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U N I T 1 : I N T E R N AT I O N A L BUSINESS THEORIES

B Y : D R . R A J N I S H K ATA R I A 1

INTERNATIONAL BUSINESS • International Business conducts business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. International business involves exports and imports. • International Business is also known, called or referred as a Global Business or an International Marketing. • An international business has many options for doing business, it includes,

– Exporting goods and services. – Giving license to produce goods in the host country. – Starting a joint venture with a company. – Opening a branch for producing & distributing goods in the host country. – Providing managerial services to companies in the host country 2

FEATURES OF INTERNATIONAL BUSINESS • Large scale operations : In international business, all the operations are conducted on a very huge scale. Production and marketing activities are conducted on a large scale. It first sells its goods in the local market.Then the surplus goods are exported. • Integration of economies : International business integrates (combines) the economies of many countries.This is because it uses finance from one country, labour from another country, and infrastructure from another country. It designs the product in one country, produces its parts in many different countries and assembles the product in another country. It sells the product in many countries, i.e. in the international market. • Dominated by developed countries and MNCs : International business is dominated by developed countries and their multinational corporations (MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control) foreign trade.This is because they have large financial and other resources. They also have the best technology and research and development (R & D). They have highly skilled employees and managers because they give very high salaries and other benefits.Therefore, they produce good quality goods and services at low prices.This helps them to capture and dominate the world market. 3

• Benefits to participating countries : International business gives benefits to all participating countries. However, the developed (rich) countries get the maximum benefits. The developing (poor) countries also get benefits. They get foreign capital and technology. They get rapid industrial development. They get more employment opportunities. All this results in economic development of the developing countries. Therefore, developing countries open up their economies through liberal economic policies.

• Keen competition : International business has to face keen (too much) competition in the world market. The competition is between unequal partners i.e. developed and developing countries. In this keen competition, developed countries and their MNCs are in a favourable position because they produce superior quality goods and services at very low prices. Developed countries also have many contacts in the world market. So, developing countries find it very difficult to face competition from developed countries. • Special role of science and technology : International business gives a lot of importance to science and technology. Science and Technology (S & T) help the business to have large-scale production. Developed countries use high technologies. Therefore, they dominate global business. International business helps them to transfer such top high-end technologies to the developing countries. • International restrictions : International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business.

• Sensitive nature : The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, etc. has a huge impact on it. Therefore, international business must conduct marketing research to find out and study these changes. They must adjust their business activities and adapt accordingly to survive changes. 4

INTERNATIONAL TRADE • International trade is the exchange of capital, goods, and services across international borders or territories. It is the exchange of goods and services among nations of the world. • In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, scramble for Africa, Atlantic slave trade, salt roads), its economic, social, and political importance has been on the rise in recent centuries.

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INTERNATIONAL TRADE AND DOMESTIC TRADE Basis for Comparison

Domestic Business

International Business

Meaning

A business is said to be domestic, International business is one which when its economic transactions are is engaged in economic transaction conducted within the geographical with several countries in the world. boundaries of the country.

Area of operation

Within the country

Whole world

Quality standards

Quite low

Very high

Deals in

Single currency

Multiple currencies

Capital investment

Less

Huge

Restrictions

Few

Many

Nature of customers

Homogeneous

Heterogeneous

Business research

It can be conducted easily.

It is difficult to conduct research.

Mobility of factors of production

Free

Restricted 6

MAIN BENEFITS OF INTERNATIONAL TRADE • • • • • • • • • • • • • •

Enhances the domestic competitiveness Takes advantage of international trade technology Increase sales and profits Extends sales potential of the existing products Maintain cost competitiveness in your domestic market Enhance potential for expansion of your business Gains global market share Reduce dependence on existing markets Stabilize seasonal market fluctuations Monetary gains to the respective countries indulging in trade. More variety of goods available for consumers Better quality of goods Competition both at the international level as well as local level Closer ties between nations

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ADVERSE EFFECTS OF INTERNATIONAL TRADE • Local production may suffer. • Local industries may be overshadowed by their international competitors.

• Rich countries may influence political matters in other countries and gain control over weaker nations. • Ideological differences may emerge between nations with regard to the procedures in trade practices.

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TRADE RECOVERY EXPECTED IN 2017 AND 2018 AMID POLICY UNCERTAINTY • World merchandise trade volume is forecast to grow 2.4% in 2017, but due to a high level of uncertainty, this is placed within a range of 1.8-3.6%. • This is up from a very weak 1.3% in 2016, as global GDP growth rises to 2.7% this year from 2.3% last year. • Trade growth in 2018 should pick up slightly to between 2.1-4.0%. • The ratio of trade growth to GDP growth fell below 1:1 in 2016, for the first time since 2001. • The slowdown in emerging market economies contributed much to the sluggish rate of trade growth in 2016, but these countries are expected to return to modest growth in 2017-18. • Export orders and container shipping have been strong in the early months of 2017, but trade recovery could be undermined by policy shocks. • Policy uncertainty is the main risk factor, including imposition of trade restrictive measures and monetary tightening. 9

RATIO OF WORL D MERCHANDISE TRADE VOL UME GROWTH TO WORL D REAL GDP GROWTH, 1 98 1 - 2 016 % CHANGE AND RATIO

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LARGEST COUNTRIES BY TOTAL INTERNATIONAL TRADE R a n k

Country

International trade of goods (billions of USD)

International trade of services (billions of USD)

Total international trade of goods and services (billions of USD)

–

World

32,430

9,635

42,065

–

European Union

3,821

1,604

5,425

1

United States

3,706

1,215

4,921

2

China

3,686

656

4,342

3

Germany

2,626

740

3,366

1,066

571

1,637

4

United Kingdom

5

Japan

1,250

350

1,600

6

France

1,074

470

1,544

7

Netherlan 1,073 ds

339

1,412

8

Hong Kong

1,064

172

1,236

9

South Korea

902

201

1,103

1 0

Italy

866

200

1,066

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MERCHANDISE TRADE VOLUME AND REAL GDP • Assuming that developed economies maintain generally accommodative fiscal and monetary policies, that economic recovery in emerging economies proceeds gradually, and that restrictive trade measures do not proliferate, we would expect merchandise trade to grow 2.4% in volume terms. • However, given the significant downside risks and the prolonged period of weak trade growth in recent years, this growth is placed within a range of 1.8% to 3.6%. World trade growth could be as low as 1.8% in 2019 if downside risks emerge, or it could be as high as 3.6% if our basic assumptions are too pessimistic, but the upside potential is less likely. In 2018 trade volume growth should be between 2.1% and 4.0%

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a. Figures for 2017 and 2018 are projections. b. Average of exports and imports. c. Includes the Commonwealth of Independent States (CIS), including associate and former member States. d. Other regions comprise Africa, Commonwealth of Independent States (CIS), and Middle East. Sources: WTO Secretariat for trade; consensus estimates for GDP, with data source from the International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD), the United Nations, the Economist Intelligence Unit (EIU) and a variety of national sources.

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LAISSEZ-FAIRE VERSUS INTERVENTIONIST APPROACHES TO EXPORTS & IMPORTS • Interventionist:  Mercantilism  Neo-mercantilism

• Free-trade theories:  Absolute advantage  Comparative advantage

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THEORIES OF TRADE PATTERNS • Explaining trade patterns:  Country size  Factor proportions  Country similarity

• Trade competitiveness:  Product life cycle theory

 Porter diamond

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WHAT THE MAJOR TRADE THEORIES DO AND DON’T DISCUSS

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MERCANTALIST THEORY  Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports)  Neo-mercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective

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THEORY OF ABSOLUTE ADVANTAGE • Suggests specialization through free trade because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones • A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage

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THEORY OF COMPARATIVE ADVANTAGE • Also proposes specialization through free trade because it says that total global output can increase even if one country has an absolute advantage in the production of all products

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THEORIES OF SPECIALIZATION Both absolute and comparative advantage theories are based on specialization • Assumptions policymakers question • full employment • economic efficiency • division of gains • transport costs • statics and dynamics • services • production networks • mobility

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TRADE PATTERN THEORIES • How much a country will depend on trade if it follows a free trade policy • What types of products countries will export and import

• With which partners countries will primarily trade

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THEORY OF COUNTRY SIZE • Countries with large land areas are apt to have varied climates and natural resources • They are generally more self-sufficient than smaller countries are

• Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade

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FACTOR-PROPORTIONS THEORY • A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors • Factor costs will determine which goods the country can produce most efficiently

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COUNTRY-SIMILARITY THEORY • Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies • Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them

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PRODUCT LIFE CYCLE (PLC) THEORY • Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries • Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline

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LIFE CYCLE OF THE INTERNATIONAL PRODUCT

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THE PORTER DIAMOND • Four conditions as important for competitive superiority: – demand conditions – factor conditions – related and supporting industries – firm strategy, structure, and rivalry

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LIMITATIONS OF THE PORTER DIAMOND THEORY • Production factors and finished goods are only partially mobile internationally • The cost and feasibility of transferring production factors rather than exporting finished goods internationally will determine which alternative is better

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THE RELATIONSHIP BETWEEN TRADE AND FACTOR MOBILITY • Capital and labor move internationally to gain more income and flee adverse political situations • Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products

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INTERNATIONAL TRADE • International Trade takes place because of the variations in productive factors in different countries. The variations of productive factors cause differences in price in different countries and the price differences are the main cause of internat ional trade. There are numerous advantages of international trade accruing to all the participants of such trade. A few of such advantages are mentioned below: • Efficient use of productive factors: The biggest advantage of international trade relates to the advantages accruing from territorial division of labor and international specialization. International trade enables a country to specialize in the production of those commodities in which it enjoys special advantages. All countries are not equally endowed with natural resources and other facilities for the production of goods and services of various kinds. Some countries are richly endowed with land and forest resources, which others happen to have abundant capital resources. Some others have abundant supplies of labor power. Without international trade, a country will have to produce all the goods it requires irrespective of the costs involved. But international trade enables a country to produce only those goods in which it has a comparative advantage or an absolute advantage and import the rest from other countries. This leads to international specialization or division of labor, which, in turn, enables efficient use of the productive factors with minimum wastages. Specialization would also lead to economies of scale and which, in turn, would lead to reduction of cost of products and services.

• Equality in commodity and factor prices: International trade leads to an equality of the prices of internationally traded goods and productive factors in all the trading regions of the world. It should, however, be remembered that the gains arising from international trade shall be available to the participating countries only if trade is free and unfettered. If the trade is subjected to tariff and non-tariff restrictions by the trading countries, the gains of international trade get nullified in the process to a large extent. 30

BENEFITS OF INTERNATIONAL TRADE • To become wealthier, countries want to use their natural resources land, labour, capital and entrepreneurship in the most efficient manner. However, there are differences among countries in the quantity, quality and cost of these resources.The advantages that a country has may vary according to the following. • Abundant minerals

• Climate suited to agriculture • Well-trained labour force

• New innovative ideas • Highly developed infrastructure like good roads, telecommunication systems, etc. • Instead of trying to produce everything by themselves, countries often concentrate on producing things that they can produce most efficiently.They then trade those for other goods and services. In doing so, both the country and the world becomes wealthier.

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• Theories of why trade occurs: – Differences across countries in labor, labor skills, physical capital, natural resources, and technology – Economies of scale (larger scale of production is more efficient)

• Sources of differences across countries that lead to gains from trade: – The Ricardian model examines differences in the productivity of labor (due to differences in technology) between countries. – The Heckscher-Ohlin model examines differences in labor, labor skills, physical capital, land, or other factors of production between countries.

OPPORTUNITY COST AND COMPARATIVE ADVANTAGE • The Ricardian model uses the concepts of opportunity cost and comparative advantage. • The opportunity cost of producing something measures the cost of not being able to produce something else with the resources used. • Example 1: If a person is having cash in hand Rs. 1,00,000/-, he may think of two alternatives to increase cash. • Option 1: Investing in bank.We will get returns amount 10000/• Option2: Investing in business.We get returns amount 17000/-

• Generally we chose the option 2 because we will get more returns than the option 1. Here the option 1 is the opportunity cost, that what we have not chosen. • Example 2: I have a number of alternatives of how to spend my Friday night: I can go to the movies; I can stay home and watch the baseball game on TV, or go out for coffee with friends. If I choose to go to the movies, my opportunity cost of that action is what I would have chosen if I had not gone to the movies - either watching the baseball game or going out for coffee with friends. Note that an opportunity cost only considers the next best alternative to an action, not the entire set of alternatives. • The opportunity cost of a decision is based on what must be given up (the next best alternative) as a result of the decision. Any decision that involves a choice between two or more options has an opportunity cost.

• For example, a limited number of workers could produce either roses or computers. – The opportunity cost of producing computers is the amount of roses not produced. – The opportunity cost of producing roses is the amount of computers not produced.

• Suppose that in the U.S. 10 million roses could be produced with the same resources that could produce 100,000 computers.

• Suppose that in Colombia 10 million roses could be produced with the same resources that could produce 30,000 computers. • Workers in Columbia would be less productive than those in the U.S. in manufacturing computers. • Colombia has a lower opportunity cost of producing roses. – Colombia can produce 10 million roses, compared to 30,000 computers that it could otherwise produce. – The U.S. can produce 10 million roses, compared to 100,000 computers that it could otherwise produce.

• The U.S. has a lower opportunity cost of producing computers. – Colombia can produce 30,000 computers, compared to 10 million roses that it could otherwise produce. – The U.S. can produce 100,000 computers, compared to 10 million roses that it could otherwise produce.

– The U.S. can produce 30,000 computers, compared to 3.3 million roses that it could otherwise produce.

• A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than in other countries. – The U.S. has a comparative advantage in computer production. – Colombia has a comparative advantage in rose production.

• Suppose initially that Colombia produces computers and the U.S. produces roses, and that both countries want to consume computers and roses. • Can both countries be made better off?

• The theory of comparative advantage is an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky (self sufficient) price, i.e. at a lower relative marginal cost prior to trade. • One does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries. • The closely related law or principle of comparative advantage holds that under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.

COMPARATIVE ADVANTAGE AND TRADE • When countries specialize in production in which they have a comparative advantage, more goods and services can be produced and consumed. – Make U.S. stop growing roses and use those resources to make 100,000 computers instead. Have Colombia stop making 30,000 computers and grow roses instead. – If produce goods in which have a comparative advantage (U.S. produces computers and Colombia roses), they could still consume the same 10 million roses, but could consume 100,000 – 30,000 = 70,000 more computers.

ONE-FACTOR RICARDIAN MODEL • The simple example with roses and computers explains the intuition behind the Ricardian model. • Constructing a one-factor Ricardian model using the following assumptions: The assumptions are: • Labor is the only factor of production. • Labor productivity varies across countries due to differences in technology, but labor productivity in each country is constant. • The supply of labor in each country is constant. • There is no transport cost • There is full employment • Two are only two countries & two goods. • International trade is free from all barriers. • Goods are exchanged against one another according to the relative amounts of labor embodied in them • Production is subject to the law of constant returns

THEREFORE, WHAT IS THE GAINS FROM TRADE? • Gains from trade come from specializing in the type of production which uses resources most efficiently, and using the income generated from that production to buy the goods and services that countries desire. – where “using resources most efficiently” means producing a good in which a country has a comparative advantage.

• Without trade, a country has to allocate resources to produce all of the goods that it wants to consume. • With trade, a country can specialize its production and exchange for the mix of goods that it wants to consume. • Consumption possibilities expand beyond the production possibility frontier when trade is allowed. • With trade, consumption in each country is expanded because world production is expanded when each country specializes in producing the good in which it has a comparative advantage.

WHAT ARE RELATIVE WAGES? • Relative wages are the wages of the home country relative to the wages in the foreign country. • Productivity (technological) differences determine relative wage differences across countries. • The home wage relative to the foreign wage will settle in between the ratio of how much better Home is at making cheese and how much better it is at making wine compared to Foreign. • Relative wages cause Home to have a cost advantage in only cheese and Foreign to have a cost advantage in only wine. • Real wages are wages adjusted for inflation, or, equivalently, wages in terms of the amount of goods and services that can be bought. This term is used in contrast to nominal wages or unadjusted wages. • Because it has been adjusted to account for changes in the prices of goods and services, real wages provide a clearer representation of an individual's wages in terms of what they can afford to buy with those wages – specifically, in terms of the amount of goods and services that can be bought. However, real wages suffer the disadvantage of not being well defined, since the amount of inflation (which can be calculated based on different combinations of goods and services) is itself not well defined. Hence real wage defined as the total amount of goods and services that can be bought with a wage, is also not defined. This is because changes in the relative prices of goods and services will change the financial comparability of various bundles of goods and services.

DO WAGES REFLECT PRODUCTIVITY? • Do relative wages reflect relative productivities of the two countries? • Evidence shows that low wages are associated with low productivity. – Wage of most countries relative to the U.S. is similar to their productivity relative to the U.S.

• Other evidence shows that wages rise as productivity rises. – For example in 1975, wages in South Korea were only 5% of those of the United States. – However, as South Korea’s labor productivity rose (to about half of the U.S. level by 2007), so did its wages (which were more than half of U.S. levels by 2007).

HOWEVER, THERE ARE CERTAIN MISCONCEPTIONS ABOUT COMPARATIVE ADVANTAGE 1.

Free trade is beneficial only if a country is more productive than foreign countries. –

But even an unproductive country benefits from free trade by avoiding the high costs for goods that it would otherwise have to produce domestically.

–

High costs derive from inefficient use of resources.

–

The benefits of free trade do not depend on absolute advantage, rather they depend on comparative advantage: specializing in industries that use resources most efficiently.

2.

3.

Free trade with countries that pay low wages hurts high wage countries. –

While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers.

–

Consumers benefit because they can purchase goods more cheaply.

–

Producers/workers benefit by earning a higher income in the industries that use resources more efficiently, allowing them to earn higher prices and wages.

Free trade exploits less productive countries. –

While labor standards in some countries are less than exemplary compared to Western standards, they are so with or without trade.

–

Are high wages and safe labor practices alternatives to trade? Deeper poverty and exploitation may result without export production.

–

Consumers benefit from free trade by having access to cheaply (efficiently) produced goods.

–

Producers/workers benefit from having higher profits/wages—higher compared to the alternative.

COMPARATIVE ADVANTAGES WITH MANY GOODS • If each country specializes in goods that use resources productively and trades the products for those that it wants to consume, then each benefits. – If a country tries to produce all goods for itself, resources are “wasted”. • The home country has high productivity in apples, bananas, and caviar that give it a cost advantage, despite its high wage. • The foreign country has low wages that give it a cost advantage, despite its low productivity in date production. How is the relative wage determined? • By the relative supply of and relative (derived) demand for labor services. • As domestic labor services become more expensive relative to foreign labor services – goods produced in the home country become more expensive, and demand for these goods and the labor services to produce them falls. – fewer goods will be produced in the home country, which will reduce further the demand for domestic labor services.

TRANSPORTATION COSTS AND NON-TRADED GOODS • •

The Ricardian model predicts that countries should completely specialize in production. But this rarely happens for three main reasons: 1. More than one factor of production reduces the tendency of specialization 2. Protectionism : the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. 3. Transportation costs reduce or prevent trade, which may cause each country to produce the same good or service.

• Nontraded goods and services (for ex., haircuts, auto repairs, including construction, public administration and health services) exist in spite of high costs. – Countries tend to spend a large fraction of national income on nontraded goods and services. – This fact has implications for the gravity model and for models that consider how income transfers across countries affect trade.

EMPIRICAL EVIDENCE • Do countries export those goods in which their productivity is relatively high? • Compare Chinese output and productivity with that of Germany for various industries . • Chinese productivity (output per worker) was only 5 percent of Germany’s on average. – In apparel, Chinese productivity was about 20 percent of Germany’s, creating a strong comparative advantage in apparel for China.

• The main implications of the Ricardian model are well supported by empirical evidence: – productivity differences play an important role in international trade – comparative advantage (not absolute advantage) matters for trade

TO SUM UP 1.

Differences in the productivity of labor across countries generate comparative advantage.

2.

A country has a comparative advantage in producing a good when its opportunity cost of producing that good is lower than in other countries.

3.

Countries export goods in which they have a comparative advantage - high productivity or low wages give countries a cost advantage.

4.

With trade, the relative price settles in between what the relative prices were in each country before trade.

5.

Trade benefits all countries due to the relative price of the exported good rising : income for workers who produce exports rises, and imported goods become less expensive.

6.

Empirical evidence supports trade based on comparative advantage, although transportation costs and other factors prevent complete specialization in production.

U N I T 2 : L I B E R AL I Z AT I ON

B Y : D R . R A J N I S H K ATA R I A 1

LIBERALIZATION • Meaning : Trade Liberalization means the removal or reduction of restrictions or barriers on the free exchange of goods between nations. • This includes the removal or reduction of tariff obstacles, such as duties and surcharges, and nontariff obstacles, such as licensing rules, quotas and other requirements. The easing or eradication of these restrictions is often referred to as promoting "free trade.“ • Advantages :• Trade liberalization promotes a free trade marketplace. This allows goods to cross international lines without any regulatory barriers or their associated costs. This can make it more cost effective for those looking to import or export goods with other nations and, ultimately, may result in lower costs to consumers due to lower fees and additional competition. • It may also provide a mechanism by which a nation can specialize in the production of a particular good in which it has an advantage.This can lead to lower production costs, which may also translate into savings for consumers. 2

LIBERALIZATION • Disadvantages :• Trade liberalization can negatively affect certain businesses within a nation.This can include increased competition from foreign producers, as well as lower local support for certain industries.There may also be higher risks to certain environments if items or raw materials are gathered from countries with lower environmental standards. • Trade liberalization may also pose a particular threat to developing nations or economies as they may not be able to effectively compete against more established economies or nations.This can lower local industrial diversity or may result in the failure of certain newly developed industries within a particular economy. • India & Liberalization :• The economic liberalization, initiated in 1991, of the country's economic policies, with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment. Liberalisation has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. • Specific changes included a reduction in import tariffs, deregulation of markets, reduction of taxes and greater foreign investment. Its opponents have blamed it for increased poverty, inequality and economic degradation.The overall direction of liberalisation has since remained the same, irrespective of the ruling dispensation, although no govt. has yet solved a variety of politically difficult issues, such as 3 liberalising labour laws and reducing agricultural subsidies.

INDIA & LIBERALIZATION Highlights of Liberalization in India • Foreign Technology Agreements • Foreign Investment • MRTP Act, 1969 (Amended)

• Industrial Licensing • Deregulation • Beginning of privatisation • Opportunities for overseas trade • Steps to regulate inflation • Tax reforms • Abolition of License - Permit Raj 4

REGIONALISM (INTERNATIONAL RELATIONS) • In international relations, regionalism is the expression of a common sense of identity and purpose combined with the creation and implementation of institutions that express a particular identity and shape collective action within a geographical region. Regionalism is one of the three constituents of the international commercial system (along with multilateralism and unilateralism).

• The first coherent regional initiatives began in the 1950s and 1960s, but they accomplished little, except in Western Europe with the establishment of the European Community. Some analysts call these initiatives "old regionalism". In the late 1980s, a new bout of regional integration (also called "new regionalism") began and continues still . A new wave of political initiatives prompting regional integration took place worldwide during the last two decades. • The European Union can be classified as a result of regionalism.The idea that lies behind this increased regional identity is that as a region becomes more economically integrated, it will necessarily become politically integrated as well. The European example is especially valid in this light, as the European Union as a political body grew out of more than 40 years of economic integration within Europe.The precursor to the EU, the European Economic Community (EEC) was entirely an economic entity. 5

MULTILATERALISM • In international relations, multilateralism is a kind of alliance where multiple countries progress any given goal. • Multilateralism was defined by Miles Kahler as "international governance" or global governance of the "many," and its central principle was "opposition of bilateral discriminatory arrangements that were believed to enhance the leverage of the powerful over the weak and to increase international conflict". • In 1990, Robert Keohane simply defined multilateralism as "the practice of coordinating national policies in groups of three or more states. • John Ruggie further elaborated the concept of multilateralism based on the principles of "indivisibility" and "diffuse reciprocity (international relations)" as "an institutional form which coordinates relations among three or more states on the basis of 'generalized' principles of conduct ... which specify appropriate conduct for a class of actions, without regard to particularistic interests of the parties or the strategic exigencies that may exist in any occurrence. 6

• Multilateralism, whether in the form of membership in international institutions, serves to bind the great power, discourage unilateralism, and give the small powers a voice and voting opportunities that they would not otherwise have. • Especially, if control is sought by a small power over a great power, then the Lilliputian strategy of small countries achieving control by collectively binding the great power is likely to be most effective. Similarly, if control is sought by a great power over another great power, then multilateral controls may be most useful. The great power could seek control through bilateral ties, but this would be costly; it also would require bargaining and compromise with the other great power. Embedding the target state in a multilateral alliance reduces the costs borne by the power seeking control, but it also offers the same binding benefits of the Lilliputian strategy. Furthermore, if a small power seeks control over another small power, multilateralism may be the only choice, because small powers rarely have the resources to exert control on their own. • As such, power disparities are accommodated to the weaker states by having more predictable bigger states and means to achieve control through collective action. Powerful states also buy into multilateral agreements by writing the rules and having privileges such as veto power and special status. 7

REGIONAL MULTILATERALISM • The term "regional multilateralism" has been proposed suggesting that "contemporary problems can be better solved at the regional rather than the bilateral or global levels" and that bringing together the concept of regional integration with that of multilateralism is necessary in today’s world. Regionalism dates from the time of the earliest development of political communities where economic and political relations naturally had a strong regionalist focus due to restrictions on technology, trade, and communications.

• The EU serves as an example of regional integration and others are following its steps. The African Union has also stepped up its peacekeeping efforts and moved toward further economic integration. However, the quest for regional multilateralism should not be confined by a conventional understanding of geography. For instance, Russia may be a force for stability both in the Far East and Central Asia, China may have a stake in the affairs of Latin America and Africa, and different parts of what we call the Middle East may integrate with parts of Central Asia or Europe. 8

INDIA & BILATERAL AGREEMENTS • India has bilateral agreements with the following countries and blocs: • ASEAN (ASEAN–India Free Trade Area)

• Sri Lanka • Singapore

• Thailand (separate from FTA agreement with ASEAN) • Malaysia (separate from FTA agreement with ASEAN) 9

TARIFF AND NON-TARIFF BARRIERS • Trade barriers are restrictions imposed on movement of goods between countries. • “America First” platform of U.S. • Trade barriers are imposed not only on imports but also on exports. • Trade barriers can be broadly divided into two broad groups: (a) Tariff Barriers, and (b) Non-tariff Barriers.

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TARIFF BARRIERS Tariff is a customs duty or a tax on products that move across borders.The most important of tariff barriers is the customs duty imposed by the importing country. A tax may also be imposed by the exporting country on its exports. However, governments rarely impose tariff on exports, because, countries want to sell as much as possible to other countries.The main important tariff barriers are as follows: • Specific Duty: Specific duty is based on the physical characteristics of goods.When a fixed sum of money, keeping in view the weight or measurement of a commodity, is levied as tariff, it is known as specific duty. • For instance, a fixed sum of import duty may be levied on the import of every barrel of oil, irrespective of quality and value. It discourages cheap imports. Specific duties are easy to administer as they do not involve the problem of determining the value of imported goods. However, a specific duty cannot be levied on certain articles like works of art. For instance, a painting cannot be taxed on the basis of its weight and size. • Ad valorem Duty: These duties are imposed “according to value.” When a fixed percent of value of a commodity is added as a tariff it is known as ad valorem duty. It ignores the consideration of weight, size or volume of commodity. • The imposition of ad valorem duty is more justified in case of those goods whose values cannot be determined on the basis of their physical and chemical characteristics, such as costly works of art, rare manuscripts, etc. In practice, this type of duty is mostly levied on majority of items 11

• Combined or Compound Duty: It is a combination of the specific duty and ad valorem duty on single product. For instance, there can be a combined duty when 10% of value (ad valorem) and Re 1/- on every meter of cloth is charged as duty. Thus, in this case, both duties are charged together. • Sliding Scale Duty: The import duties which vary with the prices of commodities are called sliding scale duties. Historically, these duties are confined to agricultural products, as their prices frequently vary, mostly due to natural factors. These are also called as seasonal duties. • Countervailing Duty: It is imposed on certain imports where products are subsidized by exporting governments. As a result of government subsidy, imports become more cheaper than domestic goods. To nullify the effect of subsidy, this duty is imposed in addition to normal duties. • Revenue Tariff: A tariff which is designed to provide revenue to the home government is called revenue tariff. Generally, a tariff is imposed with a view of earning revenue by imposing duty on consumer goods, particularly, on luxury goods whose demand from the rich is unchanged. • Anti-dumping Duty: At times, exporters attempt to capture foreign markets by selling goods at rock-bottom prices, such practice is called dumping. As a result of dumping, domestic industries find it difficult to compete with imported goods. To offset anti-dumping effects, duties are levied in addition to normal 12 duties.

• Protective Tariff: In order to protect domestic industries from stiff competition of imported goods, protective tariff is levied on imports. Normally, a very high duty is imposed, so as to either discourage imports or to make the imports more expensive as that of domestic products. • Note: Tariffs can be also levied on the basis of international relations. This includes single column duty, double column duty and triple column duty.

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NON-TARIFF BARRIERS • A non tariff barrier is any barrier other than a tariff, that raises an obstacle to free flow of goods in overseas markets. Non-tariff barriers, do not affect the price of the imported goods, but only the quantity of imports. Some of the important non-tariff barriers are as follows:

• Quota System: Under this system, a country may fix in advance, the limit of import quantity of a commodity that would be permitted for import from various countries during a given period. The quota system can be divided into the following categories: (a)

(c)

Tariff/Customs Quota

Bilateral Quota

(b)

(d)

Unilateral Quota

Multilateral Quota

Tariff/Customs Quota: Certain specified quantity of imports is allowed at duty free or at a reduced rate of import duty.Additional imports beyond the specified quantity are permitted only at increased rate of duty.A tariff quota, therefore, combines the features of a tariff and an import quota. Unilateral Quota: The total import quantity is fixed without prior consultations with the exporting countries. Bilateral Quota: In this case, quotas are fixed after negotiations between the quota fixing importing country and the exporting country. Multilateral Quota: A group of countries can come together and fix quotas for exports as well as imports for each country.

• Product Standards: Most developed countries impose product standards for imported items. If the imported items do not conform to established standards, the imports are not allowed. For instance, the pharmaceutical products must conform to pharmacopoeia standards as set by the individual country. International Organization For Standardization is the international standard setting body. 14

• Domestic Content Requirements: Governments impose domestic content requirements to boost domestic production. For instance, in the US bailout package (to bailout General Motors and other organizations), the US Govt. introduced ‘Buy American Clause’ which means the US firms that receive bailout package must purchase domestic content rather than import from elsewhere. • Product Labelling: Any written, electronic, or graphic communication on the package or on a separate but associated label. Certain nations insist on specific labeling of the products. For instance, the European Union insists on product labeling in major languages spoken in EU. • Packaging Requirements: Certain nations insist on particular type of packaging materials. For instance, EU insists on recyclable packing materials, otherwise, the imported goods may be rejected. • Consular Formalities: A number of importing countries demand that the shipping documents should include consular invoice certified by their consulate stationed in the exporting country.The purpose is to provide the foreign customs authority with a complete, detailed description of the goods so that the correct import duty can be levied.

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NON-TARIFF BARRIERS CONTD. • State Trading: In some countries like India, certain items are imported or exported only through canalizing agencies. Individual importers or exporters are not allowed to import or export canalized items directly on their own. • Preferential Arrangements: Some nations form trading groups for preferential arrangements in respect of trade amongst themselves. Imports from member countries are given preferences, whereas, those from other countries are subject to various tariffs and other regulations. • Foreign Exchange Regulations: The importer has to ensure that adequate foreign exchange is available for import of goods by obtaining a clearance from exchange control authorities prior to the concluding of contract with the supplier. • Other Non-Tariff Barriers: There are a number of other non – tariff barriers such as health and safety regulations, technical formalities, environmental regulations, embargoes, etc. Eg. Health Certificate (for animals), Phytosanitary Certificate (for plants). 16

WTO • All global trade agreements are multilateral. The most successful one is the General Agreement on Tariffs and Trade. One hundred fifty-three countries signed GATT in 1947. Its goal was to reduce tariffs and other trade barriers. • In September 1986, the Uruguay Round began in Punta del Este, Uruguay. It centered on extending trade agreements to several new areas.These included services and intellectual property. It also improved trade in agriculture and textiles. On 15 April 1994, the 123 participating governments signed the agreement in Marrakesh, Morocco.That created the World Trade Organization. It assumed management of future global multilateral negotiations.

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WTO • International organizations, such as the United Nations (UN) and the World Trade Organization are multilateral in nature. The main proponents of multilateralism have traditionally been the middle powers such as Canada, Australia, Switzerland, the Benelux (Belgium, Netherlands, Luxemburg) countries and the Nordic countries (Northern Europe and Northern Atlantic). Larger states often act unilaterally, while smaller ones may have little direct power in international affairs aside from participation in the United Nations (by consolidating their UN vote in a voting bloc with other nations, for example).

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WTO CONTD… • Multilateralism may involve several nations acting together as in the UN or may involve regional or military alliances, pacts, or groupings such as NATO (security alliance of 28 countries from North America and Europe). • These multilateral institutions were not imposed on states but were created and accepted by them in order to increase their ability to seek their own interests through the coordination of their policies. • Multilateralism restraints opportunistic behavior and points for coordination by facilitating the exchange of information about the actual behavior of states with reference to the standards to which they have consented. 19

WTO • The WTO's first project was the Doha round of trade agreements in 2001. That was a multilateral trade agreement between all 149 WTO members. Developing countries would allow imports of financial services, particularly banking. In so doing, they would have to modernize their markets. In return, the developed countries would reduce farm subsidies.That would boost the growth of developing countries that were good at producing food. But farm lobbies in the United States and the European Union stopped it. They refused to agree to lower subsidies or increased foreign competition.The WTO abandoned the Doha round in June 2006. • On December 7, 2013,WTO representatives agreed to the so-called Bali package.All countries agreed to streamline customs standards and reduce red tape to expedite trade flows. Food security is an issue. India wants to subsidize food so it could stockpile it to distribute in case of famine. Other countries worry that India may dump the cheap food in the global market to gain market share. 20

UNIT 3 : RECENT TRENDS AND MAIN D R I VE R S O F I N T E RN AT I O NA L T R A D E

B Y : D R . R A J N I S H K ATA R I A 1

RECENT TRENDS AND MAIN DRIVERS OF INTERNATIONAL TRADE • Intense competition among countries, industries, and firms on a global level is a recent development owed to the confluence of several major trends. Among these trends are:

• 1) Forced Dynamism: • International trade is forced to succumb to trends that shape the global political, cultural, and economic environment. International trade is a complex topic, because the environment it operates in is constantly changing. First, businesses are constantly pushing the frontiers of economic growth, technology, culture, and politics which also change the surrounding global society and global economic context. Secondly, factors external to international trade (e.g., developments in science and information technology) are constantly forcing international trade to change how they operate.

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• 2) Cooperation among Countries:

• Countries cooperate with each other in thousands of ways through international organisations, treaties and consultations. Such cooperation generally encourages the globalization of business by eliminating restrictions on it and by outlining frameworks that reduce uncertainties about what companies will and will not be allowed to do. Countries cooperate: • i) To gain reciprocal advantages,

• ii) To attack problems they cannot solve alone, and • iii) To deal with concerns that lie outside anyone’s territory.

• Agreements on a variety of commercially related activities, such as transportation and trade, allow nations to gain reciprocal advantages. For example, groups of countries have agreed to allow foreign airlines to land in and fly over their territories, such as Canada’s and Russia’s agreements commencing in 2001 to allow polar over flights that will save five hours between New York and Hong Kong. • Groups of countries have also agreed to protect the property of foreign-owned companies and to permit foreign-made goods and services to enter their territories with fewer restrictions. In addition, countries cooperate on problems they cannot solve alone, such as by coordinating national economic programs (including interest rates) so that global economic conditions are minimally disrupted, and by restricting imports of certain products to protect endangered species. • Finally, countries set agreements on how to commercially exploit areas outside any of their territories.These include outer space (such as on the transmission of television programs), non-coastal areas of oceans and seas (such as on exploitation of minerals), and Antarctica (for example, limits on fishing within its coastal waters). 3

• 3) Transfer of Technology: • Technology transfer is the process by which commercial technology is disseminated.This will take the form of a technology transfer transaction, which may or may not be a legally binding contract, but which will involve the communication, by the transferor, of the relevant knowledge to the recipient. It also includes non-commercial technology transfers, such as those found in international cooperation agreements between developed and developing states. Such agreements may relate to infrastructure or agricultural development, or to international; cooperation in the fields of research, education, employment or transport. • 4) Growth in Emerging Markets: • The growth of emerging markets (e.g., India, China, Brazil, and other parts of Asia and South America especially) has impacted international trade in every way. The emerging markets have simultaneously increased the potential size and worth of current major international trade while also facilitating the emergence of a whole new generation of innovative companies. According to “A special report on innovation in emerging markets” by The Economist magazine,“The emerging world, long a source of cheap labour, now rivals the rich countries for business innovation”. 4

• 5) Liberalization of Cross-border Movements:

• Every country restricts the movement across its borders of goods and services as well as of the resources, such as workers and capital, to produce them. Such restrictions make international trade cumbersome; further, because the restrictions may change at any time, the ability to sustain international trade is always uncertain. However, governments today impose fewer restrictions on cross-border movements than they did a decade or two ago, allowing companies to better take advantage of international opportunities. Governments have decreased restrictions because they believe that: • i) So-called open economies (having very few international restrictions) will give consumers better access to a greater variety of goods and services at lower prices,

• ii) Producers will become more efficient by competing against foreign companies, and • iii) If they reduce their own restrictions, other countries will do same.5

MERCHANDISE TRADE • Goods which add or subtract from the stock of material resources of a country by entering (imports) or leaving (exports) in its economic territory. • Goods simply being transported through a country (goods in transit) or temporarily admitted or withdrawn (except for goods for inward or outward processing) do not add to or subtract from the stock of material resources of a country and are not included in the international merchandise trade statistics.

• In many cases, a country's economic territory largely coincides with its customs territory, which is the territory in which the customs law of a country applies in full. 6

REAL MERCHANDISE TRADE AND OUTPUT DEVELOPMENTS • A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all the factors that affect international trade. • These include factor endowments and productivity, trade policy, exchange rates, foreign currency reserves, inflation and demand. • A crucial point to note is both goods and services are counted for exports and imports, as a result of which a nation has a balance of trade for goods (also known as the merchandise trade balance) and a balance of trade for services. A nation has a trade surplus if its exports are greater than its imports; if imports are greater than exports, the nation has a trade deficit.

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D IFFERENCE B ET WEEN B AL ANCE OF TRAD E AND B AL ANCE OF PAYMENT Balance of trade

Balance of payments

The balance of trade includes only visible imports and exports, i.e. imports and exports of merchandise, the difference of imports and exports is called balance of trade. If imports are more than exports, it is unfavourable balance of trade. If exports exceeds imports, it is favourable balance of trade.

The balance of payments includes all those visible and invisible items exported from and imported into the country in addition to exports and imports of merchandise.

The balance of trade includes revenues received or paid on The balance of payments includes all revenue and capital items account of imports and exports of merchandise. It shows only whether visible or non-visible. The balance of trade thus form revenue items. a part of the balance of payments.

The balance of trade can be favourable or unfavourable. If imports are more than exports, it is unfavourable balance of trade. If exports exceeds imports, it is favourable balance of trade.

The balance of payments is always balanced just like trading and profit and loss a/c of a business.

In case of the balance of trade, there is no deficit or surplus balance. The balance shows favourable or non-favourable. So, external assistance is not required.

In case of the balance of payments, any balance, deficit or surplus is to be financed by external source or assistance or be utilised.

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FACTOR ENDOWMENTS • Factor endowments include labor, land and capital. • Labor describes the characteristics of the workforce. Land describes the natural resources available, such as timber or oil. Capital resources include infrastructure and production capacity. • The Heckscher-Ohlin model of international trade emphasizes differences in these areas to explain trade patterns. For example, a country with an abundance of unskilled labor produces goods requiring relatively low-cost labor, while a country with abundant natural resources is likely to export them. • The productivity of those factors is also important. For example, suppose two countries have the same amount of labor and land endowments. However, one country has a skilled labor force and highly productive land resources, while the other has an unskilled labor force and relatively lowproductivity resources. The skilled labor force can produce relatively more per person than the unskilled force, which in turn influences the types of work in which each can find a comparative advantage. The country with skilled labor might be better-suited to designing highly complex electronics, while the unskilled labor force might specialize in simple manufacturing. Similarly, the efficient use of natural resources can mean relatively more or less value extracted from a similar initial endowment. 9

TRADE POLICIES • Barriers to trade also affect the balance of exports and imports for a given country. Policies that restrict imports or subsidize exports change the relative prices of those goods, making it more or less attractive to import or export. For example, agricultural subsidies might reduce the cost of agricultural activities, encouraging more production for export. Import quotas raise the relative prices of imported goods, which reduces demand. • Nations that are insular (island attitude) and have restrictive trade policies such as high import tariffs and duties may have larger trade deficits than countries with open trade policies, since they may be shut out of export markets because of these impediments to free trade. • There are also non-tariff barriers to trade. A lack of infrastructure is a notable one, as it can increase the relative cost of getting goods to market.This increases the price for those products and reduces a nation's competitiveness on the global market, which in turn reduces exports. Investment can work to reduce these barriers. For example, investments in infrastructure can increase a nation's capital base and reduce the price of getting goods to market. 10

EXCHANGE RATES, FOREIGN CURRENCY RESERVES AND INFLATION • Exchange rates: A domestic currency that has appreciated significantly may pose a challenge to the cost-competitiveness of exporters, who may find themselves priced out of export markets. This may pressure a nation’s trade balance • Foreign currency reserves: To compete effectively in extremely competitive international markets, a nation has to have access to imported goods/machinery that enhances productivity, which may be difficult if forex reserves are inadequate • Inflation: If inflation is running rampant in a country, the price to produce a unit of a product may be higher than the price in a lower-inflation country. This would affect exports, affecting the trade balance.

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DEMAND • Demand for particular products or services is an important component of international trade. For example, the demand for oil affects the price and thus the trade balance of oil-exporting and oil-importing countries alike.

• If a small oil importer faces a falling oil price, its overall imports might fall.The oil exporter, on the other hand, might see its exports fall. • Depending on the relative importance of a particular good for a country, such demand shifts can have an impact on the overall balance of trade.

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TRADE BALANCE AS AN ECONOMIC INDICATOR • The utility of trade balance data as an economic indicator depends on the nation.The biggest impact is generally seen in nations with limited foreign exchange reserves, where the release of trade data can trigger large swings in their currencies. • The trade data is usually the largest component of the current account, which is closely monitored by investors and market professionals for indications of the economy's health. The current account deficit as a percentage of gross domestic product (GDP), in particular, is tracked for signs that the deficit is becoming unmanageable and could be a precursor to a devaluation of the currency. • However, a temporary trade deficit may be viewed as a necessary evil, since it may suggest that the economy is growing strongly and needs imports to maintain the momentum. • The balance of trade is a key indicator of a nation’s health. In general, investors and market professionals appear more concerned with trade deficits than trade surpluses, since chronic deficits may be a precursor to a currency devaluation. 13

NOMINAL TRADE DEVELOPMENTS • At 4.7 %, annual global trade growth in 2017 was the highest since 2011, and looks likely to have comfortably exceeded world GDP growth last year (currently estimated to have been 3.1%). The quarterly data show growing imports demand from emerging markets in every region. Imports demand also grew for advanced economies as a whole, but this was driven by the US and Japan, while in the Eurozone and other advanced economies – where import prices increased sharply during the second half of the year – imports demand fell in Q4. • Trade volume growth in 2017, the strongest since 2011, was driven mainly by cyclical factors, particularly increased investment and consumption expenditure. Looking at the situation in value terms, growth rates in current US dollars in 2017 (10.7% for merchandise exports, 7.4% for commercial services exports) were even stronger, reflecting both increasing quantities and rising prices. Merchandise trade volume growth in 2017 may also have been inflated somewhat by the weakness of trade over the previous two years, which provided a lower base for the current expansion. • World merchandise trade volume is expected to grow 4.4% in 2018, accompanied by GDP growth of 3.2% at market exchange rates. A continued escalation of trade restrictive policies could lead to a significantly lower figure.

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• Business surveys suggest that broad-based growth in global GDP will continue, adding to the positive outlook for global import demand. Purchasing Manager’s Index (PMI) export orders suggest that the Eurozone looks likely to sustain continued growth in exports. • Faster trade expansion is being driven by stronger economic growth across regions, led by increased investment and fiscal expansion. • Trade growth should moderate to 4.0% in 2019 even as global GDP growth slows slightly to 3.1%. • The ratio of trade growth to GDP growth should remain at 1.4 in 2018, down slightly from 1.5 in 2017.

• Risks are centred on trade and monetary policy, where missteps could undermine economic growth and confidence. • An index of export orders has recently weakened, possibly signalling an effect of greater uncertainty brought about by heightened trade tensions. • The following chart shows leading merchandise exporters and importers, 2017 ($bn and % given in next slide) 15

Leading merchandise exporters and importers, 2016 $bn. Figures of 2017 in next slide.

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NOMINAL TRADE DEVELOPMENTS CONTD.. • Investment is the most import intensive component of GDP and has been particularly weak in developed economies since the financial crisis, with sharp contractions in Europe in 2012 and 2013 during the sovereign debt crisis.The contribution of investment to China’s economic growth has also declined, albeit more gradually. Investment accounted for more than half of China’s GDP growth in 2012-13, but by 2016 this had fallen to 39 per cent. • Commodity prices and exchange rates played a large part in determining regional contributions to world trade growth in 2016. Plunging prices for oil and metals since the middle of 2014 have deprived resourceexporting regions of revenue needed to purchase imports, thereby reducing the volume of their imports. Prices have stabilized and staged a partial recovery since the start of 2016, but a return to price levels of a few years ago is unlikely as long as oil inventories remain high in major economies. • Falling commodity prices tend to help net importers and harm net exporters, so their impact at the global level evens out in principle. In practice, however, the price slide since 2014 appears to have had a large negative impact on resource-producing countries without a corresponding boost to resource-importing countries. • Fuels and mining products exerted a strong negative influence on trade growth in value terms for the first three quarters of 2016 but this contribution turned positive in the fourth quarter as commodity prices recovered, bodeing well for trade growth in 2017. 18

WORLD TRADE AND ECONOMIC GROWTH IN 2018 AND 2019 • The IMF has cut its global economic forecast for 2018 and 2019, citing above all rising import tariffs between the US and China. A fall in trade volumes and manufacturing orders could hit Germany particularly hard.These include the increase in US tariffs on imported solar panels, washing machines, steel, aluminum, and a range of Chinese products, and the announced retaliatory measures by trading partners. • In the United States, near-term momentum in the economy is expected to strengthen temporarily in line with the April WEO forecast, with growth projected at 2.9 percent in 2018 and 2.7 percent in 2019. Substantial fiscal stimulus together with already-robust private final demand will lift output further above potential and lower the unemployment rate below levels last registered 50 years ago, creating additional inflationary pressures. Imports are set to pick up with stronger domestic demand, increasing the US current account deficit and widening excess global imbalances. • Growth in the euro area economy is projected to slow gradually from 2.4 percent in 2017 to 2.2 percent in 2018 and to 1.9 percent in 2019. Forecasts for 2018 growth have been revised down for Germany and France after activity softened more than expected in the first quarter, and in Italy, where wider sovereign spreads and tighter financial conditions in the wake of recent political uncertainty are expected to weigh on domestic demand.

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• Emerging market and developing economies have experienced powerful crosswinds in recent months: rising oil prices, higher yields in the United States, dollar appreciation, trade tensions, and geopolitical conflict.The outlook for regions and individual economies thus varies depending on how these global forces interact with domestic idiosyncratic factors. • Emerging and Developing Asia is expected to maintain its robust performance, growing at 6.5 percent in 2018–19. Growth in China is projected to moderate from 6.9 percent in 2017 to 6.6 percent in 2018 and 6.4 percent in 2019, as regulatory tightening of the financial sector takes hold and external demand softens. India’s growth rate is expected to rise from 6.7 percent in 2017 to 7.3 percent in 2018 and 7.5 percent in 2019, as drags from the currency exchange initiative and the introduction of the goods and services tax fade.The projection is 0.1 and 0.3 percentage point lower for 2018 and 2019, reflecting negative effects of higher oil prices on domestic demand and faster-than-anticipated monetary policy tightening due to higher expected inflation. Growth in the ASEAN-5 group of economies is expected to stabilize at around 5.3 percent as domestic demand remains healthy and exports continue to recover.

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• CURRENT DEVELOPMENTS • Oil prices dropped more than one percent in December, 2018, weighed down by a falling U.S. stock market, while weak economic data from China pointed to lower fuel demand in the world’s biggest oil importer. • Concerned by mounting oversupply, the Organization of the Petroleum Exporting Countries and other oil producers including Russia have now agreed to reduce output by 1.2 million barrels per day (bpd), or more than 1 percent of global demand. • “For the time being until the OPEC cuts start kicking in, the market is oversupplied in the short term,” said Tony Nunan, oil risk manager at Mitsubishi Corp. “If China is slowing down, that’s definitely a concern.” The International Energy Agency said on Thursday it expected a deficit in oil supply by the second quarter of next year, provided OPEC members and other key producers stuck closely to last week’s deal to cut output. As part of the agreement, de facto OPEC leader Saudi Arabia plans to reduce its output to 10.2 million bpd in January.

The IEA (International Energy Agency) kept its 2019 forecast for global oil demand growth at 1.4 million bpd, unchanged from its projection last month, and said it expected growth of 1.3 million bpd this year. Barclays said on Friday it expects oil prices to rebound in the first half of 2019 on falling inventories, Saudi Arabia’s export cuts and an end to the Iran sanction waivers.

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INDIA • India trade deficit widened to USD 16.67 billion in November of 2018 from USD 15.1 billion a year earlier and slightly higher than market expectations of USD 16.08 billion. • Exports edged up a meager 0.8% to USD 26.5 billion. Sales rose for petroleum products (42.7%); chemicals (12.3%); drugs and pharmaceuticals (3.2%); textiles (9%); and electronic goods (37.1%).

• Imports increased 4.3% to USD 43.17 billion, boosted by purchases of petroleum and crude (41.3%); electronic goods (0.3%); machinery, electrical and non-electrical (7.7%); coal, coke and briquettes (12.5%); and chemicals (10.8%). Gold purchases declined 15.6 percent. • From April to November 2018, the country's trade gap increased sharply to USD 128.13 billion from USD 106.37 billion a year earlier. • In recent years, India has become one of the biggest refined product exporters in Asia with petroleum accounting for around 20 percent of total exports.The country also exports: engineering goods (19 percent of the total shipments), chemical and pharmaceutical products (14 percent), gems and jewellery (14 percent), agricultural and allied products (10 percent) and textiles and clothing (10 percent). • India’s main export partners are: United Arab Emirates (12.1 percent of the total exports), the United States (12 percent), Singapore (4.5 percent), China (4.5 percent), Hong Kong (4 percent) and 23 Netherlands (3.5 percent).

• India is heavily dependent on crude oil imports, with petroleum crude accounting for about 34 percent of the total inward shipments.The country also imports: gold and silver (12 percent of the total imports), machinery (10 percent), electronic goods (7 percent) and pearls, precious and semi-precious stones (5 percent). • India’s main import partners are China (10.7 percent of the total shipments), United Arab Emirates (8 percent), Saudi Arabia (7 percent), Switzerland (7 percent) and the United States (5 percent).

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INDIA CONTD… • The key policy challenges that the Indian economy confronts at the present juncture as per RBI are :(a) Inflation • Although headline inflation has moderated significantly in recent years, as discussed earlier, its major components – inflation in food, fuel, and inflation excluding food and fuel – are exhibiting wide divergences in 2018. While food inflation has turned negative since October 2018 and fuel inflation has been highly volatile, inflation excluding food and fuel remains sticky at close to 6 per cent. (b) Financial Sector • There is need for continued vigil on the asset quality of banks as well as resolution of stressed assets with a focus on implementation of the new resolution framework. It will remain critical to ensure that further slippages are contained. • While technology provides opportunities for growth and innovation in the banking sphere, it also involves newer challenges and risks. Cyber risk is a major challenge. Formulation of comprehensive cyber risk and resilience policies and diligent implementation is critical.

• Another area where policy action is required is corporate governance in banks with a focus on transparency and accountability. (c) External sector • While positive policy settings and continued macroeconomic stability helped contain India’s external vulnerabilities, a close monitoring of external sector is required, given the sharp movements in global crude oil prices and global financial market volatility. These are the two global shocks that have implications for our CAD and financial flows. • Another challenge that Indian companies may face pertains to developments around Brexit. Indian companies and policy makers need to suitably weigh all opportunities, and accordingly re-strategise to respond appropriately. There are consequential policy challenges for India which enjoys strong trade and investment relations with UK and the EU. 25

 Export of Goods and Services  Import of Goods and Services  Export Trade Finance Management  Import Trade Finance Management

 Payment mechanism in International Trade  Advance Payment  Open Account Sales  Documentary Collections  Letter Of Credit Mechanism

UNIT 4 :REGIONAL BLOCKS

B Y : D R . R A J N I S H K ATA R I A 1

REGIONAL INTEGRATION • Regional Integration is a process in which neighboring states enter into an agreement in order to upgrade cooperation through common institutions and rules. • The objectives of the agreement could range from economic to political to environmental, although it has typically taken the form of a political economy initiative where commercial interests are the focus for achieving broader socio-political and security objectives, as defined by national governments. • Regional integration has been organized either via supranational institutional structures or through intergovernmental decision-making, or a combination of both. • Past efforts at regional integration have often focused on removing barriers to free trade in the region, increasing the free movement of people, labour, goods, and capital across national borders, reducing the possibility of regional armed conflict (for example, through Confidence and SecurityBuilding Measures), and adopting cohesive regional stances on policy issues, such as the environment, climate change and migration. • Intra-regional trade refers to trade which focuses on economic exchange primarily between countries of the same region or economic zone. In recent years countries within economic-trade regimes such as ASEAN in Southeast Asia for example have increased the level of trade and commodity exchange between themselves which reduces the inflation and tariff barriers associated with foreign markets resulting in growing prosperity. 2

REGIONAL INTEGRATION INITIATIVE Regional integration initiatives need to fulfil at least eight important functions: • the strengthening of trade integration in the region • the creation of an appropriate enabling environment for private sector development • the development of infrastructure programmes in support of economic growth and regional integration • the development of strong public sector institutions and good governance; • the reduction of social exclusion and the development of an inclusive civil society • contribution to peace and security in the region • the building of environment programmes at the regional level • the strengthening of the region’s interaction with other regions of the world.

3

ECONOMIC EFFECTS OF REGIONAL INTEGRATION AGREMENTS • They result in specialization and trade because of the gains in output and consumption. Higher levels of trade between nations increases specialization, efficiency, and consumption, and raises standards of living. 1. • Increase in trade results from regional economic integration. • Gives consumers and industrial buyers a wider selection of goods and services not available beforehand. • Buyers can acquire goods and services more cheaply following the lowering of trade barriers such as tariffs. • Lower costs lead to higher demand for goods because people have more money after a purchase to buy other products. • Greater Consensus Eliminating trade barriers in smaller groups of countries may make it easier to gain consensus as opposed to working in the far larger WTO. • Economic Cooperation : a group of nations can have significantly greater weight than nations have individually. The group may have more clout in negotiating in a forum like the WTO. • Economic integration reduces the potential for military conflict among members. • Employment Opportunities : regional integration can expand employment by enabling people to move from country to country for work, or to earn a higher wage. 4

T YPES OF REGIONAL INTEGRATION AGREEMENTS (RIA) • RIAs are mainly defined according to the different instruments which identified and limited the scope of regional economic integration. These instruments include preferential access for specified products, internal tariff elimination, mobility harmonization of economic policies and harmonization of political policies. These types are: • Preferential trade area (PTA) which gives preferential access to certain products from the participating countries. This can be called as a limited or sector based free trade area. • Free trade area (FTA) that include the reciprocal removal of tariffs on member countries’ goods. In an FTA, each member is free within the limits specified by the GATT/WTO system on deciding the level of external tariffs that will be applied to non members. As there is flexibility on the interactions with the third countries, the members in an FTA are free to establish or join other FTAs. The leading examples are North American Free Trade Area (NAFTA), ASEAN Free Trade Area (AFTA) and European Free Trade Association (EFTA). • Customs Union (CU) which is a type of agreement that include determination of the common external tariff (CET), in addition to the elimination of the internal tariff rates. 5

• Regional trade agreements (RTAs) seem to compete with the WTO, but often they can actually support the WTO’s multilateral trading system. RTAs, defined in the WTO as reciprocal preferential trade agreements between two or more partners, have allowed countries to negotiate rules and commitments that go beyond what was possible multilaterally. In turn, some of these rules have paved the way for agreement in the WTO. Services, intellectual property, environmental standards, investment and competition policies are all issues that were raised in regional negotiations and later developed into agreements or topics of discussion in the WTO. • The WTO agreements recognize that RTAs can benefit countries, provided their aim is to facilitate trade among its parties.They also recognize that under some circumstances these agreements could hurt the trade interests of other countries. Normally, setting up a customs union or free trade area would violate the WTO’s principle of non-discrimination for all WTO members (“most-favoured-nation”). But, certain WTO articles allow WTO members to conclude RTAs, as a special exception, provided certain strict criteria are met. • In particular, the agreements should help trade flow more freely among the countries in the RTA without barriers being raised on trade with the outside world. In other words, regional integration should complement the multilateral trading system and not threaten it. 6

• Regional integration agreements (RIAs) have led to major developments in international relations between and among many countries, specifically increases in international trade and investment and in the formation of regional trading blocs. As fundamental to the multi-faceted process of globalization, regional integration has been a major development in the international relations of recent years. As such, Regional Integration Agreements have gained high importance. Not only are almost all the industrial nations part of such agreements, but also a huge number of developing nations too are a part of at least one, and in cases, more than one such agreement. • The amount of trade that takes place within the scope of such agreements is about 35%, which accounts to more than one-third of the trade in the world.The main objective of these agreements is to reduce trade barriers among those nations concerned, but the structure may vary from one agreement to another. The removal of the trade barriers or liberalization of many economies has had multiple impacts, in some cases increasing Gross domestic product (GDP), but also resulting in greater global inequality, concentration of wealth and an increasing frequency and intensity of economic crises. • The number of agreements agreed under the rules of the GATT and the WTO and signed in each year has dramatically increased since the 1990s. The last few years have experienced huge qualitative as well as quantitative changes in the agreements related to the Regional Integration Scheme. The top three major changes were the following: • Deep Integration Recognition • Closed regionalism to open model • Advent of trade blocs

7

DEEP INTEGRATION RECOGNITION • Deep Integration Recognition analyses the aspect that effective integration is a much broader aspect, surpassing the idea that reducing tariffs, quotas and barriers will provide effective solutions. Rather, it recognizes the concept that additional barriers tend to segment the markets.That impedes the free flow of goods and services, along with ideas and investments. • Hence, it is now recognized that the current framework of traditional trade policies are not adequate enough to tackle these barriers. Such deep-integration was first implemented in the Single Market Program in the European Union. However, in the light of the modern context, that debate is being propounded into the clauses of different regional integration agreements arising out of increase in international trade.

8

CLOSED REGIONALISM TO OPEN MODEL • The change from a system of closed regionalism to a more open model had arisen out of the fact that the section of trading blocs that were created among the developing countries during the 1960s and 1970s were based on certain specific models such as those of import substitution as well as regional agreements coupled with the prevalence of generally high external trade barriers.The positive aspects of such shifting is that there has been some restructuring of certain old agreements.The agreements tend to be more forward in their outward approach as well as show commitment in trying to advance international trade and commerce instead to trying to put a cap on it by way of strict control.

9

ADVENT OF TRADE BLOCKS • The Advent of Trade Blocks tend to draw in some parity between high-income industrial countries and developing countries with a much lower income base in that they tend to serve as equal partners under such a system. The concept of equal partners grew out of the concept of providing reinforcement to the economies to all the member countries. The various countries then agree upon the fact that they will help economies to maintain the balance of trade between and prohibit the entry of other countries in their trade process. • An important example would be the North American Free Trade Area, formed in 1994 when the Canada - US Free Trade Agreement was extended to Mexico. • Another vibrant example would entail as to how EU has formed linkages incorporating the transition economies of Eastern Europe through the Europe Agreements. It has signed agreements with the majority of Mediterranean countries by highly developing the EU-Turkey customs union and a Mediterranean policy. It is a network of civil society, social movement and community-based organisations from around the world, calling for alternative forms of regional integration. It strives to promote cross-fertilisation of experiences on regional alternatives among social movements and civil society organisations from Asia, Africa, South America and Europe. • Further it aims to contribute to the understanding of alternative regional integration as a key strategy to struggle against neoliberal globalisation and to broaden the base among key social actors for political debate and action around regional integration" and is thus committed to expanding and deepening global democracy. 10

INDIA : TRADE AGREEMENTS Current Engagements/ Negotiations : Agreements already concluded •

Agreement of Cooperation with Nepal to Control Unauthorised Trade

•

Agreement on SAARC Preferential Trading Arrangement SAPTA

•

Agreement on South Asia Free Trade Area SAFTA

•

Asia Pacific Trade Agreement APTA

•

CECA (Comprehensive Economic Cooperation Agreement) between The Republic of India and the Republic of Singapore

•

Comprehensive Economic Cooperation Agreement between India and Malaysia

•

India Afghanistan PTA

•

India ASEAN Agreements

•

India Bhutan Trade Agreement

•

India Japan CEPA (Comprehensive Economic Partnership Agreement)

•

India Korea CEPA

•

India Nepal Trade Treaty

•

India Sri Lanka FTA

•

SAARC Agreement on Trade in Services SATIS

•

Treaty of Transit between India and Nepal

11

• Agreement on implementation of India – Malaysia CECA (Comprehensive Economic Cooperation Agreement ) • India Bangladesh Trade Agreement • India Ceylon Trade Agreement • India DPR Korea Trade Agreement • India Maldives Trade Agreement • MOU between Establishing Border Haats across the Border between India and Bangladesh • MOU BETWEEN INDIA AND INDONESIA ON THE ESTABLISHMENT OF BIENNIAL (every two years) TRADE MINISTERS’ FORUM • MOU between India and Vietnam on the recognition of Vietnam as a Full Market Economy

12

REGIONAL INTEGRATION AGREEMENTS & FOREIGN INVESTMENT • Investment rules govern cross-border investment in a regional grouping and usually consist of rules on the treatment and protection of FDI contributing to a favourable investment climate. • Investment rules exist in a number of RTAs, although they are not as common as trade rules, particularly amongst the poorer developing countries. Some RTAs include investment rules as voluntary principles (e.g.Asia-Pacific Economic Cooperation), while others include rules with effective dispute settlement procedures. • In some RTAs, the provisions apply only to regional investors, while in others they also apply to extraregional investors. • The membership of a regional grouping as such is not significantly related to inward foreign direct investment. • However, a country that is a member of a regional trade agreement with a sufficient level of trade and investment provisions is in a better position to attract more inward foreign direct investment. • Furthermore, countries that have larger economies or are geographically closer to larger countries within the regional grouping can expect a larger increase in foreign direct investment as a result of joining a regional trade agreement than those of countries that have smaller 13 economies or are located on the periphery.

Regionalism Vs Multilateralism

• PTAs (Preferential Trade Agreements) do have a fundamental conflict with Multilateralism, as these are built on the foundation of discrimination with the nonmembers while liberalizing trade. • The multilateral initiative under the WTO rests on the Principle of NON-DISCRIMINATION. • RTAs (Regional Trade Agreements) are an exceptional situation under the multilateral trading system enunciated within WTO.

• Any RTA is bound to have certain trade distortion effects. • This trade distortion arises due to discriminatory treatment advanced to the non-members of the RTA vis-à-vis its members on account of market access granted to the members of the same regional bloc.

• Article XXIV of GATT of 1994 is now an integral part of WTO agreement effective from 1995. It recognizes the conditional right of members to form RTAs. Three points are :  W.r.t. the overall impact of the RTAs with non-members, there is an obligation not to raise barriers to trade. Though this is quantifiable in terms of tariffs, however less easy to measure in terms of other trade regulations such as Rules of Origin clause.  For an ‘external requirement’, FTA can not lead to higher import duties for its members while a custom union must harmonize the external trade policies of its members and compensate affected non-members accordingly.  On the ‘internal dimension’ of regional agreements, tariffs and other restrictive regulations of commerce must be phased out substantially on all trade. (Though tariff component can be quantified, but it is harder to determine in the case of their restrictive trade regulations, as there is no agreed definition of the term.

• The WTO authorizes RTAs, the operation of which should not lead to the situations where non-party would ‘pay the price’ for internal preferences. To ensure coherence, RTAs are to be ‘promptly’ notified to the WTO and reviewed by peers before being implemented. • The MFN treatment calls for non-discrimination among members, while national treatment ensures non-discrimination between domestic produced and imported items.

• RTA implies a higher degree of liberalization within the region as compared to the rest of the world. • RTAs are thus allowed under the multilateral trading system as an exception to the MFN principle of the WTO in the belief that they would facilitate trade liberalization at the multilateral level in the long run.

The idea is that regionalism would gradually expand, leading to multilateral trade liberalization. Therefore, it would facilitate the formation of a liberalized fair global trading regime. However, because of the discriminatory environment created by its formation, any RTA is bound to result in some amount of trade diversion.

Building Blocks Vs Stumbling Blocks The central question is: whether regional agreements are building blocks or stumbling blocks?

The proponents of stumbling blocks emphasize that: 1. RTAs may promote costly trade diversion rather than efficient trade creation, especially when sizable MFN tariffs remain – these tariff create vested interests to maintain preferential margins in ‘their’ markets.

2.

Proliferating regional agreements absorb scarce negotiating resources (especially in poorer WTO members) and crowding out (spending more to increase growth) for policy-makers attention. 3. Competing RTAs (especially different North-South combinations) may lock in incompatible regulatory structures and standards and may result in inappropriate norms for developing partners; and 4. By creating alternative legal frameworks and dispute settlement mechanisms, RTAs may weaken the discipline and efficiency associated with a broadly recognized multilateral framework of rules.

However, on the other hand the Building blocks proponents stress that: 1. Regional/bilateral agreements can help sensitize domestic constituencies to liberalization and keep the stakes lower to allow for incremental progress on trade. 2. Expanding the number and coverage of RTAs can erode vested opposition to multilateral liberalization because each successive RTAs reduces the value of the margin of preference, thereby reducing the discriminatory impact.

3. RTAs are often more about building strategic and or political alliances or locking in domestic reforms than about actual trade liberalization and so are not necessarily competitive with multilateral efforts. 4. Regional arrangement can provide an incubator for developing country firms/producers to learn to trade with RTAs partners without facing full global competition; 5. For some issues, such as regulatory cooperation, RTAs may be a viable and more manageable alternative to the WTO where ‘lowest common denominator’ outcome trends to prevail.

Therefore, RTAs can be complement to multilateral reform, but they are not substitutes. RTAs can be stumbling blocks to multilateral arrangements by creating incentives to resist the preference erosion that can occur through new multilateral liberalization. However, because the gains are often substantially larger in multilateral agreements, concerns over preferences erosion may be limited to a few small countries that could conceivably block a multilateral agreement.

Therefore, large developed countries may gain more from signing individual bilateral agreements than they would from a multilateral accord, because they can use the carrot of preferential access to extract concessions in non-trade areas from developing country partners that would be resisted in the WTO negotiating framework.

From development perspective WTO remains the best-available forum to discipline the use of trade-distorting policies. RTAs can complement the WTO efforts by cooperating on behind-theborder policies, especially on regulation-intensive issues such as services, trade facilitation and the investment climate. Governments pursuing this agenda through RTAs must adopt rules that are appropriate to their own level of development.

• The Global North include the United States, Canada, Western Europe, outermost regions of the European Union, developed parts of Asia (the Four Asian Tigers, Japan, Brunei and Israel) as well as Australia and New Zealand. • The Global South is made up of Africa, Latin America, and developing Asia including the Middle East. • The North mostly covers the West and the First World, along with much of the Second World, while the South largely corresponds with the Third World. The North may be defined as the richer, more developed region and the South as the poorer, less developed region, • The potential for inappropriate outcomes is higher in North-South RTAs because the asymmetry in negotiating power can overtake real development priorities.

• Developing countries are likely to have the greatest success in harnessing trade for growth and poverty alleviation if they adopt a three-pronged strategy that involves autonomous liberalization, active multilateralism and open regionalism. • High income countries could promote open regionalism by including agriculture in RTAs. They could adopt more common and non-restrictive ‘rules of origin’ across agreements.

• They could work with prospective partners to ensure that new regulations regarding investment and intellectual property (IPRs) are appropriate to the level of development, which would reduce the risks of undue enforcement costs. • Finally they could provide trade related technical assistance not only in the implementation phase but also in the negotiating phase, which could promote greater liberalization and supply response to new market opportunities to regional or global markets.

Therefore, the International community working through the WTO can reduce or minimize discrimination in the system. WTO members should establish stronger multilateral surveillance mechanisms to document , analyze and monitor the effects of RTAs on non-members.

• Expanding the information on the impact of RTAs to stakeholder's-firms, consumers, taxpayers- would also help to ensure that the potential benefits of liberalization are both realized and distributed more equitably. Medium-term efforts should focus on implementing WTO disciplines on regional agreements.

Unit 5 : International Production Unit 6 : Operation Management In International Companies By DR. RAJNISH KATARIA

1 17-1

Introduction

• In today’s world, firms must decide o Where to locate productive activities o What the long term strategic role of foreign production sites should be o Whether to own foreign production activities or outsource those activities to independent vendors o How to manage a globally dispersed supply chain and what is the role of Internet based information technology should be in the management of global logistics. o Whether to manage global logistics or outsource 2 17-2

Operations: The Firm as a Value Chain • A firm’s operations can be thought of a value chain composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm’s infrastructure. • Value creation activities can be categorized as primary activities (R&D, production, marketing and sales, customer service) and support activities (information systems, logistics, human resources)

3 17-3

The Value Chain

4 17-4

Production •

•

•

•

Production is a scientific process which involves transformation of raw material (input) into desired product or service (output) by adding economic value. Production can broadly be categorized into following based on technique: Production through separation: It involves desired output is achieved through separation or extraction from raw materials. A classic example of separation or extraction is Crude Oil into various fuel products. Production by modification or improvement: It involves change in chemical and mechanical parameters of the raw material without altering physical attributes of the raw material. Annealing process (heating at high temperatures and then cooling), is example of production by modification or improvement. Production by assembly: Car production and computer are example of production by assembly.

5 17-5

How Can Quality Be Improved? • Most firms use total quality management (TQM) o aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the company o in the EU, firms must meet ISO 9000 standards before gaining access to the EU marketplace

• Improved quality reduces costs

6 17-6

What Should a Firm Do? • Production should be concentrated in a few locations when o fixed costs are substantial o the minimum efficient scale of production is high o flexible manufacturing technologies are available • Production in multiple locations makes sense when o both fixed costs and the minimum efficient scale of production are relatively low o appropriate flexible manufacturing technologies are not available

7 17-7

Why Are Product Factors Important To Location Decisions? • Two product factors impact location decisions 1. The product's value-to-weight ratio o if the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world o if the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world 2. Whether the product serves universal needs o when products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense

8 17-8

How Are Location, Strategy &Production Related? Location, Strategy, and Production

9 17-9

What Is The Strategic Role Of Foreign Factories? •

•

The strategic role of foreign factories and the strategic advantage of a particular location can change over time o factories established to take advantage of low cost labor can evolve into facilities with advanced design capabilities Many companies now see foreign factories as globally dispersed centers of excellence o supports the development of a transnational strategy o global learning

10 17-10

Should A Firm Outsource Production? • Should a firm make or buy the component parts to go into its final product? • Make-or-buy decisions are important to firms' manufacturing strategies o service firms also face make-or-buy decisions o decisions involving international markets are more complex than those involving domestic markets

11 17-11

Should A Firm Outsource Production? •

•

Vertical integration - making component parts in-house 1. Lowers costs 2. Facilitates investments in highly specialized assets 3. Protects proprietary technology 4. Facilitates the scheduling of adjacent processes Buying component parts from independent suppliers 1. Gives the firm greater flexibility 2. Helps drive down the firm's cost structure 3. Helps the firm capture orders from international customers

12 17-12

Do Strategic Alliances With Suppliers Make Sense? • Firms can capture the benefits of vertical integration without the associated organizational problems by forming long-term strategic alliances with key suppliers o however, these commitments may actually limit strategic flexibility o risk giving away key technological know-how to a supplier

13 17-13

How Do Firms manage the Global Supply Chain? • Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user o the goal is to manage a global supply chain at the lowest possible cost and in a way that best serves customer needs • Just-in-time (JIT) systems • Web-based information systems • Electronic Data Interchange (EDI)

14 17-14

Logistics • Planning, execution, and control of the procurement, movement, and stationing of personnel, material, and other resources to achieve the objectives of a campaign, plan, project, or strategy. It may be defined as the 'management of inventory in motion and at rest. • procurement and physical transmission of material through the supply chain, from suppliers to customers

15 17-15

Strategic objectives of International Production • • • • •

Meeting international quality standards Forecasting demand and production design Profitability Minimum production cost Adaptation to modern available technology

16 17-16

Global Trends in International Production Organization needs to consider the following point while developing Production strategies: • Production/Factory Location: The choice of location for the production facility depends on its proximity near to the market and cost of production (labor) in that particular environment. • Factory design, layout and quality standards: Organization need to standardize design and layout across their production location as to minimize production planning process, provide flexibility in sharing technical knowledge and manpower. • External vendor and procurement: Organization needs to finalize the vendors to provide raw material as well important components required to complete the final product. Also procurement schedule has to be finalized as not to hurt production. 17 17-17

International Production • International production and operations management deals with production of goods and services in international locations and markets. It involves management process which has to take into consideration local production market (labor and capital) and international customer requirements. • The foundation for international production and operations is no different to domestic production and operations management. But there are certain aspects which make international exposure a challenge for an organization. o The very 1st difference is international business environment where not just economics but also international quality standards have to be maintained. o The 2nd aspect is the international stint makes the company more aware of its surroundings thus making it more competitive. 18 17-18

Constraints on International Production and Operations Management (IPOM) • • • • • • • •

Culture: Domestic POM has to content with homogenous culture where as IPOM has to content with multi-culture multi-ethnicity scenario. Business Environment: Domestic POM has to consider local economical and social factors where as IPOM has to deal with economical and social factors across geography and countries. Quality Standards: Domestic POM has to look at single local market therefore not much variation in quality standards where as IPOM has to consider different international markets with different quality standard requirements. Pricing: Pricing for Domestic POM may not be a challenge as competition would also operate in the same environment. IPOM has to consider the customer paying capacity which may vary from dev eloped country to dev eloping country. Technology: In domestic env ironment innovation and usage of technology is much more comparable among competition. For IPOM owing to different quality and pricing requirements inv estment in technology becomes important. Economies of Scale: Domestic POM has to deal with limited local market, hence limiting scope of economies of scale whereas IPOM has to access to larger market thus prov iding a change of achiev ing larger economies of scale. Market Segmentation: Domestic POM is around local market where as IPOM has to developed and div ersified market. Usage of resources: Domestic POM has to deal with in-flexibility of mov ing around of resources within one location while IPOM has advantage of mov ing around of resources from high cost market to low cost market. 19 17-19

Internationalization of Service Firms • A Service firm is a business that makes its facilities available to others for a fee. • Ex: Wipro, Infosys, Tech- Mahindra, IBM, Satyam • Types of Service Firms: o Professional Service Firms: Firms of infrequent, technical or unique functions performed by independent contractors or by consultants. Provides services like Accountancy, business consultancy etc. o Financial Service Firms: Financial service firms are those who provide economic services i.e managing money. Includes banks, insurance companies, consumer finance companies, stock brokerages etc. Examples: Bajaj capital limited, DSP Merrill Lynch Limited. 20 17-20

Financial Services BANKS • Keeping money safe while also allowing withdrawals when needed. • Issuance of cheque books so that bills can be paid and other kinds of payments can be delivered by post. • Issuance of credit and debit cards. • Allow financial transactions at branches or by using Automatic Teller Machines(ATMs). • Provide wire transfers of funds and Electronic Fund Transfers between banks. • Accepting the deposits from customer and provide the credit facilities to them FOREIGN EXCHANGE SERVICES • Provided by many banks abroad the world. • Includes: Currency Exchange Foreign Currency Banking Wire Transfer

21 17-21

Financial Services INSURANCE SERVICES • Insurance Brokerage: Insurance Brokers shop for insurance on the behalf of customers. • Insurance Underwriting: Activities include life insurance, health insurance, retirement insurance, property insurance. OTHER FINANCIAL SERVICES • Advisory Services: Stock brokers. • Angel Investment: An angel is an individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Conglomerates : Firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, investment banking, etc. Debt Resolution: A consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to pay off their debts owed 22 17-22

Internationalization of Service Firms • Firms become international when they extend their activities into overseas markets. • Greater is their involvement, greater is the level of internationalization. • Internationalization appears to be the dominant strategic objective for many large business service firms seeking continued growth. • Firms initially tend to extend their geographical reach in the national market prior to international expansion. • In some cases, firms become internationally active prior to extension to national coverage

23 17-23

Modes of Internationalization • 4 modes of internationalization: • Mode I: It refers to those cases in which the service provider is located in one country and the consumer in another, without any of both needing to move. • Mode II: Refers to consumption of a given service abroad. It includes tourism, travel, cultural events etc. • Mode III: Refers to cases in which companies of a given country provide services in another one, either through subsidiaries, by participating in local companies or setting up own staff. • Mode IV: It requires presence of natural persons and relates to those cases in which an individual goes to another country to provide service to consumers 24 17-24

Internationalization of Professional Service Firms • The fastest growing sector is knowledge-based services (e.g. engineering, architectural, education, information technology, biotechnology ) which have grown at an average annual rate of 10% to 12% over several years. • Most researchers agree that professional service firms must enter a foreign market “all at once” through different forms of foreign direct investment (FDI) • Why do Professional Service Firms internationalize: • Multilateral Agreements: GATS is often referred as the starting shot for services internationalization. • Globalization: Global networking developments lead to more emphasis on services and blurring of industrial boundaries in professional services. 25 17-25

Operations Management As to deliver value for customers in products and services, it is essential for the company to do the following: • Identify the customer needs and convert that into a specific product or service (numbers of products required for specific period of time) • Based on product requirement do back-word working to identify raw material requirements • Engage internal and external vendors to create supply chain for raw material and finished goods between vendor → production facility → customers. Operations management captures above identified 3 points

26 17-26

Production Management v/s Operations Management A high level comparison which distinct production and operations management can be done on following characteristics: • Output: Production management deals with manufacturing of products like (computer, car, etc) while operations management cover both products and services. • Usage of Output: Products like computer/car are utilized over a period of time whereas services need to be consumed immediately • Classification of work: To produce products like computer/car more of capital equipment and less labour are required while services require more labour and lesser capital equipment. • Customer Contact: There is no participation of customer during production whereas for services a constant contact with customer is required. Production management and operations management both are very essential in meeting objective of an organization.

27 17-27

Operations: Policy and Strategy •

•

•

Operational strategy is essential to achieve operational goals set by organization in alignment with overall objective of the company. Operational strategy is design to achieve business effectiveness or competitive advantage. Operational strategy is planning process which aligns the following:

In this global competitive age organization goal tend to change from time to time therefore operations strategy as a consequence has also be dynamic in nature. A regular SWOT analysis ensures that the organization is able to maintain competitive advantage and business leadership.

28 17-28

Strategic Management Process for Production and Operation For success of organizational strategic objective, strategic planning has to trickle down to various function areas of the business. In order to build strategy management process a sequential process as below is followed • Competition Analysis: In this step company evaluates and studies current competition in the market and practices that are followed in the industry for operations and production vis-à-vis company policies • Goal Setting: Next step involves narrowing down the objective towards which the organization wants to move towards. • Strategy Formulation: The next step is breaking down of organizational goals into operations and production strategies. • Implementation: The final step is to convert operations and production strategies into day to day activities like production schedule, product design, quality management etc. As organizations are always customer-centric, production and operation strategy for organization are built around them 29 17-29

Internationalization of Technological Innovations

30 17-30

Why Are Technological Factors Important? • Firms should consider o The level of fixed costs o The minimum efficient scale o The flexibility of technology

• Flexible manufacturing technology or lean production o mass customization o flexible machine cells

31 17-31

Global Organizational Structure & Control and Global Knowledge Management

32 17-32

New Globalization Organization Structure

33 17-33

UNIT 7: GLOBALIZATION AND HUMAN RESOURCE DEVELOPMENTS BY DR. RAJNISH KATARIA

Globalization and HRM • The rapid globalization of business has resulted in new challenges for cross-country management of human resources. • HRM has become a crucial determinant to a firm’s success or failure in international business. • Growing significance of trans-national experience for top

management jobs in global corporations. • ‘Off-shoring’ of business operations to low-cost locations has augmented the complexity of staffing, performance monitoring, and differential compensations. • Human resource practices followed in the West may not be

relevant in other countries due to differences in socio-cultural and regulatory environments.

Human Resource Management (HRM) • All those activities undertaken by an organization to utilize its human resources effectively. It includes activities, such as staffing, training and development,

expatriate

management,

performance

management,

compensation, fulfillment of regulatory obligations, such as labour

relations, human welfare and safety etc., and industrial relations. • International HRM: Comprising diverse requirements of various subsidiaries globally

Developing and sustaining human resource

capabilities to achieve organizational goals. • It is an interplay among three dimensions, i.e., human resource activities, types of employees, and countries of operations.

Domestic vs. International HRM • Increased functional activities • Functional heterogeneity • Increased involvement in employees’ personal lives • Enhanced risks • Increased influence of external environment

International Organizational Structures • Export Department • Import Department • International Division Structure • Global Organizational Structure • Global Functional Division Structures • Global Product Structure • Global Geographic Structure • Global Matrix Structure • Trans-national Network Structure

Strategic IHRM Orientations & Practices Ethnocentric IHRM Orientation

• The company tends to follow the parent company’s home country for its employees across the world. • Key managerial and technical personnel are recruited from the parent country nationals (PCNs). • Locals are employed only for supporting or lower level jobs with limited opportunities to grow

Polycentric IHRM Orientation

• Host country nationals (HCNs) are often employed in foreign subsidiaries whereas the headquarters are generally managed by the PCNs. Host country nationals have higher opportunities for career advancement. Besides, performance evaluation measures and compensation also vary considerably from subsidiary to subsidiary.

Regiocentric IHRM Orientation

• Most HR strategies are adopted regionally. Depending upon the nature of business and marketing strategy, employees are transferred within a region rather than across the region.

Geocentric IHRM Orientation

• The HR policies and practices of the firm are globally integrated leading to development of a real global corporation. The best talented personnel are posted throughout the MNE (Multi National Entities) irrespective of their nationalities

Managing International Human Resource Activities Staffing • The process of determining the organization’s current and future human resource requirements to meet the organizational goals and taking appropriate steps so as to fulfill those requirements. The process involves identifying the human resource requirement of an organization, and recruitment, selection, and placement of human resources

Manpower Availability • Availability of desired manpower affects a firm’s decision to hire locals or expatriates. MNEs often hire locals for lower level jobs except for some Middle East countries which import people even for labour and other lowpaid jobs. However, for most skilled and professional assignments, quality of educational system, availability of scientists and engineers, and quality of management schools plays an important role in a firm’s decisions to hire locals or expatriates

Forms of International Assignments - Filling up job positions - Management development - Organizational development

Types of International Assignments  Short-term (upto three months): Assignments related to small project work, machinery or plant repairing, or an interim arrangement till a suitable permanent arrangement is made  Extended (Upto one year): Involving similar activities as for short-term assignments for a relatively longer

duration  Long-term (one to five years): Also referred to as ‘traditional expatriate assignment’, involve a well-defined role in foreign operations. Assignments, such as production or marketing manager or a managing director of a subsidiary

Sources of Human Resources for International Staffing • Local citizens or HCNs : Local employees hired by an MNE of the host country are known as Host Country Nationals (HCNs). A large number of MNEs engage host country citizens for middle and lower level jobs. • Expatriates :Employees who temporarily reside and work outside their home country are commonly known as ‘expatriates’ or ‘expats’. Expatriates are often used as agents of direct control, socialization, network trade, and gathering market business intelligence • Parent country nationals (PCNs): Employees who are citizens of the country where the MNE is headquartered. Historically MNEs filled up key positions in their foreign affiliates with PCNs. • Third country nationals (TCNs): Employees, who are citizens of countries other than the country in which they are assigned to work or the country where the MNE is headquartered.

Off-shoring Transferring jobs to foreign countries which were previously carried out domestically. The breakthroughs in ICT (Information & Communication Technology) have made it possible to off-shore various service activities.

Recruitment and Selection Recruitment:

The process by

which an organization attracts the most competent people to apply for its job openings. Selection: The process by which organizations fill their vacant positions.

The

process

of

recruitment and selection varies widely among countries

Characteristics of Global Managers - Global mindset -

Strategic

vision

and

long-term

perspective - Ability to work in diverse culture - Willingness to relocate for international assignments - Ability to manage change and transition

Selection Criteria for International Assignments • Technical and managerial competence • Ability to perform under cross-cultural environments • Family attitude towards international assignments • Regulatory framework in host countries • Language : very important consideration

Managing Expatriates • People working out of their home countries, also known as expatriates, form an integral part of a firm’s international staffing strategy, especially for higher management positions. • Beside identifying and recruiting the right personnel with desired skills for international assignments, it is also extremely important to provide them with a conducive environment to get their optimum output • Reasons for Expatriate Failure • • • • •

Inability to adjust in alien cultures Career apprehensions on repatriation Relocation anxieties High costs of living and income gaps Problems related to lifestyle adjustments, such as uncomfortable living conditions • Family problems, such as spouse dissatisfaction, children’s education, and safety concerns • Health and medical concerns • Adaptation problems to different management styles

Expatriate Adjustment Process

The series of phases expatriates undergo while adjusting to a foreign culture that include: • Initial euphoria • Cultural shock • Adjustment • Re-entry back home

Repatriation The process of returning home by an expatriate after completion of foreign assignment that include:  Preparation  Physical relocation

 Transition  Re-adjustment

Training Training: The process by which employees acquire skills, knowledge, and abilities to perform both their current and future assignments in the organization. Training aims at altering behaviour, attitude, knowledge, and skills of personnel so as to increase the performance of employees.

Pre-departure Training for Overseas Assignments Cultural sensitization programs Preliminary visit Language training Practical training

Performance Management The process that enables a firm to evaluate the performance of its personnel against pre-defined parameters for their consistent improvements so as to achieve organizational

goals. The system used to formally assess and measure employees’ work performance is termed as performance

appraisal.

Compensation The financial remuneration that employees receive in exchange of their services rendered to the organization. It includes wages, salaries, pay rise, and other monetary benefits. A good compensation system should be designed within the regulatory framework of the country of operation of an MNE and should be able to attract and retain the best available talent. Key Components of International Compensation Systems :  Base salary:  Foreign service premium:  Allowances:  Hardship allowance  Cost of living allowance (COLA)  Housing allowance  Home leave allowances  Education allowances  Relocation allowances  Assistance for tax equalization

Strategic Approaches to International Compensation  Home-country-based  Host-country-based  Hybrid of the above two

Regulatory Framework and Industrial Relations

International firms are required to adhere to various legislative provisions under the labour laws; compensation and benefit laws; and individual rights laws related to civil rights, immigration, discrimination, and sexual harassment at workplace in countries of their operations which often have considerable differences.

International Marketing It’s just marketing a product or service to consumers in different countries. Upon second inspection, however, it is a bit more complicated. International marketing is significantly more complex than domestic marketing, and several additional factors come into play. This includes legal differences—every country has its own separate set of laws that govern business that must be taken into account—as well as cultural differences.

•

Deciding When to Expand Has the company built a solid foundation at home? This seems intuitive,

but if the expansion spreads the company’s resources too thin and far from the intended success, the move could lead to disaster. • How big will this expansion be? Is this international expansion a matter of opening new locations in several countries, or is it simply expanding the company’s online presence? • Does the company have personnel in place to handle the expansion? This includes making sure that the company has employees with the required skills and the company can afford to shift those individuals into new roles or hire additional resources. • How much money is the company able to invest in international marketing efforts and where will this money come from? Depending on how business is running in the primary market, it may be wise to divert money from domestic marketing efforts into international markets. Eg. Expansion of U.S. companies to Europe, developing countries and China.

Export Management Export management is the application of managerial process to the functional area of exports. It is a form of management which is required to bring about coordination and integration of all those involved in an export business. It is thus, concerned with securing export orders and achieving their successful

completion in time as per the requirement specified by the foreign buyers. The main objectives of export management (i) secure export orders and (ii) to ensure timely shipment of goods as per prescribed norms of quality and other specifications including terms and conditions agreed to between the export and the importer

Classification of Export • •

•

• •

• •

•

Merchandise Exports : Merchandise exports refer to the export of physical goods, for example, readymade garments, engineering goods, furniture, works of art etc. Service Exports: Services exports refers to the export of goods that don’t exist in physical form, that is, professional, technical or general services. Examples of the exports would include export of computer softwares, architectural, entertainment or technical consultancy services etc. Project export refers to establishment of a project by a business firm in another country. The term ‘Project’ as been defined as ‘non-routine, non-repetitive and one-off undertaking, normally with discrete time, financial and technical performance goals.’ It is viewed as scientifically evolved work plan devised to achieve a specific objective within a specific period of time. Deemed Exports ‘Deemed Exports’ refer to those “transactions in which the goods are made in India, by the recipient of the goods.” The essential condition is that such goods are manufactured in India. This category of export has been introduced by the Export Import Policy of the Government of India. Some of the examples of goods regarded as ‘’Deemed Exports”, as given in Export-Import Policy (2002-07) are; Supply of goods against duty free licenses Supply of goods to projects financed by multilateral or bilateral agencies/Funds notified by the Department of Economic Affairs, Ministry of Finance, Government of India. Supply of goods to the power, oil and gas including refineries and so on.

Unit 8: Financing of International Trade etc.

Advance Payment The payment is remitted by the buyer in advance, either by a draft mail or

TT (telegraphic transfer). Generally, such payments are made on the basis of a single receipt and its approval by the importer.

Documentary Credit

Documentary Collection: The payment collection mechanism that allows exporters to retain ownership of the goods or reasonably ensures their receiving payments. It is governed by Uniform Customs and Practices of Documentary Credits widely known as UCPDC 600.

Documentary Credit and Letter of Credit (L/C) A documentary credit represents a commitment of a bank to pay the seller of goods or services a certain amount provided s/he presents stipulated documents evidencing the shipment of goods or performance of services within a specified period.

Types of L/C 

 



Irrevocable: The issuing bank irrevocably commits itself to make payment if the credit terms as given in the L/C are satisfied Revocable: Such L/C can be revoked any time without consent of or notice to the beneficiary. Confirmed: The confirming bank (generally a local bank in exporter’s country), commits itself to irrevocably make payment on presentation of documents. Unconfirmed: The issuing bank asks the corresponding bank to advise about the L/C without any confirmation on its part.

  



Sight: The beneficiary receives payment upon presentation and examination of documents. Term credits: These are used as financing instruments for the importer. Acceptance credit: The exporter draws a Time Draft, either on the issuing or confirming bank or the buyer or on another bank depending upon the terms of credit. Deferred payment credit: The bank issues a written promise to make the payment on due date upon presentation of the documents.

Revolving: The amount involved is reinstated

when

utilized,

i.e.,

the

amount

become

available again without issuing another L/C

and usually under the same terms and conditions. Back to Back: Used when exporter uses the

L/C as a cover for opening a credit in favour of the local suppliers.

Documentary Credit without L/C

Documents are routed through banking channels that also acts as

seller’s agent alongwith Bill of Exchange. Such drafts may be either sight or usance.

Sight draft (document against payment): The importer can take physical possession of the goods only when s/he has made the payment before getting documents from the bank.

Usance or time draft (document against acceptance): The importer gets documents by the bank on his/her acceptance of the payment obligations and can subsequently takes title of the goods

before the payment is released.

International Trade Finance & International Capital Flows 

Access to adequate finance at competitive rates is crucial to successful completion of an export transaction. Finances are required to complete an export trade cycle right from receiving the export order till the realization of final payment from the importer. Export credit is extended both at preshipment and post-shipment stages.



International capital flows are the financial side of international trade. When someone imports a good or service, the buyer (the importer) gives the seller (the exporter) a monetary payment, just as in domestic transactions. If total exports were equal to total imports, these monetary transactions would balance at net zero: people in the country would receive as much in financial flows as they paid out in financial flows. But generally the trade balance is not zero. The most general description of a country’s balance of trade, covering its trade in goods and services, income receipts, and transfers, is called its current account balance. If the country has a surplus or deficit on its current account, there is an offsetting net financial flow consisting of currency, securities, or other real property ownership claims. This net financial flow is called its capital account balance.

Types of International Financing Alternatives Banker’s Acceptance: It is time draft or Bill of Exchange drawn on and accepted by a bank. By ‘accepting’ the draft, the bank makes an unconditional promise to pay the holder of the draft the specified amount of money on maturity. Discounting: Exporters can convert their credit sales into cash by way of ‘discounting’ the draft even if it is not accepted by the bank. The draft is discounted by the bank on its face value minus interest and commissions ‘with’ or ‘without’ recourse.

Accounts Receivable Financing: Banks often provide loans to the exporter based on its credit worthiness secured by an assignment of the accounts receivables. The exporter is responsible for repaying the loan to the bank even if the importer fails to pay the exporter, for whatever reasons. Usually the period of such financing is one to six months.

Factoring:

It is widely used in short-term transactions as a continuous

arrangement. It involves purchase of export receivables by the factor at a discounted price, i.e., generally 2 per cent to 4 per cent less than the full value. However, the discount depends upon a number of other factors such as the type of product, terms of the contract, etc. Forfeiting: It refers to the exporter relinquishing his or her rights to a receivable due at a future date in exchange for immediate cash payment at an agreed discount, passing all risks and responsibility for collecting the debt to the forfeiter. Forfeiting is particularly used for medium-term credit sales (1 to 3 years).

Letters of Credit (L/C): In a L/C the issuing bank undertakes a written guarantee to make the payment to the beneficiary, i.e., the exporter, subject to the fulfillment of its specified conditions. Terms credit is often used as financing instrument for the importer who gets delivery of the goods without making payment to the importer. Counter-Trade: It is used to combine trade-financing and price setting in one transaction. Counter-trade finances imports in form of reciprocal commitments from countries that have payment problems, especially in hard currencies

Export Finance As a part of their export promotion strategy, countries around

the world offer export credit, often at concessional rates to facilitate exports. Export credit in India is available both in Indian rupees and foreign currency.

Financing to Overseas Importers Credit is also extended to overseas buyers to facilitate import of goods from the exporting country, mainly under two forms:  Buyer’s credit Extended by a bank in exporter’s country to an overseas buyer enabling the buyer to pay for import of machinery and equipment that s/he may be importing for a specific project.  Line of credit Extended by a bank in exporting country to an overseas bank, institution or government for the purpose of facilitating import of a variety of listed goods from the exporting country into the overseas country.

Credit Risk Insurance It provides protection against both political and commercial risks to the exporters who sell their goods against credit terms. Insurance policies and guarantees extended by export credit agencies, such as ECGC can be used as collateral for trade financing

WTO Compatibility of Trade Finance and Insurance Schemes WTO sets the framework for the types of subsidies that can be provided by a country for export promotion. The agreement on Subsidies and Countervailing Measures (SCM) prohibits national governments to provide subsidies that are contingent upon export performance or upon the use of domestic goods over the imported ones. It also constrains government intervention in the area of export financing and insurance.

Joint Ventures and Business Partnerships A joint venture is a common way of combining resources and expertise of two otherwise unrelated companies. This type of partnership usually offers great advantages, but it can also present certain risks, since arrangements of this sort are generally highly complex. Advantages of joint venture  A major joint venture advantage is that it can help your business grow faster, increase productivity and generate greater profits. Benefits of joint ventures include:  access to new markets and distribution networks  increased capacity  sharing of risks and costs with a partner  access to greater resources, including specializsed staff, technology and finance 

Risks of Joint Ventures 





Partnering with another business can be complex. Disadvantages of joint venture can be significant, especially if you form a relationship with a business whose abilities or resources don't match or complement yours. It takes time and effort to build the right business relationship and, even then, joint venture risks cannot be entirely avoided. Problems are likely to arise if: ◦ the objectives of the venture are not clear and communicated to everyone involved ◦ the partners have different objectives for the joint venture ◦ the partners bring in different levels of expertise, investment or assets into the venture ◦ different cultures and management styles result in poor integration and cooperation ◦ the partners don't provide sufficient leadership and support in the early stages Success in a joint venture depends on thorough research and analysis of aims and objectives.

UNIT 9 Foreign Direct Investment (FDI) (with special reference to India) BY: DR. Rajnish Kataria

Foreign Direct Investment • Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

Significance of FDI International trade and foreign direct investment (FDI) are the two most important international economic activities integrating the world economy. With the increase in mobility of factors of production across countries, FDI has become an integral part of firms’ strategy to expand international business.

Concept of FDI

In simple terms, FDI means acquiring ownership

in an overseas business entity. Foreign direct investment occurs when an investor

based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it.

Methods of Foreign Direct Investment Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger or joint venture with a foreign company. The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the Organisation of Economic Co-operation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company, typically represented for the investor acquiring 10% or more of the ordinary shares or voting shares of a foreign company. However, that definition is flexible, as there are instances where effective controlling interest in a firm can be established with less than 10% of the company's voting shares.

Types of Foreign Direct Investment Foreign direct investments are commonly categorized as being horizontal, vertical, conglomerate or greenfield in nature.

• A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United

States opening up stores in China.

• A vertical investment is one in which different but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing

company to make its products.

• A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry the investor has no previous experience in, it

often takes the form of a joint venture with a foreign company already operating in the industry.

•

A green field investment is a type of foreign direct investment ( FDI) where a parent company builds its operations in a foreign country from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.

Global FDI Patterns: Global FDI slipped in 2018:UNCTAD

• Global FDI skids 19 percent on Trump tax reform, may rebound in 2019 U.N. • Global foreign direct investment (FDI) fell 19 percent last year to an estimated $1.2 trillion, largely caused by U.S. President Donald Trump’s tax reforms, the United Nations trade and development agency UNCTAD said. • FDI, comprising cross-border mergers and acquisitions (M&A), intracompany loans and investment in start-up projects abroad, is a bellwether of globalization and a potential sign of growth of corporate supply chains and future trade ties. • But it can also go into reverse as companies pull investments out of foreign projects or repatriate earnings. • The lowest net global FDI since 2009 was the result of U.S. firms repatriating $300 billion or more in accumulated earnings to take advantage of Trump’s tax break. • Net investment flows into Europe slumped by an unprecedented 73 percent to $100 billion, a level not seen since the 1990s, as U.S. firms pulled years of profits out of affiliates in Ireland, Switzerland and elsewhere.

• The United States remained the top destination for FDI in 2018, attracting $226 billion, 18 percent less than in 2017.

• Second was China, up 3 percent to $142 billion, and third was Britain, which saw a 20 percent jump to $122 billion, mainly due to a doubling of reinvested earnings and a tripling in the value of M&A deals.

• Notable megadeals included Comcast’s (CMCSA.O) $40 billion acquisition of

Sky, Vantif ’s $10 billion purchase of Worldpay, and the acquisition of Unilever’s margarine & spreads business for $8 billion by KKR & Co.

• One major growth area in 2018 was the value of newly announced “greenfield” investments into developing countries in Asia, which rose 84 percent to $390 billion.

• The rise was largely due to firms restructuring supply chains in Southeast Asia, driven by a desire to avoid getting caught up in trade tensions, as well as by new opportunities from the 11-country Comprehensive and Progressive Trans-Pacific Partnership Agreement and investment liberalization in China. Developing Countries

• Flows rose marginally in developing Asia and Latin America and the Caribbean, and remained flat in Africa.

• Developing Asia regained its position as the largest FDI recipient region in the world, followed by the European Union and North America.

Road ahead India has become the most attractive emerging market for global partners (GP) investment for the coming 12 months, as per a recent market attractiveness survey conducted by Emerging Market Private Equity Association (EMPEA). The World Bank has stated that private investments in India is expected to grow by 8.8 per cent in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby drive the growth in India's gross domestic product (GDP) in FY 2018-19.

Foreign Portfolio Investment (FPI) An investment by individuals, firms, or a public body in foreign financial instruments, such as foreign stocks, government bonds, etc. In FPI, the equity stake in the foreign business entity is not significant enough to exert any management control. Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market. Foreign portfolio investment differs from foreign direct investment (FDI), in which a domestic company runs a foreign firm, because although FDI allows a company to maintain better control over the firm held abroad, it may face more difficulty selling the firm at a premium price in the future.

Differences Between FPI and FDI FPI lets an investor purchase stocks, bonds or other financial assets in a foreign country. Because the investor does not actively manage the investments or the companies that issue the investments, he does not have control over the securities or the business. However, since the investor’s goal is to create a quick return on his money, FPI is more liquid and less risky than FDI. In contrast, FDI lets an investor purchase a direct business interest in a foreign country. For example, an

investor living in New York purchases a warehouse in Berlin so a German company can expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits. The investor controls his monetary investments and actively manages the company into which he puts money. He helps build the business and waits to see his return on investment (ROI). However, because the investor’s money is tied up in a company, he faces less liquidity and more risk when trying to sell his interest. The investor also faces currency exchange risk, which may decrease the value of his investment when converted from the country’s currency to U.S. dollars, and political risk, which may make the foreign economy and his investment amount volatile.

Benefits of FDI to Host Countries • Access to superior technology • Increased competition • Increase in domestic investment • Bridging foreign exchange gaps of host countries

Negative Impacts of FDI • Market Monopoly • Crowding-out and unemployment effects • Technology dependence

• Profit outflow • Corruption • National security

Factors Affecting Selection of FDI Destinations • Cost of capital input • Wage rate • Taxation regime • Cost of inputs • Cost of logistics • Market demand

Types of FDI On the Basis of Direction of Investment

Inward FDI: Foreign firms taking control over domestic assets. Outward FDI: Domestic firms investing overseas and taking control over foreign assets.

On the Basis of Types of Activity

Horizontal FDI: Overseas investment in a similar activity as carried out in the home country. Vertical FDI: Overseas investment so as either to provide inputs for the firm’s domestic operations or sell its domestic output abroad.

• Backward Vertical FDI: Direct investment aimed at providing inputs for a firm’s production processes.

• Forward Vertical FDI: Direct investment overseas aimed to sell the output of a firm’s domestic production processes.

Conglomerate FDI: Direct investment overseas aimed at manufacturing products not manufactured by the firm in the home country.

On the Basis of Investment Objectives Resource-seeking FDI: Direct investment overseas so as to gain privileged access to resources vis-à-vis competitor Market-seeking FDI: Direct investment overseas with sizeable market and growth in order to protect existing markets, counteract competitors, and to preclude rivals from gaining new markets Efficiency-seeking FDI: Direct investment overseas so as to improve efficiency and or seek advantages of process specialization or product rationalization

On the Basis of Entry Modes Greenfield Investments: Overseas investment to create new facilities or expansion of existing facilities

Merger & Acquisitions (M&As): Transfer of existing assets of a domestic firm to a foreign firm that leads to mergers and acquisitions.

On the Basis of Sector

Industrial FDI: Investment by a foreign firm in the manufacturing sector.

Non-industrial FDI: Investment by a foreign firm in services sector.

On the Basis of Strategic Modes Export replacement FDI is made as a substitute for exports in response to

trade barriers of the host country, such as import restrictions and prohibitive tariff structure.

Export Platforms

In order to minimize a firm’s cost of production and distribution, FDI is made so as to utilize the target country to serve the global markets.

Domestic Substitution

FDI aimed to obtain cheap inputs to support home production.

Policy Framework to Promote FDI Attracting FDI

development

has become a key part of national

strategies

for

most

countries.

Such

investments are often viewed to augment domestic capital, employment, and productivity, leading to economic

growth.

Major Regulatory Measures & Incentives to Promote FDI - Screening, admission, and establishment

- Fiscal incentives - Financial incentives

-Other incentives, such as subsidized service fees, subsidized designated infrastructure - Performance requirements

Promotion of FDI in India Institutional framework

The Department of Industrial Policy and Promotion plays an active role in investment promotion through dissemination of information on investment climate and opportunities in India. It also advises potential investors about investment policies, procedures, and opportunities and helps resolve problems faced by foreign investors.

• FDI sector allocation FDI up to 24 per cent allowed • Manufacture of items reserved for small sector upto 24 per cent

• FDI up to 26 per cent allowed • FM broadcasting • Up-linking a news and current affairs TV channels • Publishing of news papers and periodicals

• FDI upto 49 per cent allowed - Broadcasting

• Setting up hardware facilities • Cable network: • Direct to Home (DTH):

- Scheduled Air transport services - Commodity exchanges - Refining in case of PSUs - Civil aviation - Defence production - Insurance - Stock exchange

FDI up to 74 per cent allowed - ISP with gateways, radio-paging, and end-to-end bandwidth - Establishment and operation of satellites - Private sector banking - Telecommunications services - Non-scheduled Air transport services, ground handling services - Credit rating/information

•Foreign direct investment up to 100 per cent allowed with

prior government approval subject to conditions:

• - Trading - Courier services - Tea sector, including tea plantation: - ISP without gateway, infrastructure provider, electronic mail, and voice mail: - Mining and mineral separation of titanium bearing minerals and ores, its value addition - Cigars and cigarettes manufacture - Airports- existing projects with prior government approval beyond 74 per cent -

Up-linking of a non-news and current affairs TV channels - Investing companies in infrastructure/ services sector (except telecom sector) - Publishing of scientific magazines, specialty journals and periodicals - Tourism - Medical devices - Pension - Pharma - Railway infrastructure

Foreign Direct Investment allowed up to 100 per cent under automatic route - Agriculture sector - Industrial sectors • Mining • Manufacturing activities • Petroleum sector • Power • Special Economic Zones and Free Trade Warehousing Zones • Industrial Parks • Construction development projects - Services • Non banking finance companies • Trading • Asset reconstruction companies

FDI Prohibited - Atomic energy - Lottery business - Gambling and betting sector - Business of chit fund and nidhi company - Plantation except tea

- Trading in Transferable Development Rights (TDR) - Activity/ sector not opened to private sector investment

Patterns of FDI Flow of FDI: The amount of FDI undertaken over a given time period (for example, a year). If the investment is made by a foreign firm in a country, known as inflow of FDI whereas investment made overseas is termed as outflow of FDI. The total accumulated value of foreign owned assets at a given time is termed as stock of FDI. FDI comprises of equity capital and re-invested earnings as per IMF norms. Besides, capacity expansion financed by firms of foreign origin as well as short-term or long-term loans that form part of original packages are also treated as FDI.

Components of FDI Flows FDI is mainly financed by MNCs through • Equity capital • Intra-company loans

• Reinvested earnings

FDI Performance Indices

For carrying out cross-country comparison of FDI performance and FDI potential, the

UNCTAD’s FDI performance and potential indices serve as useful tools

Inward FDI Performance Index: Measure of the extent to which a host economy receives inward FDI relative to its economy size.

Outward FDI performance index: The ratio of a country’s share in global FDI outflows to its share in the world GDP.

FDI Trends in India Equity : 74.8% Re-invested Earnings: 21.8% Other Capital: 3.4%

Sector-wise Composition of FDI Inflows Figure : Sectorwise Composition of FDI Inflows*

S e rvic e s S e c to r 22.0% o the rs 30.6% C o m pute r S o ftwa re & Ha rdwa re 11.5% C he m ic a ls 2.3%

P e tro le um & Na tura l Ga s 3.1%

M e ta llurgic a l Indus trie s 3.7%

P o we r 4.1% Auto m o bile Indus try 4.0%

Ho us ing & R e a l Es ta te Te le c o m m unic a tio ns 6.3% 5.8%

C o ns truc tio n Ac tivitie s 6.7%

Country wise FDI Inflows Figure: Country-wise Composition of FDI Inflows*

others 24.6%

Mauritius 40.6%

UAE 1.1%

France 1.4% Cyprus 1.7% Germany 2.3% J apan 3.1%

Netherlands 4.0%

UK 6.5%

Singapore 7.1%

USA 7.6%

Theories of International Investment

Capital Arbitrage Theory

FDI takes place due to differences in the rates of return on capital across countries.

Market Imperfection Theory To access countries with market imperfections, such as government policies, including import restrictions and quotas, incentives on

exports, tax regimes,

and

government’s

participation in trade etc, FDI is often employed as a strategic

tool for international business expansion.

Internalization Theory When the know-how, technology, skills, or trade secrets available with a firm are crucial to the firm’s competitive advantage, it needs to protect such knowledge base

within

the

organization.

internationally by way of FDI.

Therefore,

it

expands

Monopolistic Advantage Theory An MNE is believed to possess monopolistic advantage,

which enables it to operate overseas more profitably and

compete with local firms.

International Product Life Cycle Theory The theory provides an explanation as to why the production locations are shifted across countries and suggests that an MNE prefers

those countries for

investment as manufacturing locations that have market size large enough to support local production.

The Ownership (O) Factor

Ownership advantages possessed by a firm enabling it to reap profits from overseas investments.

The Location (L) Factor

Location Factors- influencing where to produce.

Country specific advantage contributing to relative attractiveness of an investment destination

The Internalization (I) Factor

Retaining firm’s know-how within the organization rather than transferring it to an unrelated firm overseas.

Eurocurrency Market • The eurocurrency market is the money market in which currency held in banks outside of the country where it is legal tender is borrowed and lent by banks. The eurocurrency market is utilized by banks, multinational corporations, mutual funds and hedge funds that wish to circumvent regulatory requirements, tax laws and interest rate caps often present in domestic banking, particularly in the United States. The term eurocurrency has nothing to do with the euro currency or Europe, and the market functions in many financial centers around the world.

• Interest rates paid on deposits in the eurocurrency market are typically higher than in the domestic market because the depositor is not protected by domestic banking laws and does not have governmental deposit insurance. Rates on eurocurrency loans are typically lower than those in the domestic market for essentially the same reasons: banks are not subject to reserve requirements and do not have to pay deposit insurance premiums.

• Thus, a currency deposited in a bank outside the country of its origin. It is used as a generic term rather than being confined to the geographical boundary of Europe. For instance: Eurodollars : Dollars deposited in banks outside Europe.

Euro Sterling : Sterling Pounds deposited in a bank outside the UK

Global E Business

UNIT 10 CORPORATE GOVERNANCE & CORPORATE SOCIAL RESPONSIBILITY

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled.

Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

The principal stakeholders are: The shareholders/members, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

Why Corporate Governance?  Better access to external finance  Lower costs of capital  Improved company performance sustainability  Higher firm valuation and share performance  Reduced risk of corporate crisis and scandals

Four Pillars of Corporate Governance Accountability  Fairness Transparency  Independence

Accountability : - Ensure that management is accountable to the Board -Ensure that the Board is accountable to shareholders Fairness : - Protect Shareholders rights - Treat all shareholders including minorities, equitably - Provide effective redress for violations

Transparency: -Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance Independence : - Procedures and structures are in place so as to minimize, or avoid completely conflicts of interest - Independent Directors and Advisers i.e. free from the influence of others

Elements of Corporate Governance  Good Board practices  Control Environment  Transparent disclosure  Well-defined shareholder rights  Board commitment Each explained in detail :-

Good Board Practices:  Clearly defined roles and authorities  Duties and responsibilities of Directors understood  Board is well structured with appropriate composition and mix of skills

Good Board procedures:  Appropriate Board procedures  Director Remuneration in line with best practice  Board self-evaluation and training conducted

Control Environment:  Internal control procedures  Risk management framework present  Disaster recovery systems in place  Media management techniques in use  Business continuity procedures in place  Independent external auditor conducts audits  Independent audit committee established  Internal Audit Function  Management Information systems established  Compliance Function established

Transparent Disclosure:  Financial Information disclosed  Non-Financial Information disclosed  Financials prepared according to International Financial Reporting Standards (IFRS)  Companies Registry filings up to date  High-Quality annual report published  Web-based disclosure

Well-Defined Shareholder Rights:  Minority shareholder rights formalised  Well-organised shareholder meetings conducted  Policy on related party transactions  Policy on extraordinary transactions  Clearly defined and explicit dividend policy

Board Commitment :  The Board discusses corporate governance issues and has created a corporate governance committee  The company has a corporate governance champion  A corporate governance improvement plan has been created  Appropriate resources are committed to corporate governance initiatives  Policies and procedures have been formalised and distributed to relevant staff  A corporate governance code has been developed  A code of ethics has been developed  The company is recognised as a corporate governance leader

Need for Corporate Governance There were several frauds and scams in the corporate history of the world. It was felt that the system for regulation is not satisfactory and it was felt that it needed substantial external regulations. There were several changes brought out by governments, shareholder activism and large institutional investors. All these measures have brought about a metamorphosis in the corporate world that realized that investors and society are serious about corporate governance.

In the beginning of the new millennium, several companies in the USA particularly after Watergate scandal collapsed because of corporate mis-governance and unethical practices they indulged in. The then existing regulatory framework seemed to be inadequate to deal with the gigantic business corporations that committed deliberate frauds. The Tradway Commission was formed to identify the main cause of misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The Tradway Report published in 1987 highlighted the need for a proper control environment, independent audit committees and an objective internal audit function and called for published reports on the effectiveness of internal control The commission also requested the sponsoring organizations to develop an integrated set of internal control criteria to enable companies to improve their control.

Developments in UK In England, the seeds of modern corporate governance were sown by the Bank of Credit and Commerce International (BCCI) Scandal. The Barings Bank was another landmark. It heightened people’s awareness and sensitivity on the issue and resolve that something ought to be done to stem the rot of corporate misdeeds. These couple of examples of corporate failures indicated absence of proper structure and objectives of top management. Corporate Governance assumed more importance in light of these corporate failures, which was affecting the shareholders and other interested parties. As a result of these corporate failures and lack of regulatory measurers, the Committee of Sponsoring Organizations (COSO) was born. The report produced in 1992 suggested a control framework and was endorsed a refined in four subsequent UK reports: Cadbury, Ruthman, Hampel and Turbull.

Cadbury committee on Corporate Governance – 1992 The stated objectives of the Cadbury Committee was “To help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes his expected of them.” The committee investigated the accountability of the board of directors to shareholders and to society. It spelt out the methods of governance needed to achieve a balance between the essential power of the board of directors and their proper accountability. The stress in the Cadbury committee report is on the crucial role of the board and the need for it to observe the Code of Best Practices. Its important recommendations include the setting up of an audit committee with independent members.

The Organization for Economic Co-operation and Development (OECD) were trend setters as the Code of Best practices are associated with Cadbury report. The OECD principles in summary include the following elements. i) The rights of shareholders ii) Equitable treatment of shareholders iii) Role of stakeholders in corporate governance iv) Disclosure and Transparency v) Responsibilities of the board

Corporate Governance in India In India, the governance of most of the country’s industrial

and business organizations thrived on unethical practices at the market place and showed little regard for the human and organizational values while dealing with their shareholders, employees and other stakeholders. The Indian corporate scenario was more or less stagnant till the early 90s. The position and goals of the Indian corporate sector has changed a lot after the liberalisation of 90s. India’s economic reform programme made a steady progress in 1994. India with its 20 million shareholders, is one of the largest emerging markets in terms of the market capitalization.

An overwhelmingly large number of Indian corporations used several illegal tactics such as restricting of industrial licenses with a view to keeping away competitors, using import licenses to make a quick profit, illegally holding money aboard, and indulging into corruption and other unethical practices with impunity. The reasons for the corporate mis-governance in India were many: A closed economy, a sheltered market, limited need and no access to global business, lack of competitive spirit and an inefficient regulatory framework. These were responsible for poor governance of companies in India for well over 40 years, between 1951 and 1991.

There have been several major corporate governance initiatives launched in India since the mid-1990s. The first was by the Confederation of Indian Industry (CII), India’s largest industry and business association, which came up with the first voluntary code of corporate governance in 1998. The second was by the SEBI, now enshrined as Clause 49 of the listing agreement. The third was the Naresh Chandra Committee, which submitted its report in 2002. The fourth was again by SEBI — the Narayana Murthy Committee, which also submitted its report in 2002.

Kumar Mangalam Birla committee report and Clause 49 While the CII code was well-received and some progressive companies adopted it, it was felt that under Indian conditions a statutory rather than a voluntary code would be more purposeful, and meaningful. Consequently, the second major corporate governance initiative in the country was undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to promote and raise the standards of good corporate governance. In early 2000, the SEBI board had accepted and ratified key recommendations of this committee, and these were incorporated into Clause 49 of the Listing Agreement of the Stock Exchanges. The committee’s recommendations have looked at corporate governance from the point of view of the stakeholders and in particular that of shareholders and investors.

At the heart of committee’s report is the set of recommendations, which distinguish the responsibilities, and obligations of the boards and the management in instituting the systems for good Corporate Governance. Many of them are mandatory. These recommendations are expected to be enforced on listed companies for initials disclosures. This enables shareholders to know, where the companies are in which they are involved. The committee recognized that India had in place a basic system of corporate governance and that SEBI has already taken a number of initiatives towards raising the existing standards. The committee also recognized that the Confederation of Indian Industries (CII) had published a code entitled “Desirable code of corporate of Governance and was encouraged to note that some of the forward looking companies have already reviewed their annual report through complied with the code.

The Naresh Chandra committee was appointed in August 2002 by the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs to examine various corporate governance issues. The Committee submitted its report in December 2002. It made recommendations in two key aspects of corporate governance: financial and non-financial disclosures: and independent auditing and board oversight of management. The committee submitted its report on various aspects concerning corporate governance such as role, remuneration, and training etc. of independent directors, audit committee, the auditors and then relationship with the company and how their roles can be regulated as improved. The committee stingily believes that “a good accounting system is a strong indication of the management commitment to governance.

Good accounting means that it should ensure optimum disclosure and transparency, should be reliable and credible and should have comparability. According to the committee, the statutory auditor in a company is the “lead actor” in disclosure front and this has been amply recognized sections 209 to 223 of the companies act. The fourth initiative on corporate governance in India is in the form of the recommendations of the Narayana Murthy committee. The committee was set up by SEBI, under the chairmanship of Mr. N. R. Narayana Murthy, to review Clause 49, and suggest measures to improve corporate governance standards. Some of the major recommendations of the committee primarily related to audit committees, audit reports, independent directors, related party transactions, risk management, directorships and director compensation, codes of conduct and financial disclosures.

Corporate governance: Recent Developments in India It is observed that the scale and scope of economic reform and development in India over the past 25 years has been impressive. The country has opened up large parts of its economy and capital markets, and in the process has produced many highly regarded companies in sectors such as information technology, banking, autos, steel and textile manufacturing. These companies are now making their presence felt outside India through global mergers and acquisitions. The Satyam fraud of late 2008 led to renewed reform efforts by Indian authorities and regulators. SEBI brought out new rules in February 2009 requiring greater disclosure by promoters (i.e., controlling shareholders) of their shareholdings and any pledging of shares to third parties.

Corporate Governance voluntary guidelines 2009 In December 2009, the Ministry of Corporate Affairs (MCA) published a new set of “Corporate Governance Voluntary Guidelines 2009”, designed to encourage companies to adopt better practices in the running of boards and board committees, the appointment and rotation of external auditors, and creating a whistle blowing mechanism. The guidelines are divided into the following six parts: i) Board of Directors ii) Responsibilities of the Board iii) Audit Committee of the Board iv) Auditors v) Secretarial Audit vi) Institution of mechanism for Whistle Blowing

Corporate Governance Objectives Corporate Governance has several claimants – shareholders, suppliers, customers, creditors, bankers, employees of company and society. The committee for SEBI has kept in view the interests of the shareholders. It means enhancement of shareholder value keeping in view the interests of the other stake holders. Committee has recommended Corporate Governance as company’s principles rather than just act. The company should treat corporate governance as way of life rather than code.

The major changes to Clause 49: 1.Independent Directors —1/3 to ½ depending whether the chairman of the board is a nonexecutive or executive position. 2.Non-Executive Directors ----The total term of office of non-executive directors is now limited to three terms of three years each. 3.Board of Directors-----The board is required to frame a code of conduct for all board members and senior management and each of them have to annually affirm compliance with the code.

4.Audit Committee----Financial statements and the draft audit report/reports of management discussion and analysis of financial condition and result of operations/reports of compliance with laws and risk management/management letters and letters of weaknesses in internal controls issued by statutory and internal auditors/appointment, removal and terms of remuneration of the chief internal auditor

Definition of Independent Director: who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience & who is or was not a promoter of the company or its holding, subsidiary or associate company. who is not related to promoters or directors in the company, its holding, subsidiary or associate company. SEPARATE MEETING OF INDEPENDENT DIRECTORS: at least one meeting in a year. All the independent directors of the company shall strive to be present at such meeting to review the performance of non- independent directors and the Board as a whole. to review the performance of the Chairperson of the company. to assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties

5.Whistleblower Policy ----This policy has to be communicated to all employees and whistleblowers should be protected from unfair treatment and termination. 6.COMPOSITION OF BOARD: At least one Women Director . & at least fifty percent of the Board should be comprised of Non- Executive Directors. If the chairman of the Board is Executive Director or Promoter, then at least half of the Board should be comprised of Independent Directors. If the Chairman of the Board of Board is Non – Executive Director then at least one – third of the Board should be comprised of Independent Director.

7.Disclosures----Contingent liabilities./Basis of related party transactions./Risk management/ . Proceeds from initial public offering/ .Remuneration of directors. 8.Certifications----reviewed the necessary financial statements and directors'report; established and maintained internal controls, disclosed to the auditors and informed the auditors and audit committee of any significant changes in internal control and/or of accounting policies during the year.

The Role of Independent Directors: Independent directors are those directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship with company. Further, all pecuniary relationship or transactions of the non executive directors should be disclosed in the annual report. The committee recommended that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors. In case a company has a non-executive chairman, at least one third of board should comprise of independent directors and in case a company has an executive chairman at least half of board should be independent.

Corporate Social Responsibility • Concepts, key issues, context • Key CSR drivers • Implications for enterprise • Implications for development

Main Concepts of CSR CSR (Carrol, 1979) Firms have responsibilities to societies including economic, legal, ethical and discretionary (or philanthropic). - See also DeGeorge (1999) on the “Myth of the Amoral Firm”

Social Contract (Donaldson, 1982; Donaldson and Dunfee, 1999) – There is a tacit social contract between the firm and society; the contract bestows certain rights in exchange for certain responsibilities. Stakeholder Theory (Freeman, 1984) – A stakeholder is “any group or individual who can affect or is affected by the achievement of an organisation’s purpose.” Argues that it is in the company’s strategic interest to respect the interests of all its stakeholders.

Main Concepts of CSR

CSR = political economy The rights and responsibilities assigned to private industry.

Key Issues in CSR • Labour rights: – child labour – forced labour – right to organise – safety and health • Environmental conditions – water & air emissions – climate change • Human rights – cooperation with paramilitary forces – complicity in extra-judicial killings • Poverty Alleviation – job creation – public revenues – skills and technology

Context Globally • Liberalisation of markets – reduction of the regulatory approach • Emergence of global giants, consolidation of market share • Development of the ‘embedded firm’ and the global value chain – Development of supplier networks in developing countries

Key drivers of CSR

Around the world

Developing Countries

• NGO Activism

• Foreign customers

• Responsible investment

• Domestic consumers

• Litigation

• FDI

• Gov & IGO (Intragovernmental) initiatives

• Government & IGO

Key Drivers: NGO Activism • Facilitators: IT (esp Internet), media, low cost travel • Boycotts, brand damage, influence legislation, domino effect • e.g. Problems created by Shell in Nigeria, Exxon in Cameroon, Sinopec in Sudan, Apparel Industry (Nike, Gap), GMO, Wood Products, etc.

Principles for Responsible Investment

Signatories will 1 …incorporate ESG (Environmental, Social, and Governance) issues into investment analysis and decision-making processes. 2 …be active owners and incorporate ESG issues into our ownership policies and practices. 3 …seek appropriate disclosure on ESG issues by the entities in which we invest. 4 …promote acceptance and implementation of the Principles within the investment industry. 5 …work together to enhance our effectiveness in implementing the Principles. 6 …each report on our activities and progress towards implementing the Principles.

Key Drivers: Litigation • Foreign Direct Liability

• Alien Tort Claims Act (ATCA): human rights, environmental rights o Unocal Burma $30,000,000 settlement  o Coca-Cola Columbia o Rio Tinto Papau New Guinea o Del Monte Guatemala o The Gap Saipan o Shell Nigeria Other tools: RICO, False Advertising – E.g. Saipan ‘sweatshop’ cases; Katsky v. Nike

United Nations Initiatives • UN Global Compact • UN Principles for Responsible Investment • UNEP Equator Principles • ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (MNE Declaration)

• UNHCHR Business and Human Rights • UNODC Anti-corruption • UNCTAD Corporate Responsibility Reporting, World Investment Report

Implications for Enterprises CSR Drivers •

New social and product liability patterns

•

Development of Codes of Conduct and CSR reporting

•

Transnational Corporations (TNCs)

Expanding sphere of influence – Application of Code of Conduct to value chain – CSR management: value chain management = compliance management

The Extended Firm Regional Plants / JV Partners Suppliers / Distributors

Implications for Enterprises: Trans National Corporation as an “organ of society” “every individual and every organ of society [should] promote respect for these rights and freedoms and to secure their universal and effective recognition.” - UN

It would be a strange tort system that imposed liability on state actors but not on those who conspired with them to perpetrate illegal acts through coercive use of state power. - 1997 Eastman Kodack Co. v. Kalvin

International Declaration of Human Rights

Trend in international law International principles apply only to governments

International principles apply to governments and companies

Implications for Enterprises: CSR Management

How do companies address socio-environmental & legal compliance issues?

• Policies - Code of Conduct • Systems - Compliance Management • Reporting - Accounting and Reporting

CSR Management: Systems approach Sustainable business development does not come about of its own accord. Rather, commitment to sustainability demands that corporate processes be reliably controlled and that everyone's actions in finance as much as in environmental and social areas - be coordinated. Prerequisites for this are binding guidelines, unambiguous corporate goals and a clear organizational structure.

- Deutsche Telekom

CSR Management: Management structure Example: Chiquita, a global company Audit Committee of Board

Board of Directors

President & CEO

Group Presidents

Chief Financial Officer

VP of Human Resources

General Counsel

Corporate Responsibility Officer

Steering Committee

CSR Management: Plan, Do, Check, Act method Plan

Do

• Consult stakeholders

• Establish management systems and personnel

• Establish code of conduct • Set targets

• Promote code compliance

Act

Check

• Corrective action

• Measure progress

• Reform of systems

• Audit • Report

Code of Conduct: Widespread adoption among TNCs Adoption of… • More than half of the 100 largest firms by global revenue (Fortune Global 100) • More than a third of the 100 largest firms by foreign assets (UNCTAD WIR 100) • 57% of all foreign assets • 51% of all foreign sales • 65% of all foreign employees

Codes found among all industrial sectors. Not Specified 12%

Heavy Industry 27% Light Industry 17%

Multi-Sector 7%

Technology 17%

Services 20%

Source: OECD 1999 survey of 233 codes

Code of Conduct: Issue emphasis varies by industry Heavy Industry Light Industry

Environment Fair Employment & Labour Rights Rule of Law

Services

Fair Business Practices

Technology

Multi-Sector 0

20

40

60

80

% of Codes addressing issue

100

Code of Conduct: Emerging consensus on key issues Bribery/improper payments Conflict of interest Security of proprietary information Receiving gifts Discrimination / equal opportunity Giving gifts Environment Sexual harassment Antitrust Workplace safety Political activities Community relations Confidentiality of personal information Human rights 0%

25%

50%

75%

% of codes addressing issue

100%

Code of Conduct: Cascade effect JV Partners

Suppliers/ Vendors

Giving gifts Receiving gifts Bribery/improper payments Conflict of interest Environment Discrimination / equal opportunity Sexual harassment Workplace safety Human rights Political activities Whistleblowing Child labor Nepotism 0%

10%

20%

30%

40%

50%

% of COE applying to JV partner or Supplier/Vendor

Sphere of Influence Who – is to be influenced?

Sphere of Influence What – issues are to be influenced?

Sphere of Influence How – are those issues to be influenced?

CSR Management: Governing the value chain

Compliance Management: Management by certification

ISO 14000 by Region Far East

SA 8000 by Region Aust./ New Zealand

Europe Africa/ W. Asia S. America N. America

Asia

N. America

Europe

Africa

• Introduced 1995 • By 2002: 37,000 factories, 112 countries

S. America

• Introduced 1998 • By 2005: 763 factories, 47 countries

Compliance Management: Management by certification

ISO 26000: Social Responsibility • Introduced in 2010. • ISO 26000 Guidance on social responsibility. Was launched from ISO, the International Organization for Standardization. Is an International Standard providing guidelines for social responsibility (SR) named ISO 26000 or simply ISO SR. It was released on 1 November 2010. Its goal is to contribute to global sustainable development, by encouraging business and other organizations to practice social responsibility to improve their impacts on their workers, their natural environments and their communities.

ISO 26000 Roadmap Principles of SR 1. Ethical behaviour 2. Respect for rule of law 3. Respect for international norms of behaviour 4. Respect for and considering of stakeholder interests 5. Accountability 6. Transparency 7. Precautionary approach 8. Respect for human rights

Core Subjects

Implementing SR

Organizational Governance

7.3 Working With Stakeholders

Fair operating practises

Community & society development

Consumer issues

Human Rights

Environment

Labour Practises

7.2 Defining scope

7.4 Integrating into organization 7.5 Implementing in daily practise 7.7 Evaluating performance 7.8 Enhancing credibility

7.3 Communicating

CSR Management: Supply chain specific

CSR Management: CSR reporting becomes ‘mainstream’ % of Large Firms Issuing a CSR Report

64%

CSR Management: Emerging standards in CSR Reporting Global Reporting Initiative (GRI) A multi-stakeholder initiative www.globalreporting.org

International Standards of Accounting and Reporting (ISAR) A project of UNCTAD www.unctad.org/isar

Implications for Development •

CSR ‘cascade effect’ on members of the global value chain – labour conditions (e.g. right to organise, wages) – environmental controls – transfer of new management techniques

•

Compensation for weak legal environment in Least Developed Countries

•

Impact on economic development & national competitiveness???

Implications for Development: is CSR good for growth? David Henderson “[CSR]’s adoption would reduce competition and economic freedom, and undermine the market economy.”

“…[CSR] is liable to hold back the development of poor countries through the suppression of employment opportunities within them.”

Implications for Development: Experiments in quantification Does an increase in CSR correspond with an increase in labour costs? 40,000

Labor Cost per worker in manufacturing ($ per year, 1990-1994)

35,000

30,000

25,000

20,000

15,000

10,000 R2 = 0.6079 5,000 Indonesia

Costa Rica

0 30

35

40

45

50

55

60

65

National Corporate Responsibility Index (2003 Score)

70

75

80

CSR and India India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to The Company Act, 2013 in April 2014. Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger.

The amendment states that every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on Corporate social responsibility activities. The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the act. Tata Group : carries out various CSR projects, most of which are community improvement and poverty alleviation programs. Through self-help groups, it is engaged in women empowerment activities, income generation, rural community development, and other social welfare programs. In the field of education, the Tata Group provides scholarships and endowments for numerous institutions. The group also engages in healthcare projects such as facilitation of child education, immunization and creation of awareness of AIDS. Other areas include economic empowerment through agriculture programs, environment protection, providing sport scholarships, and infrastructure development such as hospitals, research centers, educational institutions, sports academy, and cultural centers.

Ultratech Cement : India’s biggest cement company is involved in social work across 407 villages in the country aiming to create sustainability and self-reliance. Its CSR activities focus on healthcare and family welfare programs, education, infrastructure, environment, social welfare, and sustainable livelihood. The company has organized medical camps, immunization programs, sanitization programs, school enrollment, plantation drives, water conservation programs, industrial training, and organic farming programs. Mahindra & Mahindra : Indian automobile manufacturer established the K. C. Mahindra Education Trust in 1954, followed by Mahindra Foundation in 1969 with the purpose of promoting education. The company primarily focuses on education programs to assist economically and socially disadvantaged communities. CSR programs invest in scholarships and grants, livelihood training, healthcare for remote areas, water conservation, and disaster relief programs. M&M runs programs such as Nanhi Kali focusing on girl education, Mahindra Pride Schools for industrial training, and Lifeline Express for healthcare services in remote areas. ITC Group : A conglomerate with business interests across hotels, FMCG, agriculture, IT, and packaging sectors has been focusing on creating sustainable livelihood and environment protection programs. The company has been able to generate sustainable livelihood opportunities for six million people through its CSR activities. Their e-Choupal program, which aims to connect rural farmers through the internet for procuring agriculture products, covers 40,000 villages and over four million farmers. Its social and farm forestry program assists farmers in converting wasteland to pulpwood plantations. Social empowerment programs through micro-enterprises or loans have created sustainable livelihoods for over 40,000 rural women.

UNIT 11 World Economic Growth Country Risk Analysis Taxation In An International Economy Environmental Issues By : Dr. Rajnish Kataria

World Economic Growth • Global growth for 2018 is estimated at 3.7 percent, despite weaker performance in some economies, notably Europe and Asia. The global economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.

• The global growth forecast for 2019 and 2020 had already been revised downward in the last WEO, partly because of the negative effects of tariff increases enacted in the United States and China earlier that year. • The further downward revision since October in part reflects carry over from softer momentum in the second half of 2018—including in Germany following the introduction of new automobile fuel emission standards and in Italy where concerns about sovereign and financial risks have weighed on domestic demand—but also weakening financial market sentiment as well as a contraction in Turkey now projected to be deeper than anticipated.

• Emerging and developing Asia will grow at around 6.5 percent over 2018–19, broadly the same pace as in 2017. The region continues to account for over half of world growth. Growth is expected to moderate gradually in China (though with a slight upward revision to the forecast for 2018 and 2019 relative to the fall forecasts, reflecting stronger external demand), pick up in India, and remain broadly stable in the ASEAN-5 region. • In emerging and developing Europe, where growth in 2017 is now estimated to have exceeded 5 percent, activity in 2018 and 2019 is projected to remain stronger than previously anticipated, lifted by a higher growth forecast for Poland and especially Turkey. These revisions reflect a favorable external environment, with easy financial conditions and stronger export demand from the euro area, and, for Turkey, an accommodative policy stance.

• In Latin America, the recovery is expected to strengthen, with growth of 1.9 percent in 2018 (as projected in the fall) and 2.6 percent in 2019 (a 0.2 percentage point upward revision). This change primarily reflects an improved outlook for Mexico, benefiting from stronger U.S. demand, a firmer recovery in Brazil, and favorable effects of stronger commodity prices and easier financing conditions on some commodity-exporting countries. • Growth in the Middle East, North Africa, Afghanistan, and Pakistan region is also expected to pick up in 2018 and 2019, but remains subdued at around 3½ percent. While stronger oil prices are helping a recovery in domestic demand in oil exporters, including Saudi Arabia, the fiscal adjustment that is still needed is projected to weigh on growth prospects. • The growth pickup in Sub-Saharan Africa (from 2.7 percent in 2017 to 3.3 percent in 2018 and 3.5 percent in 2019) is broadly as anticipated in the fall, with a modest upgrade to the growth forecast for Nigeria but more subdued growth prospects in South Africa, where growth is now expected to remain below 1 percent in 2018–19, as increased political uncertainty weighs on confidence and investment. • Growth this year and next is projected to remain above 2 percent in the Commonwealth of Independent States, supported by a slight upward revision to growth prospects for Russia in 2018.

Country Risk Analysis • Country risk is a collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action. Country risk varies from one country to the next. Some countries have high enough risk to discourage much foreign investment. • Country risk can reduce the expected return on an investment and must be taken into consideration whenever investing abroad. Some country risk does not have an effective hedge. Other risk, such as exchange rate risk, can be protected against with a marginal loss of profit potential. • The United States is generally considered the benchmark for low country risk and most nations can have their risk measured as compared to the U.S. Country risk is higher with longer term investments and direct investments, which are investments not made through a regulated market or exchange.

Country Risk Analysis Country risk rankings Q4 2017The least-risky countries for investment Rank

Rank change

Country

Overall score

1

-

Singapore

88.6

2

-

Norway

87.66

3

-

Switzerland

87.64

4

-

Denmark

85.67

5

▲2

Sweden

85.59

6

▼1

Luxembourg

83.85

7

▼1

Netherlands

83.76

8

▲4

Finland

83.1

9

-

Canada

82.98

10

▲1

Australia

82.18

Score out of 100. Rank change to previous quarter. Source: Euromoney Country Risk published January 2018.

Country Risk Analysis : India • The Indian economy has held up better than other emerging countries to the global economic slowdown and has benefited from low oil prices in recent years. According to the IMF, the Indian economy grew by 7.3% in 2018, which is the highest growth in two years and strongest since the first quarter of 2016, driven by a rebound in industrial activity, especially manufacturing and construction, and an expansion in agriculture. • Sectors which registered growth of over 7% include manufacturing; electricity, gas and water supply; construction, and public administration and defence. India also registered the third highest growth in the world in 2018. Growth is expected to remain strong in the next couple of years, reaching 7.4% in 2019 and 7.7% in 2020.

• India is expected to overtake China as the world’s most populous country by 2024. It has the world’s largest youth population, nevertheless according to the OECD over 30% of India's youth are NEETs (not in employment, education or training). • India continues to suffer from a low GDP per capita, almost 25% of the population still lives below the poverty line (about one-third of the world’s population living on under USD 1.90/day lives in India) and the country's inequalities are very strong: the richest 1% of the population own 53% of the country’s wealth. According to ILO reports, the unemployment rate stood at 3.5% 2018 and should remain unchanged in 2019.

INDIA

MAJOR MACRO ECONOMIC INDICATORS

2016 2017 2018 ( e) GDP growth (%) 6.9 7.1 7.3 Inflation (yearly average, %) 5.5 3.3 5.0 Budget balance (% GDP) -6.7 -0.9 -3.2 Current account balance (% GDP) -0.5 -1.5 -1.0 Public debt (% GDP) 69.5 71.0 70.0

(e): Estimate. (f): Forecast.

2019 ( f) 7.5 5.2 -3.0 -1.3 69.0

INDIA STRENGTHS • Diversified growth drivers • High levels of savings and investment • Efficient private sector; notably services • Moderate level of external debt; comfortable foreign exchange reserves WEAKNESSES • High corporate debt and non-performing assets (NPA) • Net importer of energy resources • Lack of adequate infrastructure • Weak public finances • Bureaucratic red tape • Uncertainties over the Kashmir issue

Taxation In An International Economy : USA • To meet their expenses, government need income, called "revenue," which it raises through taxes. In U.S., governments levy different types of taxes on individuals and businesses. The Federal Government relies mainly on income taxes for its revenue. State governments depend on both income and sales taxes. Most county and city governments use property taxes to raise their revenue. • American economy is based on the free enterprise system. Consumers are free to decide how to spend or invest their time and money. The goal of producers is to make profits by satisfying consumer demand. Open competition among producers usually results in their providing the best quality of goods or services at the lowest possible prices. • In 2018, Trump administration reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent. • Since the 1930s, the Federal Government has been providing income or services, often called a "safety net," for those in need. Major programs include health services for the elderly and financial aid for the disabled and unemployed. Other major programs include financial aid to families with dependent children, and social services for low income individuals and families.

Taxes on Income • The earnings of both individuals and corporations are subject to income taxes. Most of the Federal Government's revenue comes from income taxes. The personal income tax produces about five times as much revenue as the corporate income tax. Taxes on Consumption • The most important taxes on consumption are sales and excise taxes. Sales taxes usually get paid on such things as cars, clothing and movie tickets. Sales taxes are an important source of revenue for most states and some large cities and counties. The tax rate varies from state to state, and the list of taxable goods or services also varies from one state to the next.

Taxes on Property and Wealth • The property tax is local government's main source of revenue. Most localities tax private homes, land, and business property based on the property's value. Usually, the taxes get paid monthly along with the mortgage payment. The one who holds the mortgage, such as a bank, holds the money in an "escrow" account. Payments then get made for the property owner. The Federal Income Tax • A basic principle underlying the income tax laws of the United States is that people should be taxed according to their "ability to pay." Taxpayers with the same total income may not have the same ability to pay. Those with high medical bills, mortgage interest payments, or other allowable expenses can subtract these amounts as "itemized deductions" to reduce their taxable incomes. Similarly, taxpayers may subtract a certain amount on their tax returns for each allowable "exemption."

Earth Summit-1992 (Rio de Janiero, Brazil) United Nations Conference on Environment & Development(UNCED)

Largest gathering of world leaders in the history wherein 117 National Leaders and 2400 representatives of non-governments organization and 178 nations participated in the conference to discuss and reconcile major worldwide development issues with environmental protection in view of:

• Global warming • Sustainable development • Preservation of Tropical Rain Forests

Main Message was: Nothing less than a transformation of our attitudes and behavior would bring about the necessary changes in terms of: • Poverty/excessive consumption by affluent population places a damaging stress on the environment

How? By committing to a statement of principles to guide the management, conservation and sustainable development of all types of forests. Agenda 21- on the Rio Declaration on Environment & Development emphasizes the need of: • Cooperation among nations • Development (socially, economically & environmentally sustainable)

Statement of Forest Principles: • • • • • • • • •

Greening of the world Use sustainable development replanting Managed to meet present and future needs Profits shared from bio-technology product and genetic material Protection of unique forests International Financial support /also private Areas around forest managed well Economic & non-economic values of forests Control of pollutants

Convention on Biological Diversity: • Identify the components of biological diversity • Develop national strategies and plans of conservation • Use media/education to promote & conserve • Establish laws to protect threatened species • Rehabilitate & restore degraded eco-system

Convention on Climate Change: It was discussed in the Summit to: • Provide $ and technological assistance to help nations measure the flows of greenhouse gases • Assisting most vulnerable countries for the harmful effects due to climate change

Therefore, Nations should: • Provide information; Publish updates; Promote management; Plan for impacts cooperatively and Protect areas which are more prone to. • Alternate source of energy- hybrid cars • New reliance on public transportation- vehicle emissions • Scarcity of water

Future: It was agreed to review the progress after every five years i.e. in 1997,2002,2007 by calling the United Nations General Assembly special session.

Earth Summit-2012 ( Rio+ 20 “ Rio is not the end of the road, it is a beginning. A beginning of a process to define sustainable development goals that build on the millennium development goals to safeguard people and our planet, to create the future we want” (UN Sec. Gen. Ban KiMoon)

Themes of the Conference • There are two main themes that the United Nations Conference on Sustainable Development will focus on: – A green economy in the context of sustainable Development & poverty eradication. – Institutional framework for sustainable development

There are three pillars of sustainable development: • Economic Development • Social Development • Environmental protection

The agenda of the UNCSD There are seven areas meant to be highlighted at Rio +20: – Decent Jobs – Energy – Sustainable Cities – Food Security & Sustainable Agriculture – Water – Oceans – Disaster Readiness

• The Kyoto protocol was the first agreement between nations to mandate country-by-country reductions in greenhouse-gas emissions. Kyoto emerged from the UN Framework Convention on Climate Change (UNFCCC), which was signed by nearly all nations at the 1992 mega-meeting popularly known as the Earth Summit. The framework pledges to stabilize greenhouse-gas concentrations "at a level that would prevent dangerous anthropogenic interference with the climate system". To put teeth into that pledge, a new treaty was needed, one with binding targets for greenhouse-gas reductions. That treaty was finalized in Kyoto, Japan, in 1997, after years of negotiations, and it went into force in 2005. Nearly all nations have now ratified the treaty, with the notable exception of the United States. Developing countries, including China and India, weren't mandated to reduce emissions, given that they'd contributed a relatively small share of the current century-plus build-up of CO2.

Under Kyoto, industrialised nations pledged to cut their yearly emissions of carbon, as measured in six greenhouse gases, by varying amounts, averaging 5.2%, by 2012 as compared to 1990. That equates to a 29% cut in the values that would have otherwise occurred. However, the protocol didn't become international law until more than halfway through the 1990–2012 period. By that point, global emissions had risen substantially. Some countries and regions, including the European Union, were on track by 2011 to meet or exceed their Kyoto goals, but other large nations were falling woefully short. And the two biggest emitters of all – the United States and China – churned out more than enough extra greenhouse gas to erase all the reductions made by other countries during the Kyoto period. Worldwide, emissions soared by nearly 40% from 1990 to 2009,

Paris climate summit and UN talks The governments of more than 190 nations gathered in Paris from 30 November to 12 December, 2015 to discuss a possible new global agreement on climate change in order to aim at reducing global greenhouse gas emissions and thus avoiding the threat of dangerous climate change. Conference of Parties to the UN Framework Convention on Climate Change (UNFCCC) (popularly known as COP-21) • reached a landmark agreement on December 12 in Paris, charting a fundamentally new course in the two-decade-old global climate effort.

The Paris Agreement marks the latest step in the evolution of the UN climate change regime, which originated in 1992 with the adoption of the Framework Convention. The UNFCCC established a long-term objective, general principles, common and differentiated commitments, and a basic governance structure, including an annual COP. The Paris Agreement is a treaty under international law, but only certain provisions are legally binding. The issue of which provisions to make binding (expressed as “shall,” as opposed to “should”) was a central concern for many countries, in particular the United States, which wanted an agreement the president could accept without seeking congressional approval. Meeting that test precluded binding emission targets and new binding financial commitments

A final step in Paris was negotiating a “technical correction” substituting “should” for "shall" in a provision calling on developed countries to undertake absolute economy-wide emissions targets. The agreement reaffirms the goal of keeping average warming below 2 degrees Celsius, while also urging parties to “pursue efforts” to limit it to 1.5 degrees, a top priority for developing countries highly vulnerable to climate impacts. The Paris Agreement articulates two long-term emission goals: first, a peaking of emissions as soon as possible (with a recognition that it will take longer for developing countries); then, a goal of net greenhouse gas neutrality (expressed as “a balance between anthropogenic emissions by sources and removals by sinks”) in the second half of this century. The latter was an alternative to terms like “decarbonisation” and “climate neutrality” pushed by some parties.

The Paris Agreement rests heavily on transparency as a means of holding countries accountable. All countries are required to submit emissions inventories and the “information necessary to track progress made in implementing and achieving” their Nationally Determined Contributions(NDCs). The COP decision says that, with the exception of least developed and small island countries, these reports are to be submitted at least every two years. In addition, developed countries “shall” report on support provided; developing countries “should” report on support received; and all “should” report on their adaptation efforts.

Other major issues included whether to set a new finance mobilization goal beyond the $100 billion a year in public and private resources already promised by developed countries, and whether to establish a process to revisit the question every five years. The COP decision extends the $100 billion-ayear goal through 2025, and beyond that, says only that by 2025 the COP will set a “new collective quantified goal from a floor of” $100 billion a year. The Paris Agreement made it compulsory to become a party to the agreement, a country must then express it consent to be bound through a formal process of ratification, acceptance, approval or accession. Each country has its own domestic procedures for deciding whether to join an international agreement. The agreement establishes a “double trigger” for entry-into-force: it requires approval by at least 55 countries accounting for at least 55 percent of global greenhouse gas emissions. If states ratify quickly, these conditions could be satisfied pre-2020, allowing the COP to begin meeting as the “meeting of the Parties” to the Paris Agreement, to be known by the acronym CMA.

The twenty-second session of the Conference of the Parties (COP 22) were held in Marrakech, Morocco from 7-18,November, 2016.The Conference successfully demonstrated to the world that the implementation of the Paris Agreement is underway and the constructive spirit of multilateral cooperation on climate change continues. The UN Climate Change Conference in Marrakech was the crucial next step for governments looking to operationalize the Paris Climate Change Agreement adopted last year. While the Paris Agreement gave clear pathways and a final destination in respect to decisive action on climate change, many of the details regarding how to move forward as one global community in that common direction still need to be resolved.

Parties as well as non-State actors, have had a real opportunity to emphasize this momentum, celebrate successes and share experiences and learning to set inclusively the path forward for action. Finally, COP 22 is also committed to reinforce responsible collaboration between all Parties in order to achieve a collective shift towards a new sustainable development model.”