider. Sharing Risk: Partnering with another firm helps reduce the financial risk burden on one firm as risk gets distributed this is especially beneficial for projects of huge magnitude like infrastructure development, setting up power grids, etc. Accessing Technological Know How: By means of a Joint investment, a firm can gain access to the technological knowledge of the partner. This can include skills and experience as well. Pooling of experiences can create a knowledge asset that otherwise cannot be extricated.Since the skills and knowledge of a technology becomes an asset of the personnel which can only benefit the other corporation if this becomes a shared resource by way of entering into a Joint Investment. This opens route for a company to enter into new technology space otherwise would have been very difficult to achieve. Expanding Customer Base: Gaining access to the existing distribution network of the partner can help in expanding customer base of a firm to many new markets. Entry into Emerging Economies: Sometimes Joint Investment may be the only viable route to enter into developing markets like Asia. In such cases it might be important to have a deep understanding of the subtle cultural aspects that only a local partner can provide. Emergence of New Technical Markets: With continuous technological advancements, new markets are also coming into being. In order to successful enter such markets the best chance of a firm is to partner with an already established player rather than reinventing the wheel in terms of the new technology. Global Competition: Merger of firms which are similar in many aspects like business segment, production capacity, capital, access to global markets, etc can make the joint entity very powerful and more capable to face competition in the international market. 96 CU IDOL SELF LEARNING MATERIAL (SLM)
Financial Leverage: Joining financial resources with a partner can help a firm accumulate enough capital to go in for an acquisition. Intermediary Stage before Final Sale/Acquisition: A joint investment can be an intermediary step before the timelines for the ultimate sale or acquisition is finalized. Means to Bring in Change in Way of Working: Sometimes as an innovative solution, a firm can bring in a partner to stimulate entrepreneurial way of working. Advantages of Joint Investments Joint investments help consolidate large funds for big projects. Joint investments help distribute risk among the participants and make different skills for project execution like experience, technical knowhow, etc easily available. Joint Investments provide advantages of synergies and help in increasing the feasibility of large-scale projects. Joint Investment is a very good route to enter new and foreign markets. Disadvantages of Joint Investments As more than one party are involved in the decision-making process in a Joint Investment, there might be delays in finalising decisions and also there can be conflicts because of different points of view. Joint Investment might not be very agile in responding to dynamic factors such as new competitors, dynamism in the business environment, etc. Also, as a market entry strategy, Joint Investment might require comparatively (vs. licensing and other options) higher capital investment and management time for working out the operational details. Strategic Alliances In the 1980s the term 'Strategic Alliance' came to be used for any kind of mutually beneficial alliance that cannot be categorised clearly as a joint investment or a licensing arrangement. According to Pritzl and Bronder, a strategic alliance is an arrangement where two companies combine their value chain activities to create competitive advantage.SIA or Strategic International Alliance is a mutually beneficial arrangement between two or more companies to balance risks in pursuit of a common objective. This concept has been coming into prominence recently as a means to build competitive advantage and address areas of weakness. Some motives for entering into a SIA can be - entry into a new market, increased efficiencies, business expansion, and access to technological knowhow. By way of forming alliances, businesses can access resources that otherwise would have been too expensive to procure .Also , its application as a market entry strategy is evident in many 97 CU IDOL SELF LEARNING MATERIAL (SLM)
industry segments like in the Tea business, Tata Tea by way of strategic alliance with Tetley entered markets abroad. Types of Strategic Alliances: Based on Production: These are more often seen in the automobile industry by achieving efficiency either by combining production of individual parts or by developing new product models together. Based on Technology: Companies with a focus on research expertise and objectives of entering new markets, establishing innovations quickly, and utilisation of complementary technology. Based on Distribution: These are becoming increasingly popular for gaining access to wider distribution networks. One example that can illustrate these structures is the alliance between General Mills (US based) and Nestle, Switzerland. The former was number two in the US in terms of market share and had no presence in the other countries. This alliance gave General Mills access to distribution networks owned by Nestle in Europe, Latin America and the Far East, in return Nestle benefitted by receiving product technology and production know how from General Mills. This proved to be a great advantage for Nestle in competing with Kellogg’s. Advantages of Strategic Alliances: Following are the advantages of Strategic Alliances. Reduction in Cost by Using Specialization: When entering into a foreign market fixed cost for setting up production facilities might be very high. To circumvent this, firms can form alliance with a local specialist which already has low production costs as it caters to other enterprises. As the business expands, tie up with specialists can greatly benefit by reducing the costs further and economies of scale. Counter Competition: Joining hands with direct competitors helps reduce competition. Specialised Competencies: Every firm has a competency which defines its area of specialization. By partnering with specialists, firms can better manage their competencies. Vertical and Horizontal Integration: Vertical integration helps reduce input costs and horizontal integration helps reduce distribution costs. Way to Address Government Constraints: In the backdrop of government regulations, companies might have to enter into alliances to enter a foreign market. Access to Location Specific Assets: Entering a foreign market involves in depth understanding of the minute cultural, economic and political differences. To handle these, the beads route is to partner with a local player. 98 CU IDOL SELF LEARNING MATERIAL (SLM)
Minimise Risk: Partnering with another firm can guard against political uncertainties in foreign land that can cause damage to the company assets set up abroad. Alliance with a local player can help avoid the need for an elaborate set up in a foreign country. Geographical Diversification: Earnings of a firm can be boosted by setting up business in different geographies. This helps in taking advantage of variance in time windows for business cycles across locations. Disadvantages of Strategic Alliances Some of the disadvantages of the strategic alliance set up are - Moral Hazard: This happens when either of the partners does not keep its side of the deal. For example, a firm might agree to make its best and most experienced talent available for the alliance but instead sends new recruits. Incorrect Selection: The alliance may get formed with partners who promise to bring certain competencies to the alliance but in reality, they do not possess these. Information Availability: Firms in an alliance might have to disclose information to their partner/s which they might prefer keeping undisclosed. Hold Up of Capital: This can happen even if the alliance selection is appropriate as the investment might be relevant only in the context of the alliance. Change in Circumstances: The changes in the business environment can lead to an alliance becoming obsolete. Wealth Distribution: Distribution of costs and profits might lead to conflicts. Loss of Autonomy: There can be turf issues leading to questions on the level of autonomy. 5.4 DIRECT INVESTMENT The direct investment is all the more regularly alluded to as foreign direct investment (FDI). FDI alludes to an interest in a foreign business endeavour intended to get a controlling interest in the investment. The immediate investment gives capital financing in return to a value interest without the acquisition of normal portions of an organization's stock. Understanding Direct Investment The motivation behind FDI is to acquire a value interest adequate to control an organization. In certain cases, it includes an organization in one nation starting its business activities in another country. In different cases, direct investment includes securing control of existing resources of a business previously working in the outside country. An immediate investment 99 CU IDOL SELF LEARNING MATERIAL (SLM)
can include acquiring a lion's share revenue in an organization or a minority premium, however, the premium obtained gives the contributing party powerful control. Direct investment is essentially recognized from a portfolio investment, the acquisition of normal or favoured stock portions of a foreign organization, and by the component of control that is looked for. Control can emerge out of sources other than investment of capital; nonetheless, control of resources, for example, innovation is viewed as just basic information. Truth be told, FDI is habitually not a basic money-related exchange of proprietorship or controlling revenue however can incorporate reciprocal elements, like hierarchical and the board frameworks or innovation. Foreign direct investments can be made by people yet are all the more usually made by organizations wishing to build up a business presence in an outside country. Foreign direct investment takes numerous structures by and by however are, for the most part, named either a vertical, level or aggregate investment. For vertical direct investment, the financial backer adds foreign exercises to a current business. A model is an American automobile producer that builds up vendors or procures a section's supply business in an outside country. The level direct investment is maybe the most well-known type of direct investment. For flat investments, a business previously exists in one nation sets up similar business activities in an outside country. A cheap food establishment situated in the United States may open eatery areas in China. Flat immediate investment is additionally alluded to as green-field passage into a foreign market. For an aggregate sort of direct investment, a current organization in one nation adds a disconnected business activity in a foreign country. This is an especially difficult type of direct investment since it requires all the while building up another business and setting up it in a far-off country. An illustration of aggregate direct investment may be a protection firm opening a hotel park in an outside country. Direct investments are of the following types: Horizontal: Green field where new line of business is set up in a foreign country.US based restaurant franchise expanding operation in a country like India is an example of Horizontal Direct Investment. Vertical: Companies add similar operations in a foreign country.An example can be US auto manufacturer setting up dealerships in foreign countries or acquiring a supply business abroad. 100 CU IDOL SELF LEARNING MATERIAL (SLM)
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