International Business Environment, Trends in International Trade, Needs for Going International,
International Marketing, Economic Growth and its impact on the International Business.
International Business Environment
Concept of International Business:-
Introduction : International business has been playing a crucial role for centuries. In the present day
world it has become indispensable for any country. Its role has increased in significance, both at the
macroeconomic and microeconomic levels. No country developed or developing produces all
commodities to meet its requirements. It needs to import items that are not produced domestically. At
the same time, it tries to export all items that are produced over and above its domestic requirements.
Meaning of International Business : International business means carrying on business activities
beyond national boundaries. These activities normally include transaction of economic resources such
o Services (comprising technology, skilled labour and transportation, etc.)
o International production.
Production may either involve production of physical goods or provision of services like banking,
finance, insurance, construction, trading and so on. Thus international business includes not only
international trade of goods and services but also foreign investment, especially foreign direct
Features of International Business Environment
Cultural and social forces in international business
Many of the additional complexities and problems faced by international marketers stem from
differences in the cultural and social environment which the marketer faces when marketing
internationally. Influences of cultural differences when marketing across national boundaries take on a
We know how people consume, their needs and wants, and the ways in which these wants are satisfied
are determined by culture. Culture is the human-made part of environment that includes knowledge,
beliefs, morals, laws, customs and other elements acquired by humans in society. Because cultures are
so different between countries, cultural forces and factors take on a particular significance for the
international marketer. We highlight some of the possible areas or aspects of culture where there may
be important differences when marketing in foreign markets:
norms and values;
arts and aesthetics.
Sometimes seemingly relatively small and subtle differences in cultural habits and practices can be
important in marketing products in different cultures. For example, attitudes towards body hair differ
between even relatively geographically proximate European countries. In the UK for instance, most
women shave their under-arm hair, whereas most German women do not. A company like Gillette takes
this difference into account in preparing its marketing plans for the different European countries.
Comparison between domestic and international marketing
The marketer must understand the implications of these different elements of culture for developing
marketing strategies e.g. there may be very different norms and values pertaining to say gender roles, or
the use of sex in advertising when marketing in a foreign country. Similarly, religious beliefs may have
a significant impact on what is acceptable marketing practice.
It is important to recognize that within any national culture there are often a number of sub-sets of
culture. In the UK there is a distinct cultural difference between the north and south, which affects
purchasing behaviour – in direct and observable ways, but sometimes in quite subtle ways.
Technological forces influence organizations in several ways. A technological innovation can have a
sudden and dramatic effect on the environment of a firm. First, technological developments can
significantly alter the demand for an organization's or industry's products or services.
Technological change can decimate existing businesses and even entire industries, since its shifts
demand from one product to another. Moreover, changes in technology can affect a firm's operations as
well its products and services.
These changes might affect processing methods, raw materials, and service delivery. In international
business, one country's use of new technological developments can make another country's products
overpriced and noncompetitive. In general,
Technological trends include not only the glamorous invention that revolutionizes our lives, but
also the gradual painstaking improvements in methods, in materials, in design, in application,
unemployment, and the transportation and commercial base. They diffusion into new industries
and efficiency" (John Argenti).
The rate of technological change varies considerably from one industry to another. In electronics, for
example change is rapid and constant, but in furniture manufacturing, change is slower and more
Changing technology can offer major opportunities for improving goal achievements or threaten the
existence of the firm. Therefore, "the key concerns in the technological environment involve
building the organizational capability to
(1) forecast and identify relevant developments - both within and beyond the industry,
(2) assess the impact of these developments on existing operations, and
(3) define opportunities" (Mark C. Baetz and Paul W. Beamish).
These capabilities should result in the creation of a technological strategy. Technological strategy deals
with "choices in technology, product design and development, sources of technology and R&D
management and funding" (R. Burgeleman and M. Maidique).
The economic of the host country plays on important role in the decisions of a multinational
In addition to foreign exchange control policies, the tax structure and the tax policies of the host
country mus be studied an considered. Some of the economic factors to be considered are:
(a) GNP, income levels of the work force and the proportion of disposable income, saving habits of the
population, economic growth trends, trends in industrial development, inflation rate, interest rate etc.
(b) Any local financial resources available that would be necessary and helpful in further expanding the
facilities of operation.
(c) Any organized labour unions that could create problems in the from of strikes, demand for higher
wages and additional fringe benefits.
(d) Any economic planning agencies that would give the economic trends for the foreseeable future.
India, for example, has five-years plans and sometimes over 10 years and the expected progress over a
number of years in the future.
(e) The infrastructure for support services providing for power and water availability,housing
conditions, transportation and communications.
(f) Stability of local currency and its acceptance outside the host country.
If any of these factors makes the operations economically risky, then some steps can be taken to reduce
these risks One way would be to go into a joint venture with local citizens. The joint ventures spread
the responsibility and the adverse effects are minimized in case of political changes and policy changes.
Also, they combine the financial and managerial resources of the organization with the needs and
traditional knowledge of the natives and local markets. Some other means of reducing these risks are:
- Entering into licensing agreements only, which require the transfer on technical knowhow for a fixed
fee or continuous royalty for as long as this technical knowledge is utilized.
- Contracts to manage host country owned installations. This involves leading the managerial talent,
with or without the transfer of technical know-how. This id done again by proper compensation for
such services rendered.
- Turn-key operations. In this case the entire project is undertaken by an organization and consists of
designing, constructing, developing the unit and training personnel to operate the unit and training
personnel to operate the unit to the point where the key can be turned over to the local owners.
Political and Legal Forces
Political-legal forces include the outcomes of elections, legislation, and court judgments, as well as the
decisions rendered by various commissions and agencies. The political sector of the environment
presents actual and potential restriction on the way an organization operates.
Among the most important government actions are: regulation, taxation, expenditure, takeover (creating
a crown corporation, and privatization. The differences among local, national, and international
subsectors of the political environment are often quite dramatic. Political instability in some areas
makes the very form of government subject to revolutionary changes.
In addition the basic system of government and the laws the system promulgates, the political
environment might include such issues as monitoring government policy toward income tax, relative
influence of unions, and policies concerning utilization of natural resources.
Political activity my also have a significant impact on three additional governmental functions
influencing a firm's external environment:
* Supplier function. Government decisions regarding creation and accessibility of private businesses
to government-owned natural resources and national stockpiles of agricultural products will profoundly
affect the viability of some firm's strategies.
* Customer function. Government demand for products and services can create, sustain, enhance, or
eliminate many market opportunities.
* Competitor function. The government can operate as an almost unbeatable competitor in the
marketplace, Therefore, knowledge of government strategies can help a firm to avoid unfavorable
confrontation with government as a competitor.
In general, the impact of government is far-reaching and increasing.
Trends in International Trade
Meaning of World Trade : World trade helps a country to utilize its natural resources and to export its
surplus production. It is only because of world trade that oil-exporting countries are utilizing their
natural resources and are able to increase the level of economic development of their countries. World
trade helps the country to import technical know-how and thus the importing country can utilize world's
best technology. At the time of natural calamity, a country can import food grains and other goods from
abroad. World trade has helped the developing and least developed countries to import machinery,
capital goods, technical know-how from industrially advanced countries.
Trends in World Trade : Trends in world trade can be analysed in the following manner:
(1)Increase in World's Exports : World's exports have increased significantly. In the year 1950,
world's exports were only 55 billion dollars and in the year 2004, it has increased to 9,153 billion
dollars. It means that in these 54 years world's exports have increased 166 times. It is clear from the
The main reason for increase in world's exports is reduction in tariff and non-tariff barriers, multilateral
trade, increase in means of communication, transportation, etc.
(2)Top Exporters in Merchandising World Trade : In the year 2004, the largestexporting country in
world trade is Germany. Its hare in total world's export is 10 per cent. The top five exporting countries
of the world are:
India's ranking in world's export is 30th. Its share in total world's export is just 0.8 per cent. Data
regarding value of exports, percentage in world's exports and their ranking given in the following table:
(Source: Statistical Outline of India, 2005-06)
(3)Top Importers in Merchandising (Goods) World Trade : In the year 2004, the largest importer
in world trade was U.S.A. Its share in world's imports was 16.1%. India's ranking in world's import is
23rd. India's percentage in world' import is just 1.0% The world's five big importers are:
(4)World Trade in Services : Services is another area in which world trade is expanding very fast.
Service sector mainly includes travel, tourism, banking, insurance, telecommunication, business
outsourcing (call centres), IT enabled services, consultancy, media-services, software, advertising,
(5)Exports of Developing Countries : Among developing countries, the top five countries in world
Their combined share is 50% of exports of all developing countries.
(6)Composition of World Trade : World Trade in terms of product groups comprise
Agricultural raw materials,
Ores and metals
Gems and jewellery
Leather products etc.
Nowadays trade in services like banking, software, shipping, telecommunication, travel, tourism etc. is
increasing at a faster rate. Presently, World Trade includes engineering goods, capital goods,
technology, computer software, services, chemicals, along with agricultural goods. So composition of
world trade is changing and share of industrial goods and services is expanding at a faster rate, than
traditional export items.
(7)Growth of Regional Blocs in World Trade : Some of the leading blocs have improved their share
in world trade. The objective of these blocs is to promote free trade and economic cooperation among
different regions of globe.
(8)Shift from Bilateral Trade to Multilateral Trade : Earlier, up to the year 1994, world trade was
mainly bilateral. In bilateral trade, agreement is signed between two nations. With the growth in World
Trade Organisation, there is shift from bilateral to multilateral trade. In multilateral trade, trade
agreements are signed among many nations at a time.
(9)Shift from Restricted Trade to Free Trade : Earlier, various tariff and non-tariff restrictions were
imposed on world trade. These restrictions were
Discriminatory transport charges
Voluntary import restraints
Commercial prohibition etc.
But now as per the directions of WTO, both tariff and non-tariff barriers to international trade have
been reduced. In other worlds, free trade is increasing in the World Trade.
Needs for going International
1. Sales Expansion : The main objective of International business is to increase the sale because in
international business a firm can sell its product in domestic as well as in foreign market. Many
companies look to international markets for growth. Introducing new products internationally can
expand a company's customer base, sales and revenue. For example, after Coca-Cola dominated the
U.S. market, it expanded their business globally starting in 1926 to increase sales and profits.
2. Resource Acquisition : It means getting the resources from other countries because there may be so
many resources of other country which may not be available in home country.
3. Minimize Competitive Risk : Many companies move internationally to minimize the risk of
competitors. They want to go in international market for defensive reasons.
4. Diversification : Many companies want to diversify the sources of sales and supplies, so they may
seek foreign market for this purpose.
5.Growth Many companies look to international markets for growth. Introducing new products
internationally can expand a company's customer base, sales and revenue. For example, after Coca-Cola
dominated the U.S. market, it expanded their business globally starting in 1926 to increase sales and
Employees Companies go international to find alternative sources of labor. Some companies look to
international countries for lower-cost manufacturing, technology assistance and other services in order
to maintain a competitive advantage
Ideas Companies go international to broaden their work force and obtain new ideas. A work force
comprised of different backgrounds and cultural differences can bring fresh ideas and concepts to help a
company grow. For example, IBM actively recruits individuals from diverse backgrounds because it
believes it's a competitive advantage that drives innovation and benefits customers.
Advantages of International Business
Increased Socio Economic Welfare : International business enhances consumption level, and
economic welfare of the people of the trading countries. For example, the people of China are now
enjoying a variety of products of various countries than before as China has been actively involved in
international business like Coca Cola, McDonald's range of products, electronic products of Japan and
coffee from Brazil. Thus, the Chinese consumption levels and socio-economic welfare
Wider Market : International business widens the market and increases the demand for the product in
a single country or customer's tastes market size. Therefore, the companies need not depend on the
preferences of a single country. Due to the enhanced market the Air France, now mostly depends on the
demand for air travel of the customers from countries other than France. This is true in case of most of
the MNCs like Toyota, Honda, Xerox and Coca Cola.
Reduced Effects of Business Cycles : The stages of business cycles vary from country to country.
Therefore, MNCs shift from the country, experiencing a recession to the country experiencing 'boom'
conditions. Thus international business firms can escape from the recessionary conditions.
Reduced Risks : Both commercial and political risks are reduced for the companies engaged in
international business due to spread in different countries. Multinationals, which were operating in to
erstwhile USSR, were affected only partly due to their safer operations in other countries. But the
domestic companies of then USSR collapsed completely.
Large Scale Economies : Multinational companies due to the wider and larger markets produce larger
quantities. Invariably, it provides the benefit of large scale economies like reduced cost of production,
availability of expertise, quality etc
Provides the Opportunity for and Challenge to Domestic Business : International business firms
provide the opportunities to the domestic companies. These opportunities include technology,
management expertise, market intelligence, product developments etc. For example, Japanese firms
operating in US provide these opportunities to US companies. This is more evident in the case of
developing countries like India, African countries and Asian countries
International marketing (IM) or global marketing refers to marketing carried out by companies
overseas or across national borderlines. This strategy uses an extension of the techniques used in the
home country of a firm.
It refers to the firm-level marketing practices across the border including
market identification and targeting, entry mode selection, marketing mix, and strategic decisions to
compete in international markets.
According to the American Marketing Association (AMA)
"international marketing is the multinational process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods, and services to create exchanges that satisfy
individual and organizational objectives."
In contrast to the definition of marketing only the word
multinational has been added.
In simple words international marketing is the application of marketing
principles to across national boundaries. However, there is a crossover between what is commonly
expressed as international marketing and global marketing, which is a similar term.
The intersection is the result of the process of internationalization. Many American and European
authors see international marketing as a simple extension of exporting, whereby the marketing mix 4P's
is simply adapted in some way to take into account differences in consumers and segments. It then
follows that global marketing takes a more standardised approach to world markets and focuses upon
sameness, in other words the similarities in consumers and segments.
Economic Growth & its Impact on International Business
The issues of international trade and economic growth have gained substantial importance with the
introduction of trade liberalization policies in the developing nations across the world. International
trade and its impact on economic growth crucially depend on globalization. As far as the impact of
international trade on economic growth is concerned, the economists and policy makers of the
developed and developing economies are divided into two separate groups.
One group of economists is of the view that international trade has brought about unfavorable changes
in the economic and financial scenarios of the developing countries. According to them, the gains from
trade have gone mostly to the developed nations of the world. Liberalization of trade policies, reduction
of tariffs and globalization have adversely affected the industrial setups of the less developed and
developing economies. As an aftermath of liberalization, majority of the infant industries in these
nations have closed their operations. Many other industries that used to operate under government
protection found it very difficult to compete with their global counterparts.
The other group of economists, which speaks in favor of globalization and international trade, come
with a brighter view of the international trade and its impact on economic growth of the developing
nations. According to them developing countries, which have followed trade liberalization policies,
have experienced all the favorable effects of globalization and international trade. China and India are
regarded as the trend-setters in this case.
There is no denying that international trade is beneficial for the countries involved in trade, if practiced
properly. International trade opens up the opportunities of global market to the entrepreneurs of the
developing nations. International trade also makes the latest technology readily available to the
businesses operating in these countries. It results in increased competition both in the domestic and
global fronts. To compete with their global counterparts, the domestic entrepreneurs try to be more
efficient and this in turn ensures efficient utilization of available resources. Open trade policies also
bring in a host of related opportunities for the countries that are involved in international trade.
However, even if we take the positive impacts of international trade, it is important to consider that
international trade alone cannot bring about economic growth and prosperity in any country. There are
many other factors like flexible trade policies, favorable macroeconomic scenario and political stability
that need to be there to complement the gains from trade.
There are examples of countries, which have failed to reap the benefits of international trade due to lack
of appropriate policy measures. The economic stagnation in the Ivory Coast during the periods of 1980s
and 1990s was mainly due to absence of commensurate macroeconomic stability that in turn prevented
the positive effects of international trade to trickle down the different layers of society. However,
instances like this cannot stand in the way of international trade activities that are practiced across the
different nations of the world.
In conclusion it can be said that, international trade leads to economic growth provided the policy
measures and economic infrastructure are accommodative enough to cope with the changes in social
and financial scenario that result from it.
Political, Legal and Cultural Environment: Impact of economic system and economic reforms. Country
Risk Insurance – Role of OPIC and MIGA; Nature of legal environment; International Protection.
International Political Environment
Political Environment : The influence of political environment on business is enormous. Political
1) Political ideology of government regarding :
a. Foreign investment
b. Foreign trade
d. Working of MNCs
e. Price Controls
h. Privatisation etc.
(2) Political stability in the country.
Forms of Political System
o Parliamentary Democracy
o Presidential Democracy
The political scenario often varies between the two extremes :
Democracy : The purest form of democracy represents direct involvement of citizens in policy making.
This is because, the democratic set-up is "of the people, for the people, and by the people". But with the
growing time and distance barriers over time, it did not remain feasible for all citizens to participate in
the political process, and as a result, democracy turned into a representative democracy where only the
elected representative have a say in political decision. Whatever may be the form of democracy, the
people enjoy fundamental rights of various kinds of freedom and civil liberties.
(i) Parliamentary Democracy : In parliamentary democracy, political decisions are
influenced by widely varying interest groups.
(ii) Presidential Democracy : On the contrary, they are comparatively centralized in
presidential democracy, although the head of the government is an elected
Totalitarianism : Totalitarianism, at the other extreme, represents monopolization of political power in
the hands of an individual or a group of individuals with virtually no opposition. The policy is simply
the dictates of the ruler. Constitutional guarantee are denied by the citizens.
Types of Political Environment : Political environment is of three types:
(1) Political Environment of Domestic Country : It refers to political environment of the country
in which MNC operates. Usually less developed countries view foreign firms and
foreign capital investment with distrust. On the other hand, different political parties, especially
opposition parties often accuse foreign firms of not providing the latest technology, violating the
rules and seeking favours from the ruling party.
(2)Political Environment of Foreign Country : It refers to political environment of the country to
which MNC belongs. MNCs are also affected by political ideology of their parent country.
(3)International Political Environment : International political environment is created from the
interaction between the domestic and foreign political environment. International political
environment is changing very fast and these changes affect the domestic, economic and political
Political Risk : There is no precious definition. However, in Thunell's view, political risk is said to
exist when sudden and unanticipated changes in political set-up in the host country lead to unexpected
discontinuities that bring about changes in the very business environment and corporate performance.
For Example, if a rightist party wins election in the host country and the policy towards foreign
investment turns liberal, it would create a positive impact on the operation of MNCs. On the other hand,
if a left party comes to power in the host country, it will have a negative impact on the operation of
MNCs. It is the negative impact that is normally the focus of attention of transnational investors.
Forms of Political Risks : Some of the forms of political risks are:
Expropriation : Expropriation means seizure of private property by the government. Confiscation is
similar to expropriation, but the difference between two is that while expropriation involves payment of
compensation, confiscation does not involve such payments. International law provides protection to
foreigner's property. It provides for compensation in case of unavoidable seizure. But the process of
compensation is often lengthy and cumbersome. The firm usually requires going-concern value tied to
the present value of lost future cash flows. On the other hand, government prefers depreciated historical
book value, which is lower in the eyes of the firm.
Currency Inconvertibility : Sometimes the host government enacts law prohibiting foreign companies
from taking their money out of the country or from exchanging the host country currency for any other
currency. This is a financial form of political risk.
Credit Risk : Refusal to honour a financial contract with a foreign company or to honour foreign debt
comes under this form of political risk.
Risk from Ethnic, Religious, or Civil Strife : Political risk arises on account of war and violence and
racial, ethnic, religious or civil strife within a country.
Conflict of Interest : The interest of MNCs is normally different from the interest of the host
government. The former manifests in the maximization of corporate wealth, while the latter is evident
in the welfare of the economy, in general and of the citizens of a constituency, in particular. It is the
conflicting interest that gives rise to political risk.
Corruption : Corruption is endemic in many host countries, as a result of which MNCs have to face
serious problems. Transparency International has surveyed 85 countries and has brought out the
Corruption Perception Index. Many countries rank high on this index.
Evaluation or Assessment of Political Risk : Assessment of political risk is an important step before a
firm moves abroad. It is because if such risks are very high, the firm would not like to operate in that
country. If the risk is moderate or low, the firm will operate in that country, but with a suitable political-
risk management strategy. But any such strategy cannot be formulated until one assesses the magnitude
of political risk. The ways of assessment may be either qualitative or quantitative.
Management of Political Risk : The political risk management strategy depends upon the type of risk
and the degree of risk the investment carries. It also depends upon the timing of the steps taken. For
example, the strategy will be different if it is adopted prior to investment from that adopted during the
life of the project. Again, it will be different if it is adopted after expropriation of assets. The
management of political risk is divided into three sections:
(A) Management Prior to Investment : Investment will prove a viable venture if political risk is
managed from the very beginning-even before the investment is made in foreign land. At this stage,
there are five ways to manage it.
(1)Increased in Discount Rate : In the first method, the factor of political risk is included in the very
process of capital budgeting and the discount rate is increased. But the problem is that it penalizes the
flows in the earlier years of operation, whereas the risk is more pronounced in the later years.
(2)Reducing the Investment Flow : The risk can be reduced through reducing the investment flow
from the parent to the subsidiary and filling the gap through local borrowing in the host country. In this
strategy, it is possible that the firm may not get the cheapest fund, but the risk will be reduced. The firm
will have to make a trade-off between higher financing cost and lower political risk.
(3)Agreement with the Host government : If the investing company undergoes an agreement with
the host government over different issues prior to making any investment, the latter shall be bound by
(4)Planned Divestment : Planned divestment is yet another method of reducing work. If the company
plans an orderly shifting of ownership and control of business to the local shareholders and it
implements the plan, the risk of expropriation will be minimal.
(5)Insurance of Risk : Political risk can also be reduced by the insurance of risk.The investing firm
can be insured against political risk. Insurance can be purchased from governmental agencies, private
financial service, organizations or from private property-centred insurers.
(B) Risk Management during the Life Time of the Project : Management of risk during the pre-
investment phase lessens the intensity of risk, but does not eliminate it. So the risk management process
continues even when the project is in operation. There are four ways to handle the risk in this phase.
(1)Joint Venture and Concession Agreement : In a joint venture agreement, the participants are local
shareholders who have political power to pressurize the government to take a decision in their favour or
in favour of the enterprise. In case of concession agreements that are found mainly in mineral
exploration, the government of the host country retains ownership of the property and grants lease to
the producer. The government is interested in earning from the venture and so it does not cancel the
(2)Political Support : Risk can also be managed with political support. International companies
sometimes act as a medium through which the host government fulfils its political needs. As long as
political support is provided bythe home country government, the assets of the investing company are
(3)Structured Operating Environment : The third method is through a structured operating
environment. Political risk can be reduced by creating a linkage of dependency between the operation
of the firm in high risk country and the operation of other units of the same firm in other countries. If
the unit in a high risk country is dependent on its sister units in other countries for the supply of
technology or raw material , the former is normally not nationalized so long dependency is maintained.
(4)Anticipatory Planning : Anticipatory planning is also useful tool in risk management. It is a fact
that the investing company takes necessary precautions against the political risk prior to the investment
or after the investment. But it is of utmost significance that it should plan the measures to be taken quite
(C) Risk Management following Nationalisation : Despite care taken by the international firms for
minimizing the impact of political risk, there are occasions when nationalization takes place. In such
cases, the investing company tries to minimize the effects of such a drastic measure. There are many
ways to do it.
(1)The investing company negotiates with the host government on various issues and shows its
willingness to support the policy and programmes of the latter. Sometimes the investing company
foregoes majority control in order to please the host government.
(2)Political and Economic Pressure : On failure of negotiation with the host government, the
investing company tries to put political and economic pressure.
(3)Arbitration : If nationalization is not reversed through negotiation and political-economic pressure,
the firm goes for arbitration. It involves the help of a neutral third party who mediates and asks for the
payment of compensation.
(4)Approach the Court of Law : When the arbitration fails, the only way out is to approach the court
of law. The international law suggests that the company has, first of all, to seek justice in the host
country itself. If it is not satisfied with the judgement of the court, the company can go to the
international court of justicefor fixation of adequate compensation.
There are wide variations between countries n the policies and regulations regarding the conduct of the
business. For example, certain trade practices or promotional methods/strategies allowed in some
countries may be regarded as unfair by the laws of some other countries. In many countries there is a lot
of restriction n the use of the media. Radio and Television, in particular are under State monopoly or
under strict state control in a number of countries. The advent of cable TV however, is creating
problems for regulation.
In most countries, apart from those laws that control investment and related matters, there are a number
of laws that regulate the conduct of the business. These laws cover such matters as standards of product,
packaging, promotion, ethics, ecological factors etc.
Business policies and regulations have much to do with the political system and the characteristics of
the political parties and politicians.
In many countries with a view to protecting consumer interests, regulations have become stronger.
Regulations to protect the purity of the environment and preserve the ecological balance have assumed
great importance in many countries.
Some governments specify certain standards for the products (including packaging) to be marketed in
the country: some even prohibit the marketing of certain products. In most nations promotional
activities are subject to various types of controls. Several European countries restrain the use of
children in commercial advertisement. In a number of countries, including India, the advertisement of
alcoholic liquor is prohibited. Advertisements, including packaging of cigarettes must carry the
statutory warning that cigarette smoking is injurious to health. Similarly, baby foods must not be
promoted as a substitute for breast feedings. In countries like Germany, product comparison
advertisements and the use of superlatives like best or excellent in advertisements is not allowed. In the
United States, the Federal Trade Commission is empowered to require a company to provide sufficient
evidence to substantiate the claim concerning the quality, performance or comparative prices of its
There area host of statutory controls on business in India. Although the controls have been substantially
brought down as a result of the liberalization, a number of controls still prevail.
Many countries today have laws to regulate competition in the public interest. Elimination of unfair
competition and dilution of monopoly power are the important objectives of these regulations.
Certain changes in government policies such as the industrial policy, fiscal policy, tariff policy etc. may
have profound impact on business. Some policy developments create opportunities as well as threats. In
other words, a development which brightens the prospects of some enterprises may pose a threat to
some others. For example, the industrial policy liberalizations in India have opened up new
opportunities and threats. They have provided a lot of opportunities to a large number of enterprises to
diversify and to make product mix better. But they have also given rise to serious threat to many
existing products by way of increased competition; many sellerâ€™s markets have given way to
buyerâ€™s markets. Even products which were seldom advertised have come to be promoted very
heavily. This battle for the market has provided a splendid opportunity for the advertising industry.
The legal systems that exist in different countries across the world may be classified into three
categories, viz, common law, civil law or code law, and theocratic law.
The basis for common law is tradition, past practices, and legal precedents set by the courts through
interpretations of statutes, legal legislation, and past rulings.
Code law, on the other hand, is based on an all-inclusive system of written rules (codes) of law. Under
code law, the legal system is generally divided into three separate codes: commercial, civil, and
criminal. The civil law system, also called a codified legal system, is based on a detailed set of laws that
make up a code. Rules for conducting business transactions are a part of the code.
The theocratic law system is based on religious precepts. The best example of this system is Islamic
law, which is found in Muslim countries. Islamic law, or Shairâ€™a, is based in the following sources:
The Koran, the sacred text; the Sunnah or decisions and sayings of the Prophet Mohammad; the
writings of Islamic scholars, who derive rules by analogy from the principles established in the Koran
ad the Sunnah; and the consensus of Muslim countriesâ€™ legal communities.
Human-Cultural Environment : Business is an integral part of society and both influence each other.
Human-Cultural Environment: Human cultural environment is studied into four parts:
Meaning of Culture : Culture represents the entire set of social norms and responses that dominate the
behavior of persons living in a particular geographic or political boundary. It is a fact that cultural
boundaries may differ from national/political boundaries because individuals with varying cultural
back-grounds may reside in a particular nation.
Culture as noted earlier represents the whole set of social norms and responses that shape the
o Behavior and
o The very way of life of a person or a group of persons.
Culture is not in-born. It is acquired and inculcated.
Elements of Culture : Based on the definition of culture, there are a few basic elements of culture.
These elements are universal, meaning that they from the cultural environment of all societies. But,
what is important is that they perform differently in different societies, leading ultimately to cultural
diversity across different societies. Czinkota et al list these elements as follows:
(1)Language : Language is the medium through which message is conveyed. It may be verbal or non-
verbal. The former includes the use of particular words or how the words are pronounced. When an
international manager gives the instructions to his subordinates, who normally come from the host
country, the instructions must be understood properly by the latter. There is no problem, if the language
spoken in the home country and the host country is similar. But normally it is not.
(2)Religion : Religion is another element of culture. Irrespective of forms, religion believes in a higher
power. It sets the ideals of life and thereby the values and attitude of individuals living in a society.
These values manifests in individual's behavior and performance.
(3)Education : The level of education in a particular culture depends primarily on the literacy rate and
on enrolment in schools and colleges. This element has a close relationship with the availability of
skilled manpower, availability of workers and managers who can be sent to the home country for
training, production of sophisticated products and with the adaptation of imported technology. If the
level of education is high in a particular society, it is easy for multinational firms to operate there. It is
because skilled manpower will be easily available, its training will be east and the firm will be able to
produce sophisticated goods.
(4)Attitude and Values : Values are belief and norms prevalent in a particular society. They determine
largely the attitude and behavior of individuals towards work, status, change and so on. In some
societies, where income and wealth are emphasized upon, people work for more hours ion order to earn
more. On the contrary, in societies where leisure is preferred, people work only for limited hours, just to
meet their essential wants necessary for survival. Again the attitude towards social status is an
important factor. Those who believe in higher social status spend even more and to this end they work
more and earn more.
(5)Customs : Customs and manners vary from one society to another. In the United State of America,
silence is taken as negation, while it is not so in Japan.
(6)Social Institutions : Social institutions form an integral part of culture. They are concerned mainly
with the size of the family and social stratification. In the United State of America and the United
Kingdom and most other developed countries, the size of the family is small, comprising of a husband,
wife and children. But in many other countries, especially in developing ones, grand parents too are a
part of the family. In yet another group of countries the family is larger comprising of cousins, aunts
and uncles. In India, the joint family system is still prevalent.
Cultural Diversity : In the preceding section, it has been mentioned how the various elements of
culture vary in different societies. In some societies, individualism motivates personal accomplishment,
while in others, the concept of the group is prominent. It is the cultural diversity that shapes the
managers as either risk averse or risk taking leaders. The former are conservative in their decisions,
while the latter are aggressive. Some managers give priority to long-term goals, while the others are
contended with achieving short-term goals. It is the cultural background that makes the two different
from each other. But it is important to know that why such diversity exists. To explain the bases of
diversity, a few of models have been developed.
(1)Hofstede's Study : Hofsede's study surveyed 117000 employees in 88 countries and suggests that
cultural diversity among nations has four dimensions. They are:
(2) Kluckhon and Strodtbeck's Study : Similarly, Kluckhon and Strodtbeck identify five problems
that tend to cultural diversity. They are:
(ii)Orientation towards time
(iii)Beliefs about human nature
(iv)Activity orientation of human being
(3) Fons Trompenaars' Study : Trompenaars' study covers 15,000 managers from 28 countries. It
concludes that cultural diversity is found because of the existence of a few relationship orientations
manifest in form of:
(i) Universalism vis-à-vis particularism
(ii) Neutralism vis-à-vis emotionalism, and
(iii)Achievement vis-à-vis ascription.
Diverse Culture and Competitive Advantage : If an MNC moves to a country with a similar cultural
envirornment, operational problems do not emerge on this count. But this is seldom a case. Generally,
the culture in the parent company's country is found to be different from that in the country where its
subsidiaries exist. This causes serious operational problems and effects the competitive advantage of
the firm, which lies at the very root of every MNC's success.
Cutural Diversity Impeding Competitive Advantage of an MNC :
(i) Poor communication between top managers and subordinates
(ii)Non-responsive attitude leading to inefficiency
(iii)Lack of responsiveness towards innovated product/technology
(iv)Buying pattern among consumers may not encourage large scale production
(v)Varying concept of human resource management may weaken employer-employee relationship
(vi)Varying culture, limiting the scope for advertisement/sales promotion campaign
Management of Cultural Diversity : Lee outlines a procedure for decision making in different
cultural setups. It is a four step model The successive steps are:
(i)To define the business goal from the home country perspective
(ii)To define the same goal from host country perspective
(iii)To compare the two and note the differences, and
(iv)To eliminate the difference and to find an optimal solution
Role of OPIC and MIGA
The Overseas Private Investment Corporation (OPIC) is the U.S. government‟s development finance
institution. It mobilizes private capital to help solve critical development challenges and, in doing so,
advances U.S. foreign policy. Because OPIC works with the private sector, it helps U.S. businesses gain
footholds in emerging markets, catalyzing revenues, jobs and growth opportunities both at home and
abroad. OPIC achieves its mission by providing investors with financing, guarantees, political risk
insurance, and support for private equity investment funds.
OPIC supports U.S. foreign policy objectives by encouraging development in regions that have
experienced instability or conflict, yet offer promising growth opportunities, such as the Middle East
and North Africa, sub‐Saharan Africa, and Southeast Asia. OPIC‟s work contributes to stability and
economic opportunity, which helps mitigate risk to U.S. companies investing abroad, and promotes a
positive developmental effect for the host countries.
OPIC operates on a self‐sustaining basis at no net cost to American taxpayers. It generated net income
of $269 million in Fiscal Year 2011,
helping to reduce the federal budget deficit for the
34th consecutive year. To date, OPIC has supported nearly $200 billion of investment in more than
4,000 projects, generated $75 billion in U.S. exports and supported more than 276,000 American jobs.
Multilateral Investment Guarantee Agency (MIGA)
The Multilateral Investment Guarantee Agency (MIGA) is an international financial institution
which offers political risk insurance guarantees. Such guarantees help investors protect foreign direct
investments against political and non-commercial risks in developing countries. MIGA is a member of
the World Bank Group and is headquartered in Washington, D.C., United States. It was established in
1988 as an investment insurance facility to encourage confident investment in developing countries.
MIGA's stated mission is "to promote foreign direct investment into developing countries to support
economic growth, reduce poverty, and improve people's lives". The agency focuses on member
countries of the International Development Association and countries affected by armed conflict. It
targets projects that endeavor to create new jobs, develop infrastructure, generate new tax revenues, and
take advantage of natural resources through sustainable policies and programs.
MIGA is owned and governed by its member states, but has its own executive leadership and staff
which carry out its daily operations. Its shareholders are member governments which provide paid-in
capital and have the right to vote on its matters. It insures long-term debt and equity investments as well
as other assets and contracts with long-term periods. The agency is assessed by an independent
evaluator each year. Its 2011 evaluation recommended that it utilize its recently expanded investing
capacity and closely monitor projects' profitability to better understand their impacts on its financial
performance. MIGA's total investments amounted to $1.1 billion in 2011. It issued $2.1 billion worth of
new investment guarantees in 2011 and held $1.5 million in total assets.
WIPO-administered systems of international protection significantly simplify the process for
simultaneously seeking IP protection in a large number of countries. Rather than filing national
applications in many languages, the systems of international protection enable you to file a single
application, in one language, and to pay one application fee. These international filing systems not only
facilitate the process but also, in the case of marks and industrial designs, considerably reduce your
costs for obtaining international protection (in the case of patents, the PCT helps your SME in gaining
time to assess the commercial value of your invention before national fees are to be paid in the national
phase). WIPO-administered systems of international protection include three different mechanisms of
protection for specific industrial property rights.
International protection of inventions is provided under the PCT system, the worldwide
system for simplified multiple filing of patent applications. By filing one international patent
application under the PCT, you actually apply for protection of an invention in each of a large
number of member countries (now more than one hundred) throughout the world.
International protection of trademarks is provided under the "Madrid system." The Madrid
system simplifies greatly the procedures for registering a trademark in multiple countries that
are party to the Madrid system. An international registration under the Madrid system produces
the same effects as an application for registration of the mark filed in each of the countries
designated by the applicant and, unless rejected by the office of a designated country within a
certain period, has the same effect in that country as a registration in the Trademark Registry of
International protection of industrial designs is provided by the Hague Agreement. This
system gives the owner of an industrial design the possibility to have his design protected in
several countries by simply filing one application with the International Bureau of WIPO, in one
language, with one set of fees in one currency.
Commodity Agreements, trading blocks, International trade, trade barriers – tariff and non-tariff, trade
and international investments; types of foreign investments and factor affecting it.
An international commodity agreement is an undertaking by a group of countries to stabilize trade,
supplies, and prices of a commodity for the benefit of participating countries. An agreement usually
involves a consensus on quantities traded, prices, and stock management. A number of international
commodity agreements serve solely as forums for information exchange, analysis, and policy
USTR leads United States participation in two commodity trade agreements: the International Tropical
Timber Agreement and the International Coffee Agreement (ICA). Both agreements establish
intergovernmental organizations with governing councils.
A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental
organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated
among the participating states.[
Regional trade blocs are intergovernmental associations that manage and promote trade activities for
specific regions of the world.
Trade bloc activities have political as well as economic implications. For example, the European Union,
the world‟s largest trading block, has “harbored political ambitions extending far beyond the free
trading arrangements sought by other multistage regional economic organizations“ (Gibb and Michalak
1994: 75). Indeed, the ideological foundations that gave birth to the EU were based on ensuring
development and maintaining international stability, i.e., the containment of communist expansion in
post World War II Europe (Hunt 1989). The Maastricht Treaty which gave birth to the EU in 1992
included considerations for joint policies in regard to military defense and citizenship.
The decisions reached by development policy makers on whether regionalism or globalized trade
should be pursued may influence a country‟s earnings from trade.
Regionalism differs from globalization in the size and area of markets. From the perspective of
developing countries skeptical of free trade, regional trade blocs offer some form of protection against
an aggressive global market.
Four major trade blocs:-
Some well known trading blocs include the EU (European Union; see Map 1), NAFTA (North
American Free Trade Agreement; see Map 2), MERCOSUR (Mercado Comun del Cono Sur, also
known as Southern Common Markets (SCCM); see Map 3), and ASEAN (Association of Southeast
Asian Nations; see Map 4). The following maps show trade data for 2001 (UNCTAD 2002). The series
of pie charts display the export composition of trade from each country in the bloc.
Interregional trade is trade that takes place between two or more regions.
The exports and imports of a region. Measurement and meaning confound the use of the term
interregional trade: first, the measure of gross exports, the out-shipments of goods and services to
producers and consumers outside a region; second, the measure of gross imports, the in-shipments of
goods and services for the use of economic units inside the region. Apropos to both measures is the
concept of the region itself. In an economic sense, a region is a collection of local labor market areas or
the commuting areas of central places that are the areas‟ trade centers. Further distinctions refer to rural
versus urban and metropolitan regions.
The trading region includes the infrastructure of commerce as well as the export-producing businesses,
their workers and production facilities, and a host of residential activities catering to these businesses
and their workers and households. All are important participants in the initiation and support of
interregional trade, the inevitable result of businesses and workers exercising their particular
competitive advantage through remunerative product specialization. We therefore address the topic by
defining and identifying interregional trade within and between trading regions and, finally, accounting
for the variability and value of interregional trade arising from the product specialization of its export-
producing businesses and industries.
Trade Barriers : Tariff and Non- Tariff
International trade increases the number of goods that domestic consumers can choose from, decreases
the cost of those goods through increased competition, and allows domestic industries to ship their
products abroad. While all of these seem beneficial, free trade isn't widely accepted as completely
beneficial to all parties. This article will examine why this is the case, and look at how countries react to
the variety of factors that attempt to influence trade. (To start with a discussion on trade, see What Is
International Trade? and The Globalization Debate.)
What Is a Tariff?
In simplest terms, a tariff is a tax. It adds to the cost of imported goods and is one of several trade
policies that a country can enact.
Why Are Tariffs and Trade Barriers Used?
Tariffs are often created to protect infant industries and developing economies, but are also used by
more advanced economies with developed industries. Here are five of the top reasons tariffs are used:
1. Protecting Domestic Employment
The levying of tariffs is often highly politicized. The possibility of increased competition from
imported goods can threaten domestic industries. These domestic companies may fire workers
or shift production abroad to cut costs, which means higher unemployment and a less happy
electorate. The unemployment argument often shifts to domestic industries complaining about
cheap foreign labor, and how poor working conditions and lack of regulation allow foreign
companies to produce goods more cheaply. In economics, however, countries will continue to
produce goods until they no longer have a comparative advantage (not to be confused with an
2. Protecting Consumers
A government may levy a tariff on products that it feels could endanger its population. For
example, South Korea may place a tariff on imported beef from the United States if it thinks that
the goods could be tainted with disease.
3. Infant Industries
The use of tariffs to protect infant industries can be seen by the Import Substitution
Industrialization (ISI) strategy employed by many developing nations. The government of a
developing economy will levy tariffs on imported goods in industries in which it wants to foster
growth. This increases the prices of imported goods and creates a domestic market for
domestically produced goods, while protecting those industries from being forced out by more
competitive pricing. It decreases unemployment and allows developing countries to shift from
agricultural products to finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the
development of infant industries. If an industry develops without competition, it could wind up
producing lower quality goods, and the subsidies required to keep the state-backed industry
afloat could sap economic growth.
4. National Security
Barriers are also employed by developed countries to protect certain industries that are deemed
strategically important, such as those supporting national security. Defense industries are often
viewed as vital to state interests, and often enjoy significant levels of protection. For example,
while both Western Europe and the United States are industrialized, both are very protective of
Countries may also set tariffs as a retaliation technique if they think that a trading partner has
not played by the rules. For example, if France believes that the United States has allowed its
wine producers to call its domestically produced sparkling wines "Champagne" (a name specific
to the Champagne region of France) for too long, it may levy a tariff on imported meat from the
United States. If the U.S. agrees to crack down on the improper labeling, France is likely to stop
its retaliation. Retaliation can also be employed if a trading partner goes against the
government's foreign policy objectives.
Types of Tariffs and Trade Barriers
There are several types of tariffs and barriers that a government can employ:
Ad valorem tariffs
Voluntary export restraints
Local content requirements
A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary
according to the type of good imported. For example, a country could levy a $15 tariff on each pair of
shoes imported, but levy a $300 tariff on each computer imported.
Ad Valorem Tariffs
The phrase ad valorem is Latin for "according to value", and this type of tariff is levied on a good based
on a percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied
by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000
vehicle now costs $11,500 to Japanese consumers. This price increase protects domestic producers from
being undercut, but also keeps prices artificially high for Japanese car shoppers.
Non-tariff barriers to trade include:
A license is granted to a business by the government, and allows the business to import a certain type of
good into the country. For example, there could be a restriction on imported cheese, and licenses would
be granted to certain companies allowing them to act as importers. This creates a restriction on
competition, and increases prices faced by consumers.
An import quota is a restriction placed on the amount of a particular good that can be imported. This
sort of barrier is often associated with the issuance of licenses. For example, a country may place a
quota on the volume of imported citrus fruit that is allowed.
Voluntary Export Restraints (VER)
This type of trade barrier is "voluntary" in that it is created by the exporting country rather than the
importing one. A voluntary export restraint is usually levied at the behest of the importing country, and
could be accompanied by a reciprocal VER. For example, Brazil could place a VER on the exportation
of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation
of coal to Brazil. This increases the price of both coal and sugar, but protects the domestic industries.
Local Content Requirement
Instead of placing a quota on the number of goods that can be imported, the government can require
that a certain percentage of a good be made domestically. The restriction can be a percentage of the
good itself, or a percentage of the value of the good. For example, a restriction on the import of
computers might say that 25% of the pieces used to make the computer are made domestically, or can
say that 15% of the value of the good must come from domestically produced components.
Trade and International Investment
The strategy of selecting globally-based investment instruments as part of an investment portfolio.
International investing includes such investment vehicles as mutual funds, American Depository
Receipts, exchange-traded funds (ETFs) or direct investments in foreign markets. People often invest
internationally for diversification, to spread the investment risk among foreign companies and markets;
and for growth, to take advantage of emerging markets.
Most investors tend to invest in what they know. This isn't necessarily a bad thing as it's important to
have a good understanding of your investments; however, it becomes detrimental when the blinders are
put on and people refrain from learning about other investments. International investing, in particular, is
a strategy sometimes overlooked by investors as a means of diversification.
With all the volatility found in stock markets, it's difficult enough to pick winning stocks let alone
winning economies. This is where diversification through international investing can help. Every year,
the economic performance of a country will fluctuate and this undoubtedly affects the stock market. By
buying securities in different markets as opposed to purchasing only U.S. stocks and bonds, you can
reduce the impact of country or region-specific economic problems. (For more information, see Can
You "Learn" The Stock Market?)
Take a look at the following chart:
Canada S&P TSX
1993 18.8% 9.7% 30% 24.3%
1994 -7.8% -2.3% -11.8% -14.3%
1995 11.6% 35.8% 23.7% 25.7%
1996 -11.9% 23.6% 23% 13.7%
1997 -12% 24.7% 9.7% 27.7%
1998 -12.8% 30.5% 0.4% 8%
1999 35% 9% 26% 6.3%
This chart outlines the percentage returns on the indexes of international exchanges. With careful
inspection, we can see that the magnitude and direction of returns for these four indexes don't always
coincide. There are years when one index is up while another is down, and other times when an index
rises by nearly 36% while others rise only by 12%. By participating in these other markets, that is,
through purchasing securities from other countries, an investor can, with the added benefit of higher
returns in foreign exchanges, add some protection against a national downturn in the U.S. economy.
Different Types of International Investments
There are numerous ways in which the ordinary investor can invest in foreign markets without having
too much trouble. Here are a few of the major types offered by most brokerages.
American Depositary Receipts (ADRs)
American depositary receipts are used by foreign countries unable to list on the NYSE or Nasdaq,
which have domestic country regulations. ADRs mimic their domestic stocks very closely, and offer
you a way of investing internationally without actually buying stock from a foreign exchange. One
ADR found on the NYSE is Nokia (NYSE:NOK). This company tracks its parent stock on the Helsinki
Exchange almost identically, allowing investors the convenience of international diversification without
actually leaving American exchanges.
Exchange-Traded Funds (ETFs)
These investments offer a wide variety of international flavors. You can buy ETFs that track most of
the major foreign indexes, and they allow investors to obtain a return based on a specific foreign market
without having too great of an exposure. Also, because they trade and work like any other ETF, they
aren't expensive to trade and are relatively liquid.
International stock funds are comparable to international ETFs as they also provide for diversification
but have same drawbacks and benefits that are associated with regular funds and ETFs. One thing to
remember is that in these international funds, a hired professional portfolio manager is in charge and
decides what to place in the portfolio. Be sure you do your research before buying such a fund to make
sure that these investments and the trading strategy of the fund are in line with your preferences.
Many brokerage firms will offer investors the ability to buy investments from different countries
directly from the brokerage's international trading desk. So, if you wanted to buy a stock in a company
that doesn't trade on American markets, you can inquire with your brokerage to see if it will facilitate
the trade for you through one of the brokerage's affiliated international companies that has a
membership on the foreign exchange or market. Because these trades are typically more expensive and
less liquid than regular domestic trades, you should carefully check out all of the other alternatives
before you decide to do it this way.
Not recommended for the beginner investor, these are bonds issued in foreign markets by domestic
companies. An example of this would be if Sony were to issue a bond that matures in yen for American
investors. Eurobonds don't always offer higher yields than domestic bonds, and they are only as secure
as the company issuing them, but they are a way you can participate in a foreign fixed-income market.
One of the main reasons that beginner investors should be wary of these bonds is that they pay a foreign
currency that the investor will probably have to exchange.
International investment or capital flows fall into four principal categories: commercial loans, official
flows, foreign direct investment (FDI), and foreign portfolio investment (FPI).
Commercial loans, which primarily take the form of bank loans issued to foreign businesses or
Official flows, which refer generally to the forms of development assistance that developed nations give
to developing ones.
Foreign direct investment (FDI) pertains to international investment in which the investor obtains a
lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or
constructing a factory in a foreign country or adding improvements to such a facility, in the form of
property, plants, or equipment.
FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks, as well as
the reinvestment of earnings by a wholly owned company incorporated abroad (subsidiary), and the
lending of funds to a foreign subsidiary or branch. The reinvestment of earnings and transfer of assets
between a parent company and its subsidiary often constitutes a significant part of FDI calculations.
According to the United Nations Conference on Trade and Development (UNCTAD), the global
expansion of FDI is currently being driven by over 65,000 transnational corporations with more than
850,000 foreign affiliates.
An investor‟s earnings on FDI take the form of profits such as dividends, retained earnings,
management fees and royalty payments.
Foreign portfolio investment (FPI), on the otherhand is a category of investment instruments that is
more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise.
These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise which
does not necessarily represent a long-term interest.
holder owns a part of a company
possible voting rights
open-ended holding period
ownership of bond rights only
no voting rights
specific holding period
While FDI tends to be commonly undertaken by multinational corporations, FPI comes from my
diverse sources such as a small company‟s pension or through mutual funds held by individuals.
The returns that an investor acquires on FPI usually take the form of interest payments or dividends.
Investments in FPI that are made for less than one year are distinguished as short-term portfolio flows.
FPI flows tend to be more difficult to calculate definitively, because they comprise so many different
instruments, and also because reporting is often poor. Estimates on FPI totals generally vary from levels
equaling half of FDI totals, to roughly one-third more than FDI totals.
The difference between FDI and FPI can sometimes be difficult to discern, given that they may overlap,
especially in regard to investment in stock. Ordinarily, the threshold for FDI is ownership of “10
percent or more of the ordinary shares or voting power” of a business entity (IMF Balance of Payments
Calculating Investment: Calculations of FDI and FPI are typically measured as either a “flow,”
referring to the amount of investment made in one year, or as “stock,” measuring the total accumulated
investment at the end of that year.
Until the 1980s, commercial loans from banks were the largest source of foreign investment in
developing countries. However, since that time, the levels of lending through commercial loans have
remained relatively constant, while the levels of global FDI and FPI have increased dramatically. Over
the period 1991-1998, FDI and FPI comprised 90 percent of the total capital flows to developing
countries. Over the period of 1996-2006, FDI and FPI outflows from the United States more than
doubled (International Monetary Fund, 2007). Global FDI flows decreased significantly from 2007-
2009 due to the Financial Crisis and finally started rising again in 2010.
Similarly, when viewed against the tremendous and growing volume of FDI and FPI, the funds
provided in the past by governments through official development assistance, or lending by commercial
banks the World Bank or IMF, are diminishing in importance with each passing year. Therefore, when
one talks about the recent phenomenon of globalization, one is referring in large part to the effects of
FDI and FPI, and these two instruments will therefore be the primary focus of this Issue in Depth.
Aside from allocating assets amongst different securities and industries, international investing is a
good alternative for diversification. It reduces the impact investors experience from the downturn of a
specific economy and helps to increase returns on portfolios concentrated in domestic markets that are
no longer growing at a rapid rate. Furthermore, the availability for international products has increased
dramatically with the globalization of equity markets, so even the average investor can take advantage
of the benefits without paying too much. Before you decide upon diversifying internationally, be sure
you research your investment closely so that you can make an informed decision.
Factors affecting Foreign Investment
Factors Affecting Foreign investment Decision
(1) Stable, predictable macro economic policy.
(2) An effective and honest government.
(3) A large and growing market.
(4) Freedom of activity in the market.
(5) Minimal government regulation.
(6) Property rights at1d protection.
(7) Reliable 'infrastructure:
(8) Availability of high-quality factors of production.
(9) A strong local currency.
(10) The ability to remit profits, dividends and interest.
(11) A fayourable tax climate.
(12) Freedom to operate between markets
International finance environment; main exchange rate regimes; International monetary system and
IMF; European monetary system and the „Euro‟; World bank (IBRD, IDA & IFC); Euro Markets and
International Finance Environment
An international financial environment represents the conditions for activity in the economy or in the
financial markets around the world. It can be influenced by something major, such as the credit
worthiness of one country's debt. Governments, corporations, and other investors around the world
participate in purchasing the debt of other nations as profit opportunities arise. A downgrade of a
country's debt by a rating's agency could damage the value of that country's debt and suggest that a
default might be imminent. These conditions have the potential to trigger a sell-off, which is when there
are more sellers than buyers of risky debt in the markets.
A brief definition of the global financial system (GFS) is: The financial system consisting of
institutions, their customers, and financial regulators that act on a global level.
The WHO defines it as "...various official and legal arrangements that govern international financial
flows in the form of loan investment, payments for goods and services, interest and profit remittances.
The main elements are the surveillance and monitoring of economic and financial stability, and
provision of multilateral finance to countries with balance of payments difficulties. The organization at
the centre of the system is the International Monetary Fund (IMF), which has the mandate to ensure its
The Financial Times lexicon defines it as:"..interplay of financial companies, regulators and
institutions operating on a supranational level. The global financial system can be divided into
regulated entities (international banks and insurance companies), regulators, supervisors and
institutions like the European Central Bank or the International Monetary Fund.The system also
includes the lightly regulated or non-regulated bodies - this is known as the “shadow banking” system.
Mainly, this covers hedge funds, private equity and bank sponsored entities such as off-balance-sheet
vehicles that banks use to invest in the financial markets."
The term global is often used synonymously with the terms "international" or "multinational".
Economists do not have a standard definition for a global versus a multinational company. 
Main Exchange Rate Regims
An exchange-rate regime is the way an authority manages its currency in relation to other currencies
and the foreign exchange market. It is closely related to monetary policy and the two are generally
dependent on many of the same factors.
The basic types are a floating exchange rate, where the market dictates movements in the exchange rate;
a pegged float, where a central bank keeps the rate from deviating too far from a target band or value;
and a fixed exchange rate, which ties the currency to another currency, mostly more widespread
currencies such as the U.S. dollar or the euro or a basket of currencies.
Floating rates are the most common exchange rate regime today. For example, the dollar, euro, yen, and
British pound all are floating currencies. However, since central banks frequently intervene to avoid
excessive appreciation or depreciation, these regimes are often called managed float or a dirty float.
Pegged floating currencies are pegged to some band or value, either fixed or periodically adjusted.
Pegged floats are:
The rate is allowed to fluctuate in a band around a central value, which is adjusted periodically. This is
done at a preannounced rate or in a controlled way following economic indicators.
Fixed rates are those that have direct convertibility towards another currency. In case of a separate
currency, also known as a currency board arrangement, the domestic currency is backed one to one by
foreign reserves. A pegged currency with very small bands (< 1%) and countries that have adopted
another country's currency and abandoned its own also fall under this category.
Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of
the domestic currency. The term is not only applied to usage of the United States dollar, but generally
to the use of any foreign currency as the national currency. Zimbabwe is a good example of
dollarization since the collapse of the Zimbabwean dollar.
International Monetary System
International monetary systems are sets of internationally agreed rules, conventions and supporting
institutions, that facilitate international trade, cross border investment and generally the reallocation of
capital between nation states. They provide means of payment acceptable between buyers and sellers of
different nationality, including deferred payment. To operate successfully, they need to inspire
confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which
global imbalances can be corrected. The systems can grow organically as the collective result of
numerous individual agreements between international economic factors spread over several decades.
Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944.
The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world.
The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at
the Bretton Woods Conference and formally created in 1945 by 29 member countries. The IMF's stated
goal was to stabilize exchange rates and assist the reconstruction of the world‟s international payment
system post-World War II. Countries contribute money to a pool through a quota system from which
countries with payment imbalances can borrow funds temporarily. Through this activity and others such
as surveillance of its members' economies and policies, the IMF works to improve the economies of its
The IMF describes itself as “an organization of 188 countries, working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce poverty around the world.”
organization's stated objectives are to promote international economic cooperation, international trade,
employment, and exchange rate stability, including by making financial resources available to member
countries to meet balance of payments needs.
Its headquarters are in Washington, D.C., United States.
The IMF works to foster global growth and economic stability. It provides policy advice and financing
to members in economic difficulties and also works with developing nations to help them achieve
macroeconomic stability and reduce poverty.
The rationale for this is that private international
capital markets function imperfectly and many countries have limited access to financial markets. Such
market imperfections, together with balance of payments financing, provide the justification for official
financing, without which many countries could only correct large external payment imbalances through
measures with adverse effects on both national and international economic prosperity.
The IMF can
provide other sources of financing to countries in need that would not be available in the absence of an
economic stabilization program supported by the Fund.
Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange rate
arrangements between countries,
thus helping national governments manage their exchange rates and
allowing these governments to prioritize economic growth,
and to provide short-term capital to aid
This assistance was meant to prevent the spread of international economic
crises. The Fund was also intended to help mend the pieces of the international economy post the Great
Depression and World War II.
The IMF‟s role was fundamentally altered after the floating exchange rates post 1971. It shifted to
examining the economic policies of countries with IMF loan agreements to determine if a shortage of
capital was due to economic fluctuations or economic policy. The IMF also researched what types of
government policy would ensure economic recovery.
The new challenge is to promote and
implement policy that reduces the frequency of crises among the emerging market countries, especially
the middle-income countries that are open to massive capital outflows.
Rather than maintaining a
position of oversight of only exchange rates, their function became one of “surveillance” of the overall
macroeconomic performance of its member countries. Their role became a lot more active because the
IMF now manages economic policy instead of just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their policy of conditionality,
which was established in the 1950s.
Low-income countries can borrow on concessional terms, which
means there is a period of time with no interest rates, through the Extended Credit Facility (ECF), the
Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF). Nonconcessional loans, which
include interest rates, are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit
Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility. The IMF
provides emergency assistance via the newly introduced Rapid Financing Instrument (RFI) to all its
members facing urgent balance of payments needs.
European Monetary System and Euro
The European Monetary System (EMS) was the forerunner of Economic and Monetary Union (EMU),
which led to the establishment of the Euro. It was a way of creating an area of currency stability
throughout the European Community by encouraging countries to co-ordinate their monetary policies.
It used an Exchange Rate Mechanism (ERM) to create stable exchange rates in order to improve trade
between EU member states and thus help the development of the single market. Stable money had been
a key part of international economic calculations since World War II. However, by the 1980s, opinion
about it was much more divided. As a result, not all countries took part in the EMS straight away, and
there were deeper splits in the years to come over the role of the EU in setting monetary policy as the
EMS was replaced with the Euro.
The EMS was launched in 1979 to help lead to the ultimate goal of EMU that had been set out in the
Werner Report (1970). Since World War II, attempts had been made to maintain currency stability
amongst major currencies through a system of fixed exchange rates called the Bretton Woods System.
This collapsed in the early 1970s. However, European leaders were keen to maintain the principle of
stable exchange rates rather than moving to the policy of floating exchange rates that was gaining
popularity in the USA. This led them to create the EMS. It was not an entirely successful move
because, firstly, it posed many technical difficulties in setting the correct rate for all member states, and
secondly, some members were less committed to it than others. Britain didn't join the ERM until 1990
and was forced to leave it in 1992 because it could not keep within the exchange rate limits. The
project, however, continued: under the Maastricht Treaty (1992), the EMS became part of the wider
project for EMU that was developed during the 1990s. When the Euro came into being in 1999, the
EMS was effectively wound up, although the ERM remained in operation.
How did the European Monetary System work?
The most important part of the EMS was the Exchange Rate Mechanism. This committed all member
states' governments to keep their currency exchange rates within bands. This meant that no country's
exchange rate could fluctuate more than 2.25% from a central point. This was designed to help create
stable commerce without the fear that sudden changes in the values of currencies would dampen trade
and encourage the development of trading barriers between member states.
It also created a European Currency Unit (ECU) to be used as a unit of account. Although not a real
currency, the ECU became the basis for the idea of creating a single currency - an idea that was realised
with the launch of the Euro in 1999.
The World Bank is an international financial institution that provides loans
to developing countries
for capital programs.
The World Bank's official goal is the reduction of poverty. According to the World Bank's Articles of
Agreement (as amended effective 16 February 1989), all of its decisions must be guided by a
commitment to promote foreign investment, international trade, and facilitate capital investment.
The World Bank differs from the World Bank Group, in that the World Bank comprises only two
institutions: the International Bank for Reconstruction and Development (IBRD) and the International
Development Association (IDA), whereas the latter incorporates these two in addition to three more:
International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and
International Centre for Settlement of Investment Disputes (ICSID).
International Bank for Reconstruction and Development
The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-
income countries and creditworthy poorer countries by promoting sustainable development through
loans, guarantees, risk management products, and analytical and advisory services. Established in 1944
as the original institution of the World Bank Group, IBRD is structured like a cooperative that is owned
and operated for the benefit of its 188 member countries.
IBRD raises most of its funds on the world's financial markets and has become one of the most
established borrowers since issuing its first bond in 1947. The income that IBRD has generated over the
years has allowed it to fund development activities and to ensure its financial strength, which enables it
to borrow at low cost and offer clients good borrowing terms.
The oldest of the World Bank agencies - the International Bank for Reconstruction and Development
(IBRD) - was set up in 1944 at a conference convened in the town of Bretton Woods, New Hampshire,
at the end of the Second World War with the original intention of providing low interest loans to
Europe and Japan to help rebuild their infrastructure after the devastation of the war. This plan was
scuppered when these countries opted instead to take money from the United States Marshall Plan,
which provided grants (money that does not have to be repaid), for the same purpose. Over the next
few decades the IBRD rewrote its original mandate to provide cheap loans to the Third World instead.
The two men who shaped the institution were probably John Maynard Keynes, the brains behind the
Bretton Woods conference (also the architect of the Gross National Product economic indicator) and
Robert McNamara, who headed up the World Bank in the 1970s, after he left his job at the Pentagon
spearheading the Vietnam War for the United States. Today the IBRD's policies are dictated by the
member countries who run the institution. Although almost every country in the world is a member, the
agency is ruled on the principal "one dollar, one vote" and so it is controlled by the US, the UK, Japan,
Germany, France, Canada, and Italy -- the "Group of 7," which holds over 40% of the votes on their
In fiscal 1999, the IBRD loaned out US$22.2 billion, up from US$21 billion dollars the previous year,
making it the biggest source of development capital for Third World countries and the former Soviet
bloc. Many of these loans are for major industrial development projects like dam building, power plants
and mining for non-renewable resources like gold and copper. In addition the IBRD dispenses loans for
social matters such as education and health but these loans are often linked to strict economic policies
such as Structural Adjustment Programs that have often exacerbated local problems. Finally because
these loans are often designed in Washington by the Bank's own staff, they often reflect theoretical
models that have little relevance in the borrowing countries.
A leaked May 1999 draft Bank review of structural and sectoral adjustment loans severely criticized
their treatment of environmental and social issues. The review assessed 54 such loans approved
between July 1997 and December 1998 and found that only 20% contained a environmental goals or
conditionalities - down from 60% in 1994. Furthermore, according to the document, ''the majority of
loans do not address poverty directly, the likely economic impact of proposed operations on the poor,
or ways to mitigate negative effects of reform.''
Although most projects did achieve their short-term physical objectives, according to the report, only
44% were likely to be sustained after completion - largely because staff appraisals underestimated the
projects' recurrent costs, which would have to be borne by the agency's borrowers.
The IBRD makes loans to countries at the best possible market rates because its bonds have the highest
possible credit rating on Wall Street. The agency has this high rating because almost all its borrowers
pay their loans back on time, although the way many borrowers do this is by taking out fresh loans. In
fact the Bank often receives more money in debt repayments than it makes in loans. Contrary to public
opinion, the agency is not even a non-profit organization: the Bank routinely makes a billion dollars in
profits every year on the loans it makes.
IBRD has three major sister agencies - the International Development Agency (IDA), the International
Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency. These four and the
much smaller International Center for the Settlement of Investment Disputes (ICSID) make up the
World Bank group. Unlike the IBRD the IDA makes loans at almost no interest over much longer
periods of time (a 0.5% handling fee is charged) to the poorest countries. This agency loaned out
US$6.8 billion dollars in fiscal 1999, down from the US$7.5 billion dollars that it loaned out in 1998.
The IFC and MIGA do not make loans to countries. Instead the IFC makes loans to private
corporations that have projects in the Third World and former Soviet bloc. This includes major
multinational corporations like Shell and Coca-Cola. MIGA provides political risk insurance to
companies that are worried that their assets may be seized by local governments or destroyed in war or
other civil disturbances.
The region that received the most loans from IBRD and IDA was East Asia and the Pacific, struggling
to recover from the financial crisis of 1997-98, with US$9.8 billion, followed by Latin America and the
Caribbean with US$7.7 billion. The region suffered ripple effects from the East Asian meltdown as
well as the ravages of Hurricane Mitch, which struck Central America in October, 1998. Europe and
Central Asia came third, with US$5.3 billion in new commitments, followed by South Asia US$2.6
billion, sub- Saharan Africa with US$2.1 billion and the Middle East and North Africa with US$1.6
Argentina is the Bank's largest borrower with US$3.2 billion in commitments from the Bank in fiscal
1999, followed by Indonesia, with US$2.7 billion in commitments, China with US$2.1 billion, South
Korea with US$2 billion, Russia with US$1.9 billion, Brazil with US$1.7 billion, Thailand with
US$1.3 billion, India with US$1.1 billion, Bangladesh US$1 billion, and Mexico with US$950 million.
Financing designed to support over-arching policy themes such as privatization of state enterprises and
commercialization of services dominated the new commitments, with loans for 'multi- sector' projects
and policy reforms amounting to US$10.3. Some US$4.5 billion went to transportation, industrial, oil
and gas, energy and mining projects, with another US$2.8 billion for agriculture, US$753 million for
water and sanitation and US$647 million dollars for urban development. Population, health and
nutrition projects accounted for another US$1.1 billion dollars. Education garnered US$1.3 billion and
US$2.7 billion were earmarked for social programs. Environmental lending amounted to US$540
The International Finance Corporation (IFC) is an international financial institution which offers
investment, advisory, and asset management services to encourage private sector development in
developing countries. The IFC is a member of the World Bank Group and is headquartered in
Washington, D.C., United States. It was established in 1956 as the private sector arm of the World
Bank Group to advance economic development by investing in strictly for-profit and commercial
projects which reduce poverty and promote development. The IFC's stated aim is to create opportunities
for people to escape poverty and achieve better living standards by mobilizing financial resources for
private enterprise, promoting accessible and competitive markets, supporting businesses and other
private sector entities, and creating jobs and delivering necessary services to those who are poverty-
stricken or otherwise vulnerable. Since 2009, the IFC has focused on a set of development goals which
its projects are expected to target. Its goals are to increase sustainable agriculture opportunities,
improve health and education, increase access to financing for microfinance and business clients,
advance infrastructure, help small businesses grow revenues, and invest in climate health.
The IFC is owned and governed by its member countries, but has its own executive leadership and staff
which conduct its normal business operations. It is a corporation whose shareholders are member
governments which provide paid-in capital and which have the right to vote on its matters. Originally
more financially integrated with the World Bank Group, the IFC was established separately and
eventually became authorized to operate as a financially autonomous entity and make independent
investment decisions. It offers an array of debt and equity financing services and helps companies face
their risk exposures, while refraining from participating in a management capacity. The corporation also
offers advice to companies on making decisions, evaluating their impact on the environment and
society, and being responsible. It advises governments on building infrastructure and partnerships to
further support private sector development.
The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report
recognized that its investments performed well and reduced poverty, but recommended that the
corporation define poverty and expected outcomes more explicitly to better-understand its effectiveness
and approach poverty reduction more strategically. The corporation's total investments in 2011
amounted to $18.66 billion. It committed $820 million to advisory services for 642 projects in 2011,
and held $24.5 billion worth of liquid assets. The IFC is in good financial standing and received the
highest ratings from two independent credit rating agencies in 2010 and 2011.
Euro Markets and their working
These can broadly be classified as Eurocurrency and Eurobond markets. We want to focus on how
MNCs can use these international markets to meet their financing requirements.
Euromarkets (occasionally called „xenomarkets‟) are markets on which banks deal in a currency other
than their own. For example, eurodollars are dollars held by banks outside the United States. The prefix
„euro‟ refers to the fact that such deposits first appeared in Europe in around 1955. The origins of the
eurodollar are traceable partly to the Cold War, when the USSR (in particular) desperately needed
international liquidity – dollars - but did not want to hold them in the United States. The rise of the
dollar as an international currency encouraged companies world-wide to hold dollar cash reserves, and
banks to ask for dollars on deposit. Some countries decided that such deposits did not need to be so
closely regulated as deposits in the national currency because they did not affect the internal money
supply. This produced a very liberal loan market, particularly in comparison with the prevailing heavy
post-war regulation. On top of that, America‟s Q regulation (put in place by the 1933 Glass Steagall
Act) set a ceiling on the interest rates payable on bank deposits and so savers looked for more attractive
rates elsewhere. Similarly, eurobonds benefited from an equalisation tax imposed in 1963 on interest
payable on foreign issues placed in the USA.