Nternational Usiness

INTERNATIONAL BUSINESS Institutions in the World Economy

Protection is harmful to Economic Growth and Consumer Welfare Brentton Woods Conference 1944 suggested formation of IMF, World Bank and ITO GATT in 1948 instead of ITO, started with 23 countries had 128 members in 1995 Uruguay Round in 1995 GATT  WTO (Similar to ITO) WTO - More powerful that GATT India founder member of IMF, World Bank, GATT and ITO

INTERNATIONAL BUSINESS WTO

22,000 page document signed on Jan 1st, 1995 by 128 countries WTO – Single Institutional frame work encompassing GATT and results of UR 5 Specific Functions Facilitate implementation, administration & operation, and further the objectives of Multilateral Trade Agreement and Provide framework for implementation, administration & operation of Plurilateral Trade Agreements

INTERNATIONAL BUSINESS WTO Provide forum for negotiations among members concerning their multilateral trade relations Administer understanding on Rules and Procedures governing settlements of disputes Administer trade review mechanism Cooperate with IMF and other bodies for achieving greater coherence in Global Economic Policy making

INTERNATIONAL BUSINESS WTO 4 Main Functions Supervise on regular basis operations related to declarations related to Goods, Services, TRIPS Act as dispute settlement body To serve as Trade Review Mechanism Establish Goods Council, Services Council and TRIPS Council as subsidiary bodies

INTERNATIONAL BUSINESS WTO Three Basic Issues Taken up by UR Reducing improving

specific trade market access

barriers

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Strengthening GATT principles TRIPs (Trade Related Intellectual Property Rights) TRIMs (Trade Related Investment Measures)

INTERNATIONAL BUSINESS IMF 

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Brenton Woods Conference, 1945 – ITO, World Bank, IMF Unstable currencies & inadequate monetary reserves could not develop & function world markets 01.03.1947 – IMF Functioning 29 Signatories to startwith, 184 by 2002 end

INTERNATIONAL BUSINESS IMF - Major Objectives  To Promote International Monetary Cooperation  To Facilitate Expansion and Balanced Growth of International Trade  To Promote Exchange Rate Stability  To Establish Multilateral System of payment  To Make Its Resources Available to Its Members Who Are Experiencing Balance of Payment Difficulties

INTERNATIONAL BUSINESS IMF Brenton Woods Agreement Established Fixed Exchange Rates for Each Member Country  USD 35 = Gold 1 Oz. par Value was same whether Gold or USD was used  Variation of 1% allowed, raised to 2.25% In 1971  US had 70% of World’s Gold Reserve in 1947  Redemption of Dollar in Gold

INTERNATIONAL BUSINESS IMF 

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Member Countries Contribute to IMF Quota Quota Depends Upon National Income, Monetary Reserves, Trade Balance and Other Economic Indicators Quota is Pool of Money IMF can Lend to Member Countries, Basis of How Much Country Can Borrow as Allocation of SDR Quota determines Voting Rights

INTERNATIONAL BUSINESS IMF  Total SDR - 213 million  Largest Quota USA 17.5%, Japan 6.6%,Germany 6.11%, France and UK 5.05% each  Board of Governors is Final Authority  Day to Day Business with 24 Executive Directors

INTERNATIONAL BUSINESS IMF SDR  Created in 1969  SDR 213 = $ 280 billion  SDR is weighted average of USD (45%), Euro (29%), JPY (15%), GBP (11%) by end 2002  SDR designed to take over Gold  Several Countries Have SDR Base for Value for Their Currencies

INTERNATIONAL BUSINESS IMF SDR  Created in 1969  SDR 213 = $ 280 billion  SDR is weighted average of USD (45%), Euro (29%), JPY (15%), GBP (11%) by end 2002  SDR designed to take over Gold  Several Countries Have SDR Base for Value for Their Currencies

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WORLD BANK Lending Money to the governments of developing countries to finance development projects in education, health and infrastructure Providing assistance to governments for developmental projects to the poorest developing countries Lending directly to private sector to help strengthen the private sector in developing countries with long-term loans equity investments and other financial assistance

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WORLD BANK Providing investors with investment guarantees against non-commercial risks, to create an environment in developing countries to attract foreign investments Promoting increased flow of international investments by providing facilities for conciliation and arbitration between governments and foreign investors Advise, Research, Publication Contributed for trade since WW2

INTERNATIONAL BUSINESS FDI - International Trade • Factor Mobility Why factors move? Short term capital – most mobile factor due differences in expected returns, Govt. loans and aid, Remittances to NGO’s, Expat’s remittances Population Mobility – Better salaries

INTERNATIONAL BUSINESS FDI - International Trade • Factor Mobility and Trade Choice between mobility of finished goods and production factors Mobility of production factors may be a substitute for trade, but will stimulate trade through sale of components, equipment etc Costs are lowest when trade and production factor both are mobile

INTERNATIONAL BUSINESS FDI • Marketing • Production • R&D • Factors like Raw Material • Other Factors

INTERNATIONAL BUSINESS FDI - Benefits for Host Country • Capital – MNCs Invest for Long Term Projects and Take Risks for the Profits • Technology – Positive Effect on Productivity and Economic Growth • Market Access – Exports, Maruti Exports to East Europe • Increase in Domestic Investments - JVs

INTERNATIONAL BUSINESS FDI - Benefits for Host Country • Export Promotion – Plants in SEZ, EOU • Employment Generation – Direct and Indirect Employment • Social Effects – Market Reforms, Competition Privatisation, Infrastructure, Literacy • Spin off Benefits – Growth of Ancillary Units, Better Products in Domestic Markets

INTERNATIONAL BUSINESS FDI – Entry Strategies • Rep or Liaison Office – FIPB Controls • Project Office – Temporary or Site Office, RBI • Branch Office – Production Not Allowed Through Indian Arm • As an Indian Co. – Indian Companies Act 1956, Registrar of Companies • JV with Indian Partner • Wholly Owned Subsidiary – FIPB Approval

INTERNATIONAL BUSINESS FDI Both companies and countries are concerned about the control of foreign investments Countries fear decisions contrary to national interest and companies want to safeguard their competitive positions Ownership of 10 to 25% voting stocks is considered as FDI FDI - Expand Sales, Acquire Resources, Minimize Competitive Risk and Political Advantage

INTERNATIONAL BUSINESS Company's Motives for FDI Expand Sales High Transportation Cost Excess Capacity Scale of Economies and Product Alterations Trade Restrictions Country of Origin Effect Lower Production Costs

INTERNATIONAL BUSINESS Company's Motives for FDI Resource Acquisition Savings through Vertical Integration – Value Chain Savings through Raionalised Production Access to Cheaper or Different Resource or Knowledge - Indian IT Companies Buying US Companies Need to Lower Costs as Product Matures (PLC) Gain Government Investment Incentives

INTERNATIONAL BUSINESS Company's Motives for FDI Risk Minimization Important for Oligopolistic Industries like Automobiles Decisions based on not what I gain, but what I lose Diversification of Customer Base Diversification of Supplier Base

INTERNATIONAL BUSINESS Company's Motives for FDI Political Objectives Aramaco US investments in Caribbean to Counter Cuba Chinese Govt. owned Cos investing in Foreign Oil Companies

INTERNATIONAL BUSINESS FDI - International Trade Post World War 2 Rightist – Free Trade Leftist – Protectionism Democracy in most of the countries International Trade declined after World War 1 International Trade improved after World War 2 Liberalization and Globalization Technology Advancement Improved Production Factor Mobility

INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS Resource Mobilisation Access to Foreign Capital Market For Indian Companies Permitted Since 1992-93 Companies With Good Track Record For Three Years Allowed For Euro Issue / GDR / ADR / FCCB • Global Depository Receipts • American Depository Receipts • Foreign Currency Convertible Bonds

INTERNATIONAL BUSINESS Resource Mobilisation DR • Negotiable Certificate in USD • Represents non-US company’s Publicaly Traded Local Currency Equity Shares • DR Created By Delivering Indian Company Shares With Depository’s Custodian Bank • Depository’s Custodian Bank Issues DR in USD • DR are Freely Tradable

INTERNATIONAL BUSINESS Resource Mobilisation DR • GDR is Marketed Globally and Not For Specific Country • As per Guidelines of 1995 Three Year Condition is Relaxed For Infrastructure Projects, Including Power Oil Exploration Telecom Ports and Airports

INTERNATIONAL BUSINESS Resource Mobilisation DR • GDR is Cheap Source of Capital • Restriction for Investments in Stock Market and Real Estate • No Limits for GDR Issues • Other Investments in India Can be in Form of Investments by FII • FCCB Issue Proceeds to Conform to External Commercial Borrowings and end use