MBA 302 - International Business and International Trade PDF

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International Business and International Trade...

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Yashwantrao Chavan Maharashtra Open University

MBA 302

MBA : SECOND YEAR SEMESTER III COMPULSORY COURSE

INTERNATIONAL BUSINESS AND INTERNATIONAL TRADE Unit 1

GLOBALIZATION AND INTERNATIONAL BUSINESS

11

Unit 2

NATIONAL DIFFERENCES IN POLITICAL ECONOMY, CULTURE AND ECONOMIC DEVELOPMENT 25

Unit 3

INTERNATIONAL TRADE THEORIES

40

Unit 4

REGIONAL ECONOMIC INTEGRATION

58

Unit 5

THE POLITICAL ECONOMY OF INTERNATIONAL TRADE

74

Unit 6

WORLD TRADE ORGANIZATION (WTO)

93

Unit 7

THE BALANCE OF PAYMENTS AND FOREIGN EXCHANGE MARKETS

107

Unit 8

INTERNATIONAL MONETARY SYSTEM

126

Unit 9

FOREIGN DIRECT INVESTMENT

138

Unit 10 INTERNATIONAL BUSINESS STRATEGY

155

Unit 11 MULTINATIONAL COMPANIES (MNCs) AND ENTRY STRATEGIES

167

Unit 12 INTERNATIONAL MARKETING

180

Unit 13 SUPPLY-CHAIN MANAGEMENT FOR MNCs

193

Unit 14 FINANCIAL MANAGEMENT FOR MNCs

208

Unit 15 ACCOUNTING FOR MULTINATIONAL OPERATIONS

222

Unit 16 INTERNATIONAL HUMAN RESOURCE MANAGEMENT

235

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY VICE-CHANCELLOR : Prof. E. Vayunandan DIRECTOR, SCHOOL OF COMMERCE & MANAGEMENT : Dr. Pandit Palande NATIONAL ADVISORY BOARD Dr. Pandit Palande Former Vice Chancellor Director, School of Commerce & Management, Yashwantrao Chavan Maharashtra Open University, Nashik

Prof. Devanath Tirupati, Dean Academics, Indian Institute of Management (IIM) Bangalore.

Dr. Surendra Patole Assistant Professor, School of Commerce & Management, Yashwantrao Chavan Maharashtra Open University, Nashik

Prof. Sudhir. K. Jain Former Vice Chancellor Professor & Former Head Dept. of Management Studies Indian Institute of Technology (IIT) Delhi

Prof. Karuna Jain, Director, N I T I E, Vihar Lake, Mumbai

Dr. Latika Ajitkumar Ajbani Assistant Professor, School of Commerce & Management, Yashwantrao Chavan Maharashtra Open University, Nashik

Prof. Vinay. K. Nangia Professor & Former Head Department of Business Studies, Indian Institute of Technology (IIT) Roorkee

Author

Editor

Dr. Ruchi Sharma Associate Professor School of Humanities and Social Sciences Indian Institute of Technology Indore Simrol, Indore 453552

Dr. Bharath Kumar Associate Professor School of Humanities and Social Sciences Indian Institute of Technology (IIT) Indore, Simrol, Indore - 453 552

Instructional Technology Editing & Programme Co-ordinator Dr. Latika Ajitkumar Ajbani Assistant Professor School of Commerce & Management Yashwantrao Chavan Maharashtra Open University, Nashik

Production Shri. Anand Yadav Manager, Print Production Centre, Y. C. M. Open University, Nashik- 422 222 Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik. (First edition developed under DEB development grant) q First Publication : October. 2017 q Publication No. : 2235 q Cover Design : Shri. Avinash Bharne q Printed by : Shri. Shashikant Ahirrao, M/s. Abhiyankit Printers, B-11, NICE, Satpur, Nashik - 422 007 q Publisher : Dr. Dinesh Bhonde, Registrar, Y. C. M. Open University, Nashik- 422 222

ISBN : 978-81-8055-419-3

MBA 302

Introduction In present times, firms operate in a challenging environment as in a globalized world the competition is no longer restricted to domestic firms. In a continuously growing and changing situation, firms have to learn to survive through international connections. Firms are involved in a range of international activities either partially by merely exporting and importing or broadly by having affiliates, subsidiaries across the world and decentralized decision making. Such firms have to deal with different countries that vary in terms of culture, political system, legal system and economic development. Clearly, managers of such firms have extensive challenges in form of marketing, human resource management, supply chain management and financial management. It is the presence of these challenges that necessitates the study of international trade and business that can equip managers with tools and techniques to deal with the problems and issues in effective manner. Against this backdrop, I have formulated the plan of this book for the readers. I can visualize the entire book in 5 parts. Part I (units 1-3) focuses on initial discussion on globalization and international business, national differences in political economy, culture and economic development and international trade theories. Part II (units 46) takes the discussion further and deals with economic integration, political economy of trade, India’s trade policy and WTO. Part III (units 7-8) brings monetary aspect of international trade and talks about balance of payment, foreign exchange market, Indian foreign exchange market, and international monetary system. Part IV is a bridge between the international trade and business as it starts with foreign direct investment and moves on to discuss international business strategy of firms and entry strategies. Part V deals with more functional aspects of international business including marketing, supply-chain management, financial management, accounting and human resource management for MNCs. The manuscript could not have been completed without the assistance of Mr. Madan Dhanora. I would always be grateful for his enthusiasm in drafting the initial chapters. I would like to acknowledge the help received from Dr. Bharath Kumar for his editing in completing this project. Dr. Bharath Kumar Dr. Ruchi Sharma

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik. All rights reserved. No part of this publication which is material protected by this copyright notice may be reproduced or transmitted or utilized or stored in any form or by any means now known or hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recording or by any information storage or retrieval system, without prior written permission from the Publisher. The information contained in this book has been obtained by authors from sources believed to be reliable and are correct to the best of their knowledge. However, the publisher and its authors shall in no event be liable for any errors, omissions or damage arising out of use of this information and specially disclaim any implied warranties or merchantability or fitness for any particular use.

Message from the Vice-Chancellor Dear Students, Greetings!!! I offer cordial welcome to all of you for the Master’s degree programme of Yashwantrao Chavan Maharashtra Open University. As a post graduate student, you must have autonomy to learn, have information and knowledge regarding different dimensions in the field of Commerce & Management and at the same time intellectual development is necessary for application of knowledge wisely. The process of learning includes appropriate thinking, understanding important points, describing these points on the basis of experience and observation, explaining them to others by speaking or writing about them. The science of Education today accepts the principle that it is possible to achieve excellence and knowledge in this regard. The syllabus of this course has been structured in this book in such a way, to give you autonomy to study easily without stirring from home. During the counseling sessions, scheduled at your respective study centre, all your doubts will be clarified about the course and you will get guidance from some experienced and expert professors. This guidance will not only be based on lectures, but it will also include various techniques such as question-answers, doubt clarification. We expect your active participation in the contact sessions at the study centre. Our emphasis is on ‘self study’. If a student learns how to study, he will become independent in learning throughout life. This course book has been written with the objective of helping in self-study and giving you autonomy to learn at your convenience. During this academic year, you have to give assignments and complete the Project work wherever required. You have to opt for specialization as per programme structure. You will get experience and joy in personally doing above activities. This will enable you to assess your own progress and thereby achieve a larger educational objective. We wish that you will enjoy the courses of Yashwantrao Chavan Maharashtra Open University, emerge successful and very soon become a knowledgeable and honorable Master’s degree holder of this university. Best Wishes! - Vice-Chancellor

International Business and International Trade

SYLLABUS UNIT 1 :

UNIT 2 :

Globalization and International Business 

International Trade: Basic Concepts



Globalization and its Drivers



State of World Economy



International Business

National Differences in Political Economy, Culture and Economic Development

UNIT 3 :

UNIT 4 :



Political System and International Business



Legal Systems and International Business



Culture and International Business

International Trade Theories 

Trade Theories of Absolute and Comparative Advantage



Heckscher-Ohlin’s Theory of Factor Endowment



Modern Theories of International Trade

Regional Economic Integration 

Economic Integration



The Theory of Custom Unions



Dynamic Gains of Custom Unions



European Union



India and International Agreements

UNIT 5 :

UNIT 6 :

The Political Economy of International Trade and Overview of India’s Trade Policy 

Instruments of Trade Policy



Free Trade v/s Protectionism: The Debate



Strategic Trade Policy:



Inward v/s Outward Looking Strategies



Overview of India’s Foreign Trade Policy



Composition and Direction of Indian Foreign Trade

World Trade Organization 

Scenario before WTO



About WTO



Basic structure of WTO



WTO and International Business

UNIT 7 : Balance of Payment, Foreign Exchange Market and Overview of Indian Foreign Exchange Market 

Components of the Balance of Payments Account



Balance of Payment Statement since Independence



Balance of Payment Statement After 1990



Recent Concerns in Balance of Payment Statement



Foreign Exchange Market



Exchange Rate and its Types



Economic Theory of Exchange Rate



Indian Foreign Exchange

UNIT 8 : International Monetary System 

International Monetary System



Reserve Currency



Gold Standard Period



Bretton Woods System



International Monetary Fund

UNIT 9 : Foreign Direct Investment 

Portfolio investment by Foreign Institutional Investors



Theories of FDI



FDI Flows in India



Historical Context



FDI Policy: Historical Phases



FDI Policy: Different Routes



Factors that attract FDI



Advantages and Disadvantages of FDI

UNIT 10 : International Business Strategy 

The Role of Strategy in International Business



Operation of a Firm: Primary v/s Secondary activities



Global Expansion and Profitability of a firm



Alternative Organizational Arrangements for International Operations



Issues of Control



Global Corporate Social Responsibility

UNIT 11 : MNCs and Entry Strategies 

Types of MNCs



Taxonomy of Entry Modes of MNCs



Determinants of Entry Mode Choice in Emerging Nations

UNIT 12 : International Marketing 

Global Marketing Strategy: Marketing Mix In case of International firms



International Pricing



International Marketing Communications



International Distribution Channels

UNIT 13 : Supply-chain Management for MNCs 

Supply-Chain Management for International Businesses



Outsourcing and Off-shoring



Strategic Implications of Outsourcing



Risk and Limits to Global Sourcing

UNIT 14 : Financial Management for MNCs 

Global Capital Market



International Financial Management



Risks Involved in Foreign Currency Transactions



Emerging Markets as International Investment Destinations

UNIT 15 : Accounting for Multinational Operations 

Accounting Standard Differences



Managing the Diversity of International Accounting and Tax Practices



Maintaining Transparency in Financial Reporting



Accounting Aspects of Control Systems



Trends toward Harmonization

UNIT 16 : International Human Resource Management 

The Strategic Role of Human Resources in International Business



International Staffing Policy



Training of Personnel



International Performance Appraisal



Compensation of Personnel

BLANK

UNIT 1 GLOBALIZATION AND INTERNATIONAL BUSINESS Structure 1.0 Introduction 1.1 Unit Objectives

GLOBALIZATION AND INTERNATIONAL BUSINESSS

1.2 International Trade: Basic Concepts 1.3 Globalization and its Drivers

NOTES

1.4 State of World Economy 1.5 International Business 1.6 Summary 1.7 Key Terms 1.8 Questions & Exercises 1.9 Further Readings and References 1.0 Introduction This unit introduces the readers of this book to the basic concepts of international trade, international business and globalization. It discusses about the drivers of globalization in the past four decades. Most importantly, it highlights the changing world order particularly after 2000 and financial crisis of 2008. 1.1 Unit Objectives After reading this unit, you will be able to: 1. understand basic concepts related to international trade. 2. explain the phenomenon of globalization along with its drivers and implications for international business. 1.2 International Trade: Basic Concepts Trade essentially involves buying and selling of goods and services produced elsewhere. This is a voluntary exchange of goods and services. The initial form of trade in traditional societies was barter system including direct exchange of goods between two groups of people. This is a very restrictive type of trade involving high search and transactional costs. The problem of barter system is overcome by introduction of money. Trade is not limited and has been expanded to international level. In recent times, world trade has increased rapidly leading to increase in the degree of interdependence among nations. International trade is different from inter-regional trade which takes place between different parts

11

GLOBALIZATION

of a same nation or different parts of same geographical regions.

AND

International trade is carried out by firms engaged in exports and imports, and

INTERNATIONAL

by Multinational Corporations (MNCs) or Multinational Enterprises (MNEs).

BUSINESSS

These firms may vary in their operations, for example, some firms may participate only in import and export activities but do not make any investment outside the

NOTES

country. Other firms may be present through investment in many countries. However, all units may be controlled by a single headquarter which is responsible for the overall marketing strategies. Furthermore, there are firms that also make investment in different countries and operate from a single headquarter only. However, these firms may give decision making power regarding research and development expenditure, marketing strategies or any other local activity to affiliate in the foreign market. Reasons for International Trade A pertinent question is about the need for international trade which is the result of specialization in production and its techniques. According to Adam Smith, trade between two nations is based on absolute advantage for instance if one nation is efficient in production of one commodity as compare to another nation and less efficient in production of second commodity then both nations will get advantage by specializing in production of a commodity which can be produced efficiently and exchange it with each other. In this process, resources can be utilized in the most efficient way. In modern times, trade is the basis of world’s economic organisation and is related to foreign policy of nations. With welldeveloped transportation and communication systems, no country is willing to forego the benefits derived from participation in international trade. Following are the reasons behind international trade: 1. Difference in natural resources: Geographical structures, mineral resources and climatic conditions are different in various countries leading to exchange of goods between nations. Geographical structures determine mineral resources and climatic conditions influence trade by diversity in production of commodities. For example, wool production takes place in cold regions whereas the production of banana and rubber is possible in tropical regions only. 2. Population factors: The size, diversity and distribution of population among

12

different countries also affect the trade.Young countries with higher population

between 15-35 years of age bracket will demand commodities that are different

GLOBALIZATION

from the country with aging population. Standard of living also determines volume

AND

of trade. A high standard of living of the population may lead to the demand for

INTERNATIONAL

better quality imported products and more need for more variety. On the other

BUSINESSS

hand, economies with lower standard of living will require goods and services to fulfil basic needs only.

NOTES

3. Differences in cost of production: The differences in cost of production of different goods and services across the countries imply that the prices of the commodities vary. As long as the transportation cost does not reduce the cost differences, traders will find it profitable to purchase goods from a cheaper place and sell it in the market where they can get higher prices. The possibility for arbitrage will always motivate businesses to be in...