UGC NET-JRF COMMERCE
INTERNATIONAL
BUSINESS
International Business- An Overview
·
Include any type of activity that crosses national
borders
·
Organisations that buys or sells goods and services
across two or more countries, even if management is located in a country
·
Include all commercial transactions, private or
governmental between two or more countries
Importance of
International Business
International
business
·
causes the flow of ideas, services, and capital across
the world
·
offers consumers new choices
·
permits the acquisition of a wider variety of products
·
facilitates the mobility of labor, capital, and technology
·
provides challenging employment opportunities
·
reallocates resources, makes preferential choices, and
shifts activities to a global level
Modes of
entry into International Business: Export and Import, International investment
Merchandise
Export and Import: International trade of all tangible products send-out or brought-in, Visible export and import
Service
export and import: Trade of services like tourism, banking, transportation,
health, insurance and so on, Invisible items
Theories of International Trade
(1)
Mercantilist Views on Trade
(2)
Absolute Advantage Theory
(3)
Comparative advantage Theory
(4)
Modern Theory of International Trade
(5)
Trade based on Technological Differences
Mercantilist Views on Trade
§ Collection
of economic thought in Europe during 1500 to 1750
§ Merchants,
bankers, philosophers
§ National
wealth is reflected in holdings of precious metals
§ More
gold, more powerful the country
§ Export
more as it leads to inflow of gold
§ Restrict
import as it leads to outflow of gold
§ Trade
is a “Zero- Sum Game”
§ Mutually
beneficial trade is impossible
§ Calls
for ‘economic nationalism’
Absolute Advantage Theory-Adam Smith
o Refuted
mercantilist views on trade
o Mutually
beneficial trade is possible based on
‘absolute advantage’
o Each
country should specialise on the basis of absolute advantage and exchange for
other commodities
o Specialisation
leads to increased world production
o Benefits
of increased world production reaches all countries
o Trade
is a “positive-sum game”
o All
participating countries gain from trade
o Advocated
‘laissez-faire’
Comparative Advantage Theory-David Ricardo
·
Still unchallenged law in Economics
·
Tried to explore unanswered question in Smithian
Absolute Advantage
·
Why would trade occur if one country is more
productive than other country in all lines of production ?
·
Mutually beneficial trade is still possible if less
efficient country is not equally less productive in all lines of production
·
Should specialise where its disadvantage is smaller,
that is, on the basis of comparative advantage
Modern Theory of International Trade: Heckscher Ohlin
Model
§ Eli
Heckscher and Bertil Ohlin
§ Analysed
reasons for comparative advantage
§ Reasons
for comparative cost difference is due to :-
1.
Countries differ in their factor endowments
2.
Commodities differ in their factor intensities
Fundamental
Theorem: “each country should specialise in the
production and export of those goods whose production requires a relatively
large amount of the factor with which the country is relatively well endowed”
§ Capital
abundant country will tend to specialise in capital intensive goods
§ Labour
abundant country will tend to specialise in labour intensive goods
§ Abundance
of factor makes it cheap (less expensive)
§ Producers
prefers less expensive factor
§ Capital
rich country tend to specialise in capital intensive goods
§ Labour
rich country tend to specialise in labour intensive goods
Empirical Tests or Exceptions of Heckscher Ohlin
Model 1.Leontief
Paradox and 2.Factor Intensity Reversal
Leontief Paradox
o First
comprehensive empirical test of H O
o Used
US trade data of 1947
o US
was believed to be a K rich L scarce country
o If
H O is true , then US should export K intensive good and import L intensive
goods
o Empirical
Tests or Exceptions of Heckscher Ohlin Model – Leontief Paradox
o Leontief
used Input-output technology
o Startling
result !
o US
exporting labour intensive products and importing capital intensive products
o Opposite
of Heckscher Ohlin prediction
o Paradoxical
result termed as ‘Leontief paradox’
Factor Intensity Reversal
§ In
H O model pattern of trade is determined by factor intensity and factor
endowments
§ Changes
in these two is possible overtime
§ Such
changes could reverse the pattern of trade
§ Factor
intensity reversal is when one commodity is capital intensive in capital
abundant country and labour intensive in labour abundant country
§ Each
country will specialise in the same product
§ H
O theorem becomes invalid
Trade
Based on Technological Differences:
1.Technological Gap Model and 2. Product Cycle Theory
Technological Gap Model
o Michael
V Posner 1961
o also
called “imitation lag hypothesis”
o relaxes
the assumption in the H-O analysis that the same technology is available
everywhere
o It
assumes that the same technology is not always available in all countries
o There
is a ‘delay in the transmission of technology’ from one country to another
o A
great deal of trade among industrialized countries is based on introduction of
new products and new production process which give innovating firm and country
a temporary monopoly in the world market
o “imitation
lag” is defined as the length of time that takes between product’s introduction
in country I and the appearance of the version produced by firms in country II
o Central
point of importance is that trade focuses on new products
o A
country can become a continually successful exporter by focusing on continuous
innovation
Product Cycle Theory
§ Reymond
Vernon 1966
§ Generalization
and extension of the Technological Gap Model
§ Builds
on its treatment of delay in the diffusion of technology
§ When
a new product is introduced, it requires highly skilled labour
§ As
the product matures and acquires mass acceptance, it becomes standardized and
familiar so that it can be produced with less skilled labour
§ Comparative
advantage in the product shift from the advanced nation that originally introduced
it to LDCs, where labour is relatively cheaper
§ Stresses
the standardization process
§ Most
highly indutrialised economies are expected to export the non-standardised
products embodying new and more advanced technology and import products
embodying less advanced technology
§ Through
imitation and product standardization, LDCs earn a comparative advantage based
on their relatively cheap labour
Foreign
Investment: Foreign Direct Investment (FDI) and Foreign Portfolio Investment
(FPI)
Foreign Direct Investment (FDI)
One that
gives the investor a control over investment
Control
need not be 100%
Business
investments
Faces
market risk
‘Real’
investment
Examples:
purchase of a company abroad, starting a subsidiary or taking over the control
of existing firm on other country
Types of
FDI: 1. Vertical 2. Horizontal and 3. Conglomerate
Benefit of FDI
Ø Helps to fill the resource gap of
developing countries
Ø Transfer of technology
Ø Provides growth stimulants
Ø Improves balance of payments
Ø Product specialisation
Ø Anti monopoly weapon
Cost of FDI
o Basic Motive of FDI is commercial
profitability
o Technology may not be suitable to the host country
o Adversely affect small scale
sectors
o Leads to monopoly/oligopoly
o Demonstration effect
o Political influence
Foreign
Portfolio Investment (FPI)
§ No
control over investment
§ Lending
of capital to get return but no control over the use of capital (rentier
investment)
§ Financial
investment
§ Indirect
investment
§ Examples:
investment in securities, deposits in commercial banks, purchase of equities,
bonds, securities and so on
Foreign investment decision
First
choice :- whether to exploit the existing competitive advantage in abroad or
concentrate on development of new competitive advantage in domestic market
Second
choice:- production at home and export or Production abroad
Third
choice:- choosing to produce abroad, must decide how
1.
Firms as seekers
2.
Firms as exploiters of imperfections
3.
Firms as internalisers
Firms as Seekers
·
Seeking resources
·
Seeking factor advantage
·
Seeking knowledge
·
Seeking security
·
Seeking market
Firms as exploiters of imperfections
§ Imperfections
in Access
§ Imperfections
in factor mobility
§ Imperfections
in management
Firm as internalisers
Ø By
establishing their own via FDI
Ø Internalise
production
Ø Keeping
information confidential
Ø No
effective transmission of knowledge
Balance of Payment
§ “Statistical
record of all international economic transactions of residents of country with
residents of rest of the world during a year”
§ Economic
transaction:- exchange of good, service or asset for which payment is required
§ Unilateral
transfers (for which no payment is made) are also included in BoP
§ Most
important statistical record of a country !
§ Reveals
export and import of goods and services
§ Reveals
borrowing and lending of the country
§ Reveals
foreign exchange position of the country
§ BoP
are always in balance
§ Double
entry book keeping system
§ Each
transaction has a credit and equal debit side
Balance
of Payment Accounts
: Current
Account, Capital Account and Other
Remaining Items
Current Account
·
Export and import of goods and services and unilateral
transfers
·
Sum of visible trade and ‘invisible balance’
·
Invisible balance :-export and import of services, receipts
of interest, dividends, profits and unilateral transfers
Capital Account
§ Movement
of financial capital in and out of the country
§ Capital
inflows: credit item; through borrowing, sales of overseas assets, investment
by foreigners
§ Capital
outflows: debit item; through lending, buying of overseas asset, purchase of
domestic asset owned by foreigners
Other Remaining Items of BoP
Ø Errors
and Omissions: reflects difficulties of accurate information
Ø Official
Reserves and Liabilities : as balancing items; changes in Gold, SDRs and
foreign currencies
Autonomous Items: All the transactions in the current and
capital account, Purely done for profit or business motive, Items above the
line
Accommodating Items: To
finance any deficit or surplus in the autonomous receipt and payment
Determined
by the net consequences of autonomous items, Balancing item, Items below the
line
Disequilibrium in International Transactions
1.
Deficit or Surplus in Current Account
2.
Basic Balance : sum of current account balance and net
balance on long-term capital
3.
Official Settlement Balance: operations of monetary
authorities undertakes to finance any deficit in current account and/or capital
account
International Monetary System
Ø Refers
to rules custom, instruments, facilities and Organisations for affecting
international payments
Gold
Standard(1880-1914)
§ First
and oldest system
§ Fixed
exchange rates
§ Each
country defines gold content of its currency and ready to buy any amount of
gold at that price
§ Mint
Parity
§ Willingness
to back currencies with gold
§ Currencies
are freely convertible in to gold
§ Gold
can be bought and sold at will
§ No
restriction on the shipment of gold
§ Collapsed
with the outbreak of First World War (1914-18)
§ Tried
again after the war but failed with Great Depression (1929-33)
Brettonwoods Conference (1944)
·
44 countries of United Nations met at Brettonwood, New
Hampshire US
·
Aim was to create a new international monetary system
·
To avoid instability and protective policies of Great
Depression
·
Called for the establishment of TWO Organisations
1. IMF,
to achieve exchange rate stability and help countries to finance BoP deficits
2. IBRD,
to assist post-war reconstruction and development of member countries and to
provide long-term development assistance
3. ITO,
to eliminate trade barriers (NEVER MATERIALISED)
·
Gold exchange standard
·
US to maintain the price of gold at $35 per ounce and
ready to exchange $ for gold without restriction
·
Other countries to fix exchange rate with $
·
Pegged exchange rate system (+ 1%)
Reasons for the collapse
1945-49 :
Huge BoP surplus for US (Marshall Plan)
1950s :
period of US BoP deficits
$
shortage to $ glut
Gold
depletion of US
Inability
to devalue $ as intervention currency
Nixon
Shock : Richard Nixon (August 15, 1971) withdraw commitment of gold
convertibility of $
Post Brettonwoods Era
Smithsonian Agreement (1971)
§ After
Nixon shock
§ Meeting
of leading industrial countries at Smithsonian Institute, Washington DC
§ Established
new set of par values called “central rates”
§ Countries
agreed to permit + 2.25 either side of the central rates
§ Germen
Mark and Japanese Yen was revalued by 13% and 17% respectively
§ Provided
greater exchange rate flexibility than Brettonwoods system (+ 1%)
§ Created
optimism for future
§ Failed
due to continuous speculations of $ and steps taken by countries to float their
currencies
Jamaica Accords (1976)
·
January 1976
·
IMF made series of changes that were incorporated into
IMF’s Articles of Agreement
·
Changes:-
·
Each member country was free to adopt its own exchange
rate arrangement
·
Role of gold to be downgraded and SDR to be enhanced
·
IMF to maintain surveillance of exchange rate behavior
to avoid manipulation
International Monetary Fund (IMF)
§ Product
of Brettonwood conference
§ Began
operations in Washington DC in March 1, 1947
§ Started
with 30 members, now has 189 members
§ Head
Quarters : Washington DC
§ Present
Managing Director : Christina Lagarde
Objectives
1.
To promote international monetary cooperation
2.
To facilitate expansion and balanced growth of
international trade
3.
To promote exchange stability and maintain orderly
exchange agreements
4.
Provide borrowing facilities for countries in
temporary BoP difficulties
Functions
a.
Surveillance
b.
Financial Assistance
c.
Technical Assistance
Borrowing from IMF
·
Each country assigned a quota
·
Quota is based on economic importance and volume of
international trade
·
Size of quota determines voting power and ability to
borrow
·
US assigned largest quota followed by Japan,
Germany, UK and France (India’s position
= 11th )
·
Country pay 25% of quota in gold and 75% in own
currency (Gold Tranche and Credit Tranche)
·
Paying 25% of
quota in gold was discontinued in 1978 and replaced by SDR
·
Country can borrow 25% of its quota automatically- no
restrictions
·
Further borrowing high rates of interest
·
Repayment in 3 to 5 years
·
Quota serves three purposes
1.
Constitutes resources to IMF
2.
Basis for determining how much a member country can
borrow (SDRs)
3.
Determines voting power of member
Special Drawing Right (SDRs)
o Created
by IMF in 1969 and started with effect from
January1, 1970
o To
supplement international reserves of gold and foreign exchange
o Accounting
entries in books of IMF
o Genuine
international reserves
o Also
known as paper gold
o Only
to be used in dealings amoung central banks to settle BoP deficits or surpluses
o Not
in private commercial dealings
o Not
backed by gold
o Created
“out of thin air” !
o From
1974, value of SDR tied with a basket of currencies
Composition(
2015-20)
41.73 % US $
30.93% Euro
10.92% Chinese Yuan
8.33 % Japanese Yen
8.09 % Pound Sterling
Other Credit Facilities
a)Buffer
Stock Financing Facility (BSFF) :1969
For
financing commodity buffer stock by member countries
Facility
is equivalent to 30% of the borrowing members quota
b)
Extended Fund Facility (EFF): 1974
Provides
credit to meet BoP deficits for longer periods up to 10 years
In
amounts larger than their quota
International
Monetary Fund (IMF)
c)
Structural Adjustment Facility (SAF): 1986
Concessional
adjustment to poorer LDCs to solve BoP problems and carry out medium term macro
economic and SAPs
ESAF
in 1987
d)Compensatory
and Contingency Financing Facility (CCFF): 1988
compensation
for temporary shortfalls or excesses in cereal import costs
International Bank for Reconstruction and Development
(IBRD)
§ Product
of Brettonwood conference
§ Popularly
called World Bank
§ Provides
loans and developmental assistance to ‘creditworthy’ poor and middle income
countries
§ Organizationally
similar to IMF
§ Head
Quarters : Washington DC
§ President:
Jim Yong Kim
Objectives
1.
Assist the reconstruction and development
of territories of members by facilitating the investment of capital for
productive purposes
2.
To promote private investment by means of guarantee or
participation in loans
3.
To promote long range balance growth of international
trade and maintenance of equilibrium in BOP
4.
To affect international investment and to assist a
smooth transition from a wartime to peacetime economy
·
Owned by 189 members
·
Voting power proportional to subscription
·
Each country appoints a Governor and Alternative
Governor, meet once in year
Financing Policy
Ø Main
task is promote growth of middle income and poor countries
Ø Provides
developmental assistance
Ø Resources
are raised form financial market by selling bonds and other assets
Ø Lends
indirectly by guaranteeing loans made by private investor
Ø Lends
only to govt or have the guarantee of the govt in whose territory the borrower
is located
Special Action
Programme (SAP): 1983
To
assist member countries in adjusting to the current economic environment
Support
structural adjustment, policy changes, production for exports, maintenance of
economic infrastructure
Structural
Adjustment Facility (SAF): 1985
To
reduce BoP deficits of countries while maintaining or regaining the economic
growth- Used to finance imports
ESAF
in 1987
World
Bank Group: Group of THREE institutions: IDA, IFC and MIGA
International Development Association (I D A)
·
Affiliate of World Bank
·
Established in 1960 to supplement IBRD
·
Make available loans to developing countries on softer
terms and for longer periods
·
“Soft loan window”
·
173 member countries
Objectives
1.
To provide supplementary finance to LDCs on easy and
flexible terms
2.
To promote economic development, increase productivity
and thus raise std. of living in LDCs
3.
To supplement objectives of World Bank
Financing Policy
§ Grants
loans to projects productive or unproductive
§ Interest-free
loans
§ Loans
for longer periods, that is 35 to 40 years
§ 10
year grace period when no payment
§ Repayable
in foreign exchange
§ Loans are known as credits which
are made to governments only
§ Given to projects for which no
assistance is provided by World Bank
§ Before approving IDA considers 3
criteria: poverty, performance and project criterion
§ Sanction credits for agriculture,
education, health, nutrition, water supply, sewerage etc.
International Finance Cooperation (IFC)
Ø Affiliate
of World Bank
Ø Private
sector arm of IBRD
Ø Established
in July 20, 1956
Ø 184
member countries
Objective:
Providing capital to private enterprises in LDCs without Govt guarantee
o Considers
only those enterprises which are predominantly industrial and contribute to the
economic development of the country
o Projects
must be in private sector and productive in nature
o Enterprises
should be experienced and competent and loan should not be more than half of
capital of the enterprise
o Provides assistance to large,
medium and small scale industries
o Provides assistance in three ways
o Direct investment both in the
form of loans and equity participation
o By securing foreign and local
capital
o By providing technical assistance
Multilateral
Investment Guarantee Agency (MIGA)
·
Established
in 1988
·
International
finance institution
·
181
member countries
·
Primary
objective is to encourage the flow of FDI in to the developing countries
·
Offers
political risk insurance and credit enhancement incentives
·
Protect
foreign investments against political and non-commercial risks
·
Insures
only new investments
·
Provides
promotional and advisory services to the govts of LDCs to improve the
investment climate
·
Tries
to establish credibility among investors and improve their credit rating
International Liquidity
Defined
as resources available to the monetary authorities of different countries for
the settlement of international payments
Denotes
all resources available to the monetary authorities of a country which may
facilitate the meeting of its BoP difficulties
Functions
To
facilitate settlement of international indebtedness and
To act as
a means of stabilizing or controlling the external value of the domestic
currency through intervention in the
normal functioning of the foreign exchange market
Components:
Gold, National currencies like Dollar,
Pound, Euro and SDRs of IMF
World Trading System:
General Agreement on Tariffs and Trade (GATT)
§ Signed
by 23 countries in 1947
§ Membership
rose to 123 in 1993
Objectives
1.
To promote
international trade through tariff reduction
2.
To avoid discriminatory practices
3.
evolve rules to counter protectionism
Basic
Principles
a)
Nondiscrimination
b)
Elimination of Non tariff barriers
c)
Consultation to solve trade disputes
Ø Reduction
of tariff and other trade restrictions were accomplished in phased manner
Ø Through
different Rounds of multilateral trade negotiations
Ø Eight
multilateral trade negotiations so far under auspices of GATT
Rounds of Multilateral Trade Negotiations
I.
Geneva (1947)
II.
Annecy (1949)
III.
Torquay(1950-51)
IV.
Geneva (1954-62) (Dillon Round)
V.
Geneva (1960-61)
VI.
Geneva (1963-67) (Kennedy Round)
VII.
Tokyo (1973-79)
VIII.
Uruguay (1986-94)
Uruguay Round of Negotiations
o Eighth
Round
o Punta
Del Este
o Took
8 years of complex negotiations
o Considerable
differences among members
o Then
director general of GATT Arthur Dunkel
came up with a package to solve – ‘Dunkel Draft’
o Dunkel
Draft was agreed and as a package
o Signing
up of Final act in April 1994, paved way of setting up of World Trade
Organisation (WTO)
World Trade Organisation (WTO)
·
Came into force on January 1, 1995 as a successor of
GATT
·
WTO has 164 members
·
International organisation and a permanent body
·
WTO is an organisation while GATT is a treaty and
legal arrangement
·
Head Quarters: Geneva
·
Director General: Roberto Azvedo
Functions
1.
Facilitate implementation, administration and
operation of WTO agreements
2.
Provide forum for negotiations amoung members
concerning their multilateral trade relations
3.
Administer rules and procedures governing settlement
of disputes
4.
Administer trade policy review mechanism
5.
Cooperate with IMF and IBRD and the affiliated
agencies to achieve greater coherence in global policy making
§ Highest
decision-making body is the ministerial conference
§ It
usually meet once in two years
§ Any
matters under multilateral trade agreements can be discussed in ministerial
conference
§ So
far 11 ministerial conferences were held
WTO Ministerial Conferences
1.
Singapore
(1996)
2.
Geneva (1998)
3.
Seattle (1999)
4.
Doha (2001)
5.
Cancun (2003)
6.
Hongkong (2005)
7.
Geneva (2008)
8.
Geneva (2011)
9.
Bali (2013)
10. Nairobi
(2015)
11. Buenos Aires (2017)
WTO Agreements
Agreement
on Agriculture(AoA)
Ø Framework
for long term of agricultural trade
Ø Relates
to domestic subsidies, export subsidies, minimum market access commitment,
domestic support, sanitary and phyto-sanitary and food aid operations
Ø Seeks
to open national market to international competition
Multi
Fibre Arrangement (MFA): Agreement on textiles and clothing
Ø Phasing
out of import quotas
Ø Integration
of the textiles and clothing sector into the GATT 1994
Trade
Related Investment Measures(TRIMs)
Ø Introducing
national treatment of foreign investment
Ø Removal
of quantitative restrictions within the period of 5 years
Trade
Related Intellectual Property Rights (TRIPs)
Ø Covers
7 areas of intellectual property, namely 1. patents, 2.copy rights,
3.geographical indications, 4.industrial design, 5.integrated circuits
(layouts), 6.trade marks, 7.trade secrets
Ø Both
process and product patent
General
Agreement on Trade in Services (GATS)
Ø Covers
all internationally traded services
Ø Foreign
services and service suppliers would be treated on equal national footings with
domestic suppliers
Ø Transparency
and progressive liberalisation of trade in services like banking, insurance,
travel, transportation etc
Dispute
Settlement Body (DSB)
Ø For
the settlement of disputes between members concerning their rights and
obligations under the provisions of WTO agreements
Ø To
provide security and predictability to trading system
Ø Findings
are final and binding
Agreement
on Subsidies and Countervailing Measures(SCM)
Ø Applies
to non-agricultural products
Ø Classifies
subsidies in to red (prohibitive), green(non-actionable) and amber
(actionable).
Trade
Policy Review Mechanism (TPRM)
Ø To
carryout reviews of the trade policies and practices
Ø Each
member has to report their trade policies and practices to the TPRB
United Nations
Conference on Trade and Development (UNCTAD)
o Established in 1964
o Headquarters : Geneva
o Permanent intergovernmental body
o Pert of UN’s secretariat dealing
with trade, investment and development issues
o Founded by UN General Assembly
o Head : Mukhisa Kituyi
Functions
1.
To
promote international trade between countries especially for accelerating
economic development of LDCs
2.
To
formulate principles and policies of international trade and related problems
of economic development
3.
To
make proposals for putting the said principles and policies into effect
4.
To
review and facilitate the coordination of activities of other institutions
within the UN systems in the field of international trade and related problems
of economic development
5.
To
be available as a centre for harmonious trade related development policies of government and regional economic
groupings
Achievements
a)
Trade
in Primary Commodities
There
has been continuous deterioration of terms of trade of developing countries
International
commodity agreements (ICA) to stabilise the prices and markets of primary
commodities
Introduced
Integrated Programme for Commodities (IPC) and common fund for buffer stock
financing
b)
Generalised
System of Preferences
Urged
developed countries to give tariff preferences on the manufactured goods
exports of LDC
To
increase export earnings of LDCs
To
promote industrialisation and growth rates of LDCs
c)
Development
Finance
Urged
IMF to link SDR with development finance of LDCs
Measures
to solve the debt problems of LDCs through debt rescheduling and conversion of
loans into grants
Development
aid for developing countries
d)
Technology
Transfer
Introduced
measures that would strengthen technological capability of LDCs
For
the speedy and self reliant development of LDC
Reducing
their external technological dependence
Laid
down broad principles for transfer of publically funded technologies at the
inter-governmental level
Globalisation
·
Expansion of economic activities across political
boundaries of nation states
·
A process of economic integration
·
Increasing openness and growing economic interdependence
between countries in the world economy
Drivers
of Globalisation
a)
Trade in goods and services
b)
Movement of capital
c)
Flow of finance
Multinational
Corporations
§ Also known as multinational
enterprise, transnational corporations, global corporations, international
corporations
§ Firms that own, control or mange
production facilities in several countries
§ Operates in many countries at
different levels of economic development
MNC’s:
Features
o Managerial headquarters in home
country
o Carryout operations in a number
of other (host) countries
o Predominantly large-sized and
great degree of economic dominance
o Oligopolistic in character
o Modern technology, managerial
skill, product differentiation and enormous advertising
Case
for MNC’s
ü For increasing investment, income
and employment
ü Transfer of technology, finance
and modern management
ü Promote professionalization of
management
ü Promote exports of the host
country
ü Improves BoP of host countries
ü Integrate national with
international market
Case
Against MNC’s
Ø Technology is designed for profit
maximisation, not to meet development needs of LDCs
Ø Can undermine national economic
autonomy
Ø Can have unfavourable effect on
BoP
Ø May destroy competition and
acquire monopoly power
Ø Retard growth of employment opportunities
in the country
Ø Depletion of non-renewable
natural resources of the host country
Economic Integration
·
A group of counties come together and agree to
cooperate in international trade by various means
·
Countries place differential treatment to their
trading partners
·
Countries join together to create a larger economic
unit
·
Special relationship among members within the group
Levels of
Economic Integration
i.
Free Trade Area
ii.
Customs Union
iii.
Common Market
iv.
Economic Union
(i) Free Trade Area
o The
most common integration scheme
o No
Internal Tariffs (all members remove tariff on each others product)
o External
Tariffs could be different
o Retains
independence of establishing trade
policies with non-members
o Examples:
U.S-Israel, European Free Trade Area
(EFTA)
(ii) Customs Union
o Second
level of economic integration
o No
Internal Tariffs
o Common
External Tariffs
o Group
adopts common external commercial policy towards nonmembers
o Group
acts as one body
o Examples:
France-Monaco, Italy-San Marino.
(iii) Common Market
o Third
level of economic integration
o No
Internal Tariffs.
o Common
External Tariffs and common external trade policy for nonmembers
o Free
movement of factors (labour and capital)
o Example
: Southern Cone Common Market (MERCOSUR) - Argentina, Brazil, Paraguay,
Uruguay, Bolivia, and Chile.
(iv) Economic Union
o Most
comprehensive of all 4 forms
o All
features of common market
o No
Internal Tariffs
o Common
External Tariffs.
o Free
flow of labor and capital.
o Integration and co-ordination of economic policies
o Harmonization
monetary policies, taxation, and government spending
o When
EU adopts Common currency it becomes monetary union
o Example
: European Union - Full monetary union (1999)
Regional Economic Integration
I.
SAARC
II.
ASEAN
III.
EU
IV.
NAFTA
South Asian Association for Regional Cooperation
(SAARC)
·
Formed in December 1985
·
Brainchild of Zia ul Rahman (1979)
Objectives
·
Promotion of economic welfare
·
Improve quality of life in the region
·
Accelerate rate of economic growth
·
Promotion of collective self reliance
·
To strengthen active collaboration and
cooperation
Members
1.
Bangladesh
2.
Bhutan
3.
India
4.
Maldives
5.
Nepal
6.
Pakistan
7.
Sri Lanka
8.
Afghanistan
Eight
members and 9 Observers
SAARC
secretariat (headquarters): Kathmandu
Secretary
General : Amjad B Hussian
Eighth
SAARC summit (New Delhi 1995) endorsed SAPTA – (SAARC Preferential
Trading Arrangement)
SAPTA is
for promotion of intra-regional trade and economic cooperation amoung SAARC
nations through extension of tariff and other concessions
Association of South East Asian Nations (ASEAN)
§ Regional
inter-governmental organisation
§ Comprises
10 south east Asian countries
§ Primary
Multinational group in Asia
§ Formed
on August 1967
§ Headquarters
:Jakarta
§ Secretary
General: L Jock Hoi
1.
Indonesia
2.
Malaysia
3.
The Philippines
4.
Singapore
5.
Thailand
6.
Laos
7.
Myanmar
8.
Brunei
9.
Cambodia
10. Vietnam
o Ten
members and 2 Observers
o Fastest
growing economies in the region
o Principal
aim is to accelerate economic growth, social progress and socio cultural
evolution among its members
o The
protection of regional stability and the provision of a mechanism to resolve
differences
o Reduced
Tariff and non-tariff barriers, guaranteed member access to markets, and
harmonized investment incentives.
European Community (EC) or European Union (EU)
·
European Community (EC) was founded under the Treaty of Rome in 1957 with 6 countries
·
EC consist of three organisations based on separate
treaties
1.
European Steel and Coal Community (ESCC)
2.
European Atomic Energy Community (EAEC or Euratom)
3.
European Economic Community (EEC)
Maastricht
Treaty 1993 renamed the European Community (EC)
to European Union (EU)
Objectives
1.
Elimination of customs duties between members
2.
Establishment of common customs tariff and common
external commercial policy
3.
Abolition of obstacles
to freedom of movement of persons, services and capital between member
countries
4.
Establishment of common policy with respect to
agriculture and transport
·
Single European Act 1986 led to the formation of
single internal market for EC
·
A true common market for goods, people and money by
1992
·
EURO, the official currency of EU used by 19 countries
(European Monetary Union) from January 1, 1999
EC
institutions - The European Commission, Council of Ministers, European
Parliament, European Court of Justice
North American Free Trade Agreement (NAFTA)
Ø Extension
of US-Canada Agreement (CUSTA) of 1988
Ø Later
Mexico joined in 1991
Ø NAFTA
commenced from January 1994
Objectives
a)
Free trade area between members
b)
Fair competition and facilitation of cross border movement
of goods and services
c)
Increase investment opportunities
d)
Protection of intellectual property rights
ü Covers
trade, financial services and dispute settlement
ü Benefits
similar to the E.U. in terms of one Large market
ü Additionally
Mexico is a different economy with different comparative advantages
ü prevents
firms from looking for cheap labor in outside markets
ü Encourage
foreign investment in this market
ü Increase
competitiveness in outside markets
ü Labor
and environmental issues
Effects of Economic Integration
Jacob
Viner (1950)
Static effects of integration
Trade
Creation Trade
Diversion
Effects
of Economic Integration
Trade Creation
§ Economic
integration leads to a shift in the product’s origin from a domestic producer
whose cost are higher to a member producer whose resource cost is lower
§ Movement
towards free trade allocation of resources
§ Beneficial
and increases in welfare
Trade Diversion
§ Economic
integration leads to a shift in the product’s origin from a non-member producer
whose cost are lower to a member country producer whose resource cost are
higher
§ Movement
away from free trade allocation of resources
§ Could
reduce welfare
Other effects
§ Many
economic advantages
§ Reduced
Import Prices, Increased competition and economies of scale, Higher factor
Productivity
§ Political
Factors and power in international markets
Foreign Exchange Market
·
Worldwide network of markets and institution that
handle the exchange of foreign currencies
·
Buying and selling of foreign currencies or foreign
exchange
·
Largest Market : London
·
Heavily Traded Currency : US Dollar
Participants:
Commercial Banks., Business Corporations, Non Bank Financial Institutions and Central
Bank
Functions
1.
Transfer of funds or purchasing power from currency to
another or from one country to another
2.
Credit function
3.
Facilities for Hedging and Speculation
Foreign Exchange Risk
o Arises
out of the fluctuations in the value of assets, liabilities, income or
expenditure when unanticipated changes in the exchange rates occur
o When
ever future payments must be made or received in foreign currency
o Due
to ever-changing spot exchange rate
Foreign
Exchange Risk:- Avoidance->Hedging; Acceptance -> Speculation
Hedging
Ø Avoidance
of foreign exchange risk
Ø Altering
the composition of assets and liabilities so as to offset an existing or
potential exposure of foreign exchange risk
Ø Want
to eliminate or reduce risk exposure
Ø Usually
takes place in the forward foreign exchange market
Speculation
Ø Opposite
of hedging
Ø Accept
or take risk in the hope of making profit
Ø Uncertain
gain from unanticipated changes in the exchange rate
Ø Committing
oneself to the uncertain future value
Ø Takes
place in the forward market
Ø Stabilizing
v/s destabilizing
Protection
v
Policy whereby domestic industries are protected from
foreign competition
Arguments
for Protection
1.
Infant industry argument
(Hamilton 1791)
2.
Terms of Trade argument
3.
Anti dumping argument
4.
Balance of trade argument
5.
National defense argument
6.
Key industries arguments
7.
Employment argument
Forms of
Protection: Tariff and Non Tariff Barriers
Forms of
Protection- Tariff
•
Most important form of protection
•
Tax or levy or duty on traded commodity as it crosses
national boundaries
•
Price based measure (import tariff and export tariff)
Types
1.
Specific tariff
2.
Advelorem tariff
3.
Compound tariff
Effects
of Tariff
1.
Price Effect
2.
Consumption Effect
3.
Production Effect
4.
Revenue Effect
5.
Balance of Trade Effect
6.
Welfare Effect
Optimum
Tariff
•
Rate that maximizes
country’s welfare
•
Starting from a free trade
position increase in tariff leads to increase in welfare up to maximum (optimum
tariff), then welfare decreases as tariff is again raised
Non
Tariff Barriers to Trade
1.
Quotas
2.
Voluntary Export Restraints
3.
Technical, administrative
& other regulations
4.
Export Subsidies
5.
Dumping
6.
International cartel
India’s
Foreign Trade Policy (2015-2020)
Ø
Period covered from 1st April, 2015 to 31st
March, 2020
Ø
Different schemes like Focus Product Scheme, Market
Linked Focus Product Scheme, Focus Market Scheme, etc for rewarding merchandise
exports merged into a single scheme, namely Merchandise Export from India
Scheme (MEIS)
Ø
Service Exports from India Scheme (SEIS) provides for rewards to all Service providers
of notified services, who are providing services from India
Ø
Business leaders who have excelled in international
trade and have successfully contributed to country’s foreign trade are proposed
to be recognized as Status Holders and given special treatment and privileges
to facilitate their trade transactions, in order to reduce their transaction
costs and time
Ø
The nomenclature of Export House, Star Export House,
Trading House, Star Trading House, Premier Trading House certificate has been
changed to One (3 million $), Two (25 million $), Three (100 million $),
Four(500 million $), Five Star Export House (2000 million $)
Ø
Manufacturers
who are also Status Holders will be enabled to self-certify their manufactured
goods as originating from India with a view to qualify for preferential
treatment under different Preferential Trading Agreements [PTAs], Free Trade
Agreements [FTAs] etc
Ø
Boost to “make in India”: Reduced Export Obligation
(EO) for domestic procurement under EPCG scheme ( reduced to 75% from 90%)
Ø
Higher level of rewards under MEIS for export items
with high domestic content and value addition
Ø
Trade facilitation & ease of doing business
:-Online filing of documents/ applications and Paperless trade in 24x7
environment, Simplification of procedures/processes, digitisation and
e-governance.
Ø
EOUs have been allowed facility to set up Warehouses
near the port of export to reduce lead
time for delivery of goods and also to address the issue of un-predictability
of supply orders
Ø
The period by which EOU units have to achieve
Positive Net Foreign Exchange Earning (NEE) is
extended by one year (5 to 6)
Ø
Facilitating & Encouraging Export of Defence
goods
Ø
e-Commerce Exports : Goods falling in the category
of handloom products, books / periodicals, leather footwear, toys and
customized fashion garments, having FOB value up to Rs.25000 per consignment
can be exported in manual mode through Foreign Post Offices at New Delhi,
Mumbai and Chennai
Ø
Additional Ports allowed for Export and import :
Calicut Airport, Kerala and Arakonam ICD, Tamil Nadu have been notified as
registered ports for import and export.
Ø
Duty Free Tariff Preference (DFTP) Scheme extended
to 33 Least Developed Countries (LDCs)
Ø
To resolve quality complaints and trade disputes,
between exporters and importers a Committee on Quality Complaints and Trade
Disputes (CQCTD) is being constituted in 22 offices
Ø
Vishakhapatnam and Bhimavaram added as Towns of
Export Excellence (Product Category– Seafood)
Ø
Higher rewards have been granted for the products like
Agricultural and Village industry products ,Value added and packaged products,
Eco-friendly and green products , Labour intensive Products with large
employment potential ,Hi-tech products with high export earning potential
India’s FDI Policy
•
Initial
policy (1960-80) was more restrictive with the aim to develop local industries
Foreign Exchange Regulation Act (FERA) 1973
•
allowed
foreign equity participation only up to 40%
•
inward looking policy for boosting domestic
ownership and effective control of foreign enterprises
•
No
FDI without transfer of technology
•
FDI
was restricted only in high priority industries
Foreign Exchange
Management Act 1999
•
Liberalised
foreign exchange controls and restrictions on foreign investments
•
Deals
in foreign exchange were to be ‘managed’ instead of ‘regulated’
•
New
foreign exchange management regime consistent with framework of WTO
•
Direct
outcome of liberal trade policies
•
Enables
RBI to pass regulations and central government to pass rules relating to
foreign exchange in tune with the foreign trade policy of India
Currency
Convertibility in India
•
Currency convertibility is defined as the freedom to
convert one currency into other internationally accepted currencies
•
Implies the absence of restrictions on foreign
exchange transactions or absence of exchange control
Two
forms of convertibility
I.
convertibility for current international transactions
(current account convertibility)
II.
convertibility for international capital movement (capital account convertibility)
•
India has made Rupee
convertible on current account on August 19, 1994
Current
account convertibility has been defined as the freedom to buy or sell foreign
exchange for
a)
International transactions
consisting of payment due in connection with foreign trade, other current
business including services and normal short term banking and credit facilities
b)
Payment due as interest on
loans and as net income from other investments
c) Payment of moderate amounts of amortization of
loans for depreciation of direct investments
d) Moderate remittances for family living expenses
Ø
More relaxations were
affected by the Reserve Bank of India with effect from July 5, 1995
Ø
Strong pressure from various
corners to make the Rupee fully convertible
Ø
Committee on capital account
convertibility under the chairmanship of Dr S S Tarapore
Globalisation
and India
Trends
•
First step- liberalization
of trade late 1980
•
New Economic Policy of 1991
•
Measures to welcome
international investment (FDI & FPI): opening up
•
Deregulation of financial
sector
•
Current account
convertibility of Rupee
Effects
•
Exports increased
•
No flood of import
•
Improvement in current
account deficit
•
Adequate foreign exchange
reserves
•
Substantial flow of FDI, FPI
and FII
•
New environment for Indian
companies
•
Choices for Indian consumers
Prepared
By
Dr SHABEER K
P
Assistant Professor and Research Guide
PG and Research Department of Economics
Government College, Kodanchery, Kozhikode
Mobile: 9961 48 86 83
Email: kp.shabeer78@gmail.com
www.skpeco.blogspot.in
