INTERNATIONAL BUSINESS - MG UNIVERSITY 3RD SEMESTER - FULL NOTES

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INTERNATIONAL BUSINESS
MODULE - I
Introduction to International Business – Nature & Dimension of International
business –Environment of International Business – Economical, Political,
Demographical, Global,Social, Cultural, Technological, Legal – Entry strategies
for International Business.
MODULE - II
Process ofGlobalization – Globalizations of Indian Business – WTO, Regional
block –International commodity agreement – Global Trade – Global Supply Chain
and LogisticsManagement – Investment Environment.
MODULE - III
International Economic Institutions – IMF, World Bank, UNCTD, UNIDO – Asian
Development Bank, - International Trade centre – Foreign Exchange Market
Mechanism– Determinants of Exchange rate.
MODULE - IV
Export and Import Procedure – Licensing & Joint ventures - International
Investment –FDI – Productionlinkages, Foreign – Investment in India, Cross
Border – Forex reserve– Over view of Currency Exchange and Risk Management.
MODULE - V
Social responsibility of business,. Country Evaluation & Selection – International
Asset Protection, Foreign Trade Policy, Social issues in International Business,
Labour issues,Environmental issues.

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MODULE- 1
INTERNATIONAL BUSINESS
• Product presence in different markets of the world.
• Production bases across the globe.
• Human resource to contain high diversity.
• Investment in international services like banking, advertising, tourism, retailing and process
technology.
• Transactions involving intellectual properties such as copyrights, patents,trademarks and process
technology.
NEED FOR INTERNATIONAL BUSINESS
• causes the flow of ideas, services,and capital across the world
• offers consumers new choices
• facilitates the mobility of labor, capital, and technology
• provides challenging employment opportunities
• reallocates resources,makes preferential choices, and shifts activities to a global level
• permits the acquisition of a wider variety of products
WHY FIRMS GO INTERNATIONAL
1. Pull factors
• The pull factors most of which are proactive reasons are those forces of attraction which
pull the business to the foreign markets.
• In other words, companies are motivated to internationalize because of the attractiveness
of the foreign market.
• Such attractions include, broadly the relative profitability and growth prospects.
2. Push factors
• The push factors refer to the compulsions of the domestic market such as saturation of the
markets which prompt companies to internationalize.
• Most of the push factors are reactive reasons.
CHARACTERISTICS OF INTERNATIONAL BUSINESS
• Large scale of operations
• Integration of economies
• Dominated by developed countries and MNCs
• Benefits to participating countries
• Keen competition
• Special role of science and technology
• International restrictions
• Sensitive in nature

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TYPES OF INTERNATIONAL BUSINESS

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IMPORTANCE OF IB
• Managing the product life cycle
• Geographic expasion as a growth strategy
• The adventurous spirit of the younger generation
• Corporate ambition
• Technology advantage
• Building a corporate image
• Incentives and business impact
• Labour advantages
• New business opportunities
• A company perspective
• Earning valuable foreign exchange
• Interdependency of nations
• Diplomatic realtions
• Core competency of nations
• Investment for infrastructure
• National image
• Foreign trade policy and targets
• Government perspective
ADVANTAGES OF INTERNATIONAL BUSINESS
• Profit advantage
• Growth opportunities
• Domestic market constraints
• Competition
• Government policies & regulations
• Monopoly power
• Spin-offs of international business
• Strategic vision
FACTORS CAUSINGGLOBALIZATION OF BUSINESS
• Liberalization
• MNC’S
• Technology
• Transportation & Communication revolutions
• Quality & cost
• Rising aspirations & wants
• Competition
• World economic trends
• Regional Integration
• Leverages
• Restraining forces

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CHALLENGES OF IB
• Global trade practices
• Role of culture and language
• Foreign politics
• Economic and financial challenges
• Social and cultural factors
• Nature of environment
• Exchange rate
INTERNATIONAL BUSINESS ENVORNMENT
• P – Political Environment
• E – Economic Environment
• S – Social / Cultural Environment
• T – Technological Environment
ECONOMIC ENVIRONMENT
• The nature and level of development of the economy, economic resource size of the economy,
economic system and economic policies, economic conditions, trends in the GNP growth rate and
per capita income nature of the trends in foreign trade, domestic supply and demand conditions
are all factors relevant to business,
CLASSIFICATION OF ECONOMIES
• Developing Economies
• Low Income Economies
• Middle Income Economies
• Developed Economies
• High Income Economies
VARIOUS ECONOMIC CONDITIONS
• Income levels
• Distribution of income
• GDP trends
• Sectorial growth trends
• Demand & supply
• Trend and BOP trends
• Foreign exchange reserve position
• Global economic trends.
FEATURE OF AN ECONOMY
• Inflation
• Unemployment
• Debt

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• Income distribution
• Poverty
• Balance of payment
ECONOMIC POLICIES
• Industrial policy
• Trade policy
• Foreign exchange policy
• Monetary policy
• Fiscal policy
• Foreign investment & technology policy
SOCIAL/CULTURAL ENVIRONMENT
ELEMENTS OF CULTURE
• Knowledge & belief
• Ideals
• Preference
CULTURAL TRAITS
• Low-context & high-context cultures
• Masculine & feminine cultures
• Monochromic & polychromic societies
• Universalism Vs. particularism
• Individualism Vs. communitarianism
• Neutral Vs. emotional
POLITICAL ENVIRONMENT
• Industrial policy
• Policy towards foreign capital and technology
• Fiscal policy
• Foreign trade policy
DEMOGRAPHIC ENVIRONMENT
• Age structure
• Gender
• Income distribution
• Family size
• Family life cycle
• Occupation
• Education
• Social class
• Religion

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• Race
• Nationality
LEGAL ENVIRONMENT
• Home country laws
• Host country laws
• International laws
ENTRY STRATEGIES IN IB
1.Exports
• Direct/indirect
• Single/multiple product lines
• Proprietary, partnership, private/public ltd companies
• Occasional/dynamic exporters
2.International licensing
• BATS 2 ITC-555
• Pepsito Heineken in Netherlands

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MODULE – II
GLOBALISATION
• The term globalization means International Integration
• Opening up of world trade, development of advanced means of communication,
internationalisation of financial markets, growing importance of MNC's,population migrations
and more generally increased mobility of persons, goods, capital, data and ideas.
DEFINITION
• An economic phenomenon?
• A social phenomenon?
• A cultural phenomenon?
• The movement towards the expansion of economic and social ties between countries through the
spread of corporate institutions and the capitalist philosophy that leads to the shrinking
of the world in economic terms.
• Globalization could involve all of these things

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INTEGRATION OF ECONOMIES
• The increasing reliance of economies on each other
• The opportunities to be able to buy and sell in any country in the world
• The opportunities for labour and capital to locate anywhere in the world
• The growth of global markets in finance
• Made possible by:
o Technology
o Communication networks
o Internet access
o Growth of economic cooperation – trading blocs (EU, NAFTA,etc.)
o Collapse of ‘communism’
o Movement to free trade
TRADE VERSUS AID?
• Benefits of Trade:
o Increased choice
o Greater potential for growth
o Increase international economies of scale
o Greater employment opportunities
• Disadvantages of trade:
o Increase in gap between the rich and the poor
o Dominance of global trade by the rich, northern hemisphere countries
o Lack of opportunities for the poor to be able to have access to markets
o Exploitation of workers and growers
CORPORATE EXPANSION
• Multi-national or trans-national corporations (MNCs or TNCs) – businesses with
a headquarters in one country but with business operations in a number of others.
• Characteristics:
o Expanding revenue
o Lowering costs
o Sourcing raw materials
o Controlling key supplies
o Control of processing
o Global economies
of scale
CORPORATE DOMINATION
• Key Issues:
o Damage to the environment?
o Exploitation of labour?
o Monopoly power

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o Economic degradation
o Non-renewable resources
o Damage to cultures
• Other Issues:
o Accountability
of Global businesses?
o Increased gap between rich and poor fuels potential terrorist reaction
o Ethical responsibility of business?
o Efforts to remove trade barriers
FACTORS CAUSING GLOBALIZATION OF BUSINESS
• Liberalization
• MNC’S
• Technology
• Transportation & Communication revolutions
• Quality & cost
• Rising aspirations & wants
• Competition
• World economic trends
• Regional Integration
• Leverages
• Restraining force
ECONOMIC IMPACT OF GLOBALIZATIONIN INDIA
• Multilateral agreements in trade,taking on such new agendas as environmental and social
conditions
• New multilateral agreements for services ,Intellectual properties
• communications, and more binding on national governments than any previous agreements
• Market economic policies spreading around the world, with greater privatization and
liberalization than in earlier decades
• Growing global markets in services. People can now execute trade services globally -- from
medical advice to software writing to data processing , that could never really be traded before.
TECHNOLOGICAL & CULTURAL IMPACT OF GLOBALIZATION IN INDIA
• Access to television grew from 20% of the urban population (1991) to 97% of the urban
population (2016). Even in the rural areas satellite television has a grown up market
• In the cities Internet facility is everywhere .Extension of internet facilities even to rural areas
• Global food chain /restaurants has already found a huge market in the urban areas of India.
• Lavish Multiplex movie halls, big shopping malls and high rise residentials are seen in every
cities
• Telecommunication and Software Industries are booming in India

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• Entertainment sector in India has a worldwide market. Bollywood movies are distributed and
accepted worldwide. Big international companies(Walt Disney,20th Century Fox,Columbia
Pictures) are investing on this sector.
• Famous International brands(Armani,Gucci,Nike,Omega etc.) are investing in the Indian market
with the changing of fashion statement of Indians.
INDIA‘S PROBLEM WITH GLOBALIZATION
• Some section of people in India,basically poor and very poor,tribal groups,they did not feel the
heat of globalization at all. They remain poor & poorest as they were.
• Increased gap between rich and poor fuels potential terrorist reaction
• Ethical responsibility of business has been diminished
• Youth group of India leaving their studies very early and joining Call centres to earn easy money
thereby losing their social life after getting habituated with monotonous work
• High growth but problem of unemployment
• Price hike of every daily usable commodities
THE ROLE OF GATT/WTO
• Economic integration is the political and economic agreements among countries that give
preference to member countries to the agreement
• Three ways of approaches
o Economic integration- global integration through the world trade organization.
o Bilateral integration-where two countries decide to cooperate together, usually in the
form of tariff reductions.
o Regional integration- where a group of countries located in the same geographic
proximity decide to co-operate.
GATT
• The fundamental principle of GATT was that each member nation must open its markets equally
to every other member nation – any sort of discrimination was prohibited.
• The principle of “trade without discrimination” was embodied in GATT’s most favored nation
(MFN) clause.
• Once a country and its trading partner had agreed to reduce a tariff, that tariff cut was
automatically extended to every other member country.
• GATT held severalmajor conferences from 1948 to 1993 to address trade issues.
• These sessions led to many multilateral reductions in tariffs and non-tariff barriers.
• GATT grappled with the issue of non-tariff barriers in terms of industrial standards, government
procurement, subsidies and countervailing duties, licensing, customs valuation, etc.
• GATT slowly ran into problems, GATT could not enforce compliance with agreements; it
depended on its member’s commitment to co-operate with each other.
• GATT was transformed into a World Trade Organization (WTO) with effect from January 1995.
• The original proposal of an International Trade Organization took shape as the WTO.
• The WTO, which is more powerful body than the GATT, has an enlarged role than the GATT.
• India is one of the founder members of GATT and WTO.

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OBJECTIVES OF GATT
• Raising standard of living.
• Ensuring full employment and a large and steadily growing volume of real income and effective
demand.
• Developing full use of the resources of the world.
• Expansion of production and International trade.
WORLD TRADE ORGANIZATION (WTO)
• WTO now serves as a single institutional framework encompassing GATT and all the results of
the Uruguay round.
• It is directed by a Ministerial conference that will meet at least once every two years and its
general business is overseen by general council.
• 153 members as on 23 July 2008.
• To become a member of the WTO,a country must completely accept the results of the Uruguay
Round.
• The WTO members now account for over 97 per cent of the international trade indicating the
potential of the WTO in bringing about an orderly development of the international trade.
DIFFERENCE B/WGATT AND WTO

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OBJECTIVES OF WTO
• Promote trade flows by encouraging nations to adopt non- discriminatory and predictable trade
policies.
• Raising standard of living and incomes, promoting full employment, expanding production and
trade and optimum utilization of world’s resources.
• Introduce sustainable development- a concept which envisages that development and
environment can go together.
• Taking positive steps to ensure that developing countries, especially the least developed ones,
secure a better share of growth in world trade.
• Establish procedures for resolving trade disputes among members.
FUNCTIONS OF WTO
• Acting as a forum for multilateral trade negotiations.
• Administering and implementing the multilateral and plurilateral trade agreements which together
make up the WTO.
• Seeking to resolve trade disputes.
• Overseeing national trade policies.
• Co-operating with other international institutions involved in global economic policy-making.
• Maintaining trade related database; members are required to notify in detail various trade
measures and statistics.
• Acting as a watchdog of international trade, constantly examining the trade regimes of individual
members.
• Acting as a management consultant for world trade. Experts on the panel of WTO scan the world
economic environment and make observations on contemporary issues.
• Technical assistance and training for developing countries.
MAJOR DECISION-MAKING UNITS OF WTO
• Ministerial conference
• General council
• Services council
• Council on trade related aspects of Intellectual Property rights.
MINISTERIAL CONFERENCE
• WTO is directed by Ministerial conference.
• They will meet at least once every two years to discuss about the various activities and policies
relating to trade agreements.
GENERAL COUNCIL
• All the General business of WTO taken place in ministerial conference is overseen by general
council.
SERVICES COUNCIL (GATS)

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• Services in general have been highly protected because of their strategic/sensitive nature.
• Heavily protected services in different countries include banking and insurance; transportation;
television, radio, film and other forms of communication and so on.
• The GATS covers four modes of international delivery of services:
o Cross border supply (trans- border data focus, transportation services).
o Commercial presence (provision of services abroad through FDI or representative offices).
o Consumption abroad
o Movement of personnel (entry and temporary stay of foreign consultants).
INVESTMENT COUNCIL :- (TRIMS)
• Trade related Investment measures (TRIMS) refer to certain conditions or restrictions imposed by
a government in respect of foreign investment in the country.
• TRIMs were widely employed by developing countries.
• Local content requirement (i.e. a certain amount of local inputs be used in products).
• Trade and foreign exchange balancing requirements.
• Trade balancing requirements (i.e. imports shall not exceed a certain proportions of exports).
PRINCIPLES OF WTO

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COUNCIL ON TRADE RELATED ASPECTS ON INTELLECTUALPROPERTYRIGHTS
• The protection of intellectual property rights has become an issue of wide and serious discussion
with the formation of the General agreement on trade related aspects of intellectual property
rights (TRIPS) under the Uruguay round (UR) Agreement.
• According to the WTO “Intellectual property rights are the rights given to persons over the
creations of their minds. They usually give the creator an exclusive right over the use of his/her
creation for” a certain period of time.
COPYRIGHT & RIGHTS RELATED TO COPYRIGHT
• The rights of authors of literary and artistic works such as musical composition, paintings,
sculpture, computer programs and films are protected by copyright for a minimum period to 50
years after the death of the author.
• The main social purpose of protection of copyright and related rights is to encourage and reward
sensitive work.
INDUSTRIAL PROPERTY
• Protection of distinctive signs in particular trademark and geographical indication.
• The protection of such distinctive signs aims to stimulate and ensure fair competition and to
protect consumers, by enabling them to make informed choices between various goods and
services.
• Other type of industrial property is protected primarily to stimulate innovation design and
creation of technology.
OBJECTIVE OF PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
• Encourage and reward creative work.

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• Technological Innovation.
• Fair competition
• Consumer protection
• Transfer of technology
TRADE BLOCS
FACTORS IN FORMINGTHE TRADE BLOCS
• To obtain economic benefits
• To pursue non-economic objectives such as strengthening political ties and managing migration
flows.
• To ensure increased security of market access for smaller countries by forming regional trading
blocs with lager countries
• To improve members’ bargaining strength in multilateral trade negotiations
• To promote regional infant industries
• To prevent damages to their trading strength from third countries.
CLASSIFICATION OF TRADE BLOCS-BASED ON ECONOMIC INTEGRATION
• Free trade area
• Customs union
• Common market
• Economic union
• Economic integration
o Free trade among members,
o Common external commercial policy,
o Free factor mobility,
o Harmonized economic policies,
o Supernational organizational structure
ADVANTAGES OF TRADE BLOCS
1. Increased Foreign Direct Investment
• An increase in foreign direct investment may result from the creation of trade blocs.
• This can benefit the economies of participating nations by creating jobs in new or expanded
businesses.
2. Economies Of Scale
• The larger markets created by trade blocs permit companies to take advantage of economies
of scale.
• Since the average cost of each good produced tends to fall as production increases,this
results in lower prices for consumers.
3. Competition
• Trade blocs force the manufacturers in participating countries to compete with each other.
• Increased competition creates pressures for greater efficiency within firms, which results in
lower prices for consumers.

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4. Trade Effects
• Trade blocs eliminate tariffs, which drives down the cost of imports.
• As a result, consumers can save money by buying imported goods when cheaper than locally-
produced ones—they can then spend those savings on other goods.
• Reducing the cost of imports also reduces the cost of locally-produced goods that use
imported parts or components.
5. Improved Market Efficiency
• Increased competition and the removal of tariffs, which may act as a price floor, drive down
prices and allow for increased consumption.
• This reduces deadweight loss and hence improves market efficiency.
DISADVANTAGES OF TRADE BLOCS
1. Regionalism vs. Multinationalism
• Trading blocs inherently favor their participating countries.
• NAFTA partners,the United States, Canada and Mexico, trade has risen to more than 80
percent of Mexican and Canadian trade and more than a third of U.S. trade.
• Regional economies establish tariffs and quotas that protect intra-regional trade from outside
forces,according to the University of California Atlas of Global Inequality
• Regional trade bloc countries contribute to regionalism rather than global integration
2. Loss of Sovereignty
• A trading bloc, particularly when it is coupled with a political union, is likely to lead to at
least partial loss of sovereignty for its participants.
• For example, the European Union, started as a trading bloc in 1957 by the Treaty of Rome,
has transformed itself into a far-reaching political organization that deals not only with trade
matters, but also with human rights, consumer protection, greenhouse gas emissions and other
issues which are only marginally related.
3. Concessions
• No country wants to let foreign firms gain domestic market share at the expense of local
companies without getting something in return.
• Any country that wants to join a trading bloc must be prepared to make concessions.
• For example, in trading blocs that involve developed and developing countries, such as
bilateral agreements between the U.S. or the EU and relatively poor Asian, Latin American or
African countries, the latter may have to allow multinational corporations to enter their home
markets, hurting the business of some local firms.
4. Interdependence
• Trading blocs increase trade among participating countries, those countries become
increasingly dependent on each other.
• A disruption of trade within a trading bloc as a result of a natural disaster, conflict or
revolution may have severe consequences for the economies of all participating countries.

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Regional Economic Integration : Important mode of economic development

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INTERNATIONAL COMMODITYAGREEMENTS
• 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.
• Commodity agreements are arrangements between producing and consuming countries to
stabilize markets.
• Such agreements are common in many markets, including the market for cocoa, coffee,tea,and
sugar.
• (OECD is an oil suppliers organization and can be considered a commodity cartel)
• An agreement usually involves a consensus on quantities traded, prices, and stock management.
THE INTERNATIONAL COCOA ORGANIZATION(ICCO)
• The International Cocoa Organization (ICCO) is a global organization, composed of both cocoa
producing and cocoa consuming member countries.
• Located in London, ICCO was established in 1973 to put into effect the first International Cocoa
Agreement which was negotiated in Geneva at a United Nations International Cocoa Conference.
• There have since been seven Agreements. The Seventh International Cocoa Agreement,
negotiated in 2010 in Geneva, came into force provisionally in October 2012.

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OBJECTIVES
• To promote international cooperation in the world cocoa economy;
• To provide an appropriate framework for discussion on all cocoa matters among governments,
and with the private sector;
• To contribute to the strengthening of the national cocoa economies of Member countries, through
the preparation, development and evaluation of appropriate projects to be submitted to the
relevant institutions for financing and implementation and seeking finance for projects that
benefit Members and the world cocoa economy;
• To strive towards obtaining fair prices leading to equitable economic returns to both producers
and consumers in the cocoa value chain, and to contribute to a balanced development of the world
cocoa economy in the interest of all Members;
• To promote a sustainable cocoa economy in economic, social and environmental terms;
• To encourage research and the implementation of its findings through the promotion of training
and information programmes leading to the transfer to Members of technologies suitable for
cocoa;
• To promote transparency in the world cocoa economy, and in particular in the cocoa trade,
through the collection, analysis and dissemination of relevant statistics and the undertaking of
appropriate studies, as well as to promote the elimination of trade barriers;
• To promote and to encourage consumption of chocolate and cocoa-based products in order to
increase demand for cocoa,inter alia through the promotion of the positive attributes of cocoa,
including health benefits, in close cooperation with the private sector;
• To encourage Members to promote cocoa quality and to develop appropriate food safety
procedures in the cocoa sector;
• To encourage Members to develop and implement strategies to enhance the capacity of local
communities and small-scale farmers to benefit from cocoa production and thereby contribute to
poverty alleviation;
• To facilitate the availability of information on financial tools and services that can assist cocoa
producers, including access to credit and approaches to managing risk.
GLOBAL TRADE
FEATURES OF GLOBAL TRADE
• Increased world trade benefits all the participating countries. World business promotes
competition.
• The Economic interdependence among countries makes countries engage less in conflicts.
• Uneven distribution of resources makes trade inevitable.
• World Trade encourages efficient use of global resources.
• Global competition forces companies to become more efficient and innovative.
• Global trade has created awareness.
• Exports create jobs.

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MERCANTILISM
• Mercantilism is the first International trade theory and it emerged in England in the mid-16th
century.
• According to this theory the holdings of a country’s treasure primarily in the form of gold
constituted its wealth.
• This theory specifies that countries should export more than they import and receive the value of
trade surplus in the form of gold from those countries which experience trade deficits
• The mercantilism theory suggests for maintaining favorable balance of trade in the form of import
of gold for export of goods and services
THEORYOF ABSOLUTE ADVANTAGE
• Adam Smith proposed absolute cost advantage theory of International Trade (1776) based on the
principle of division of labor.
• According to him application of this principle to international scenario helps the countries to
specialize in the production of those goods in which they have cost advantage over their
countries.
• Suppose country A is better than country B at making automobiles, and
• Country B is better than country A at making bread.
• It is obvious that both would benefit if A specialized in automobiles, B specialized in bread and
they traded their products.
• That is a case of absolute advantage.
COMPARATIVE ADVANTAGE THEORY
• What if a country is bad at making everything? Will trade drive all producers out of business?
The answer,according to Ricardo (Economist), is no. The reason is the principle of comparative
advantage.
• It says, countries A and B still stand to benefit from trading with each other even if A is better
than B at making everything.
• If A is much more superior at making automobiles and only slightly superior at making bread,
then A should still invest resources in what it does best — producing automobiles — and export
the product to B.
• B should still invest in what it does best — making bread — and export that product to A,even if
it is not as efficient as A.
• Both would still benefit from the trade. A country does not have to be best at anything to gain
from trade. That is comparative advantage.
RELATIVE FACTOR ENDOWMENTS
• Swedish Economists Eli Hecscher (in 1919) and Bertil Ohlin (in 1933) developed the theory of
relative factor endowments.
• Factor endowments are land, capital, natural resources,labor, climate etc
• Factor endowments vary among countries: For example, the USA is rich in capital resources,
India is rich in labor, Saudi Arabia is rich in oil resources,and South Africa has gold mines.

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• if labor is available in abundance in relation to land and capital, in a country, the price of labor
would be low and price of land and capital would be high in that country.
• The vice-versa is true in those countries were land and capital are abundance in relation to labor
• Countries participate in International trade by exporting those products which they can produce at
low cost consequent upon abundance of factors and import the other products which they can
produce comparatively at high cost.
INTERNATIONAL PRODUCT LIFE CYCLE THEORY
• Raymond Vernon of the Harvard Business School developed the Product Life Cycle Theory.
• International product life cycle theory traces the roles of innovation, market expansion,
comparative advantage and strategic response of global rivals in international manufacturing,
trade and investment decisions.
• International product life cycle consists of four stages
o New product Introduction
o Growth
o Maturity
o Decline
GLOBAL STRATEGIC RIVALRYTHEORY
• This theory focuses on firms strategic decisions to acquire and develop competitive advantage in
order to compete internationally.
• Owning Intellectual Property Rights
• Investing in Research & development
• Achieving large Scale economies
• Exploiting the experience curve
OWNINGINTELLECTUAL PROPERTY RIGHTS
• Firms which own an IPR in the form of patent, brand name, copyright and trade mark acquire
competitive advantage over their competitor’s.
• For example, LG, Coca-Cola has competitive advantage over their competitors
INVESTINGIN R&D
• Investment in R&D would probably result in the development of new products, improvements to
the existing products and development of new technologies etc.
• These developments provide competitive advantage to the firms.
• Boeing spent US $ 2 billion and developed 747 jet aircraft. The firms that gain the competitive
advantage through R&D have the first mover advantage.
ACHIEVINGLARGE SCALE ECONOMIES
• Companies with large scale operations enjoy low cost of production per unit. These companies
may enjoy low cost leadership.
EXPLOITINGTHE EXPERIENCE CURVE

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• Production cost per unit tends to decline with the increase in the experience of the firm in
manufacturing in case of certain industries. This is due to increase in employees experience,
expertise and skill.
• The companies gain competitive advantage with the presence of experience curve.
• Samsung has the lowest cost advantage in manufacturing standardized semiconductor chips
PORTER’S NATIONAL COMPETITIVE ADVANTAGE
• Factor Endowments (Provide With Talent Or Ability)
o A nation’s position is factors of production such as skilled labor or the infrastructure
necessary to complete in a given industry.
• Demand Conditions
o The nature of home demand for the industry’s production service.
• Relating &Supporting Industries
o The presence of supplier industries and related industries in a nation those are
internationally competitive.
• Firm Strategy, Structure & Rivalry
o The fourth board attribute of national competitive advantage in porter’s model is the
strategy, structure,and rivalry of companies within a nation.
GLOBAL SOURCING
• Lower price
• Better quality
• Only source available
• More advanced technology
• More consistent delivery
• Counter trade requirement
REASONS FOR OFF SHORE PURCHASING
1. Global Supply Chain
• The firm’s integrated network of sourcing, production, and distribution, organized on a
worldwide scale and located in countries where competitive advantage is maximized.
• Global supply chain management involves both upstream (supplier) and downstream
(customer) flows.
Domestic In-House Sourcing
Domestic
Offshore Subsidiary Sourcing
International
Intra-Firm Sourcing
Domestic Purchasing Arrangement
Domestic
Offshore Outsourcing
International
Outsourcing
Sourcing

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2. Global SCM Factors
• Costs
o Local labor rates
o International freight tariffs
o Currency exchange rates
• Customs Duty
o Duty rates differ by commodity and level of assembly
o Impact of GATT/WTO: Changes over time
• Export Regulations
o Denied parties list
o Export licenses
• Time
o Lead time
o Cycle time
o Transit time
o Export license approval cycle
o Customs clearance
• Taxes on Corporate Income
o Different markups by country
o Tax havens and not havens
o Make vs. buy effect
• Offset Trade and Local Content
o Local content requirement for government purchases
o Content for preferential duty rates
RISKS IN GLOBAL SOURCING
• Less than expected cost saving
• Environmental factors (exchange rate fluctuation, labor strikes, adverse macro-economic events)
• Weak legal environment (weak laws and enforcement regarding intellectual property rights which
can lead to erosion of key strategic assets)
• Risk of creating competitors. (as the focal firm shares its intellectual property and business
process knowledge with foreign suppliers, it runs the risk of creating future competitors)
• Inadequate or low skilled workers
• Over reliance on suppliers
• Erosion of morale and commitment among home country employees.
MINIMIZINGRISK IN GLOBAL SOURCING
• Get employees of home country on board
• Choose carefully between what should be done inside (captive operation) and what should be
outsourced.
• Emphasize effective communication with suppliers.
• Invest in supplier development and collaboration.
• Study the macroeconomic and other macro-environmental issues in the sourcing country.

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INTERNATIONAL LOGISTICS
• It is a process of planning, implementing and controlling the efficient, cost effective flow and
storage of raw materials, in-process inventory, finished goods and related information from point
of origin to the point of consumption for the purpose of conforming to customer requirement.
COMPONENTS OF LOGISTICS
• Fixed facilities location
• Inventory management
• Order processing
• Material handling and transportation
IMPORTANCE OF LOGISTICS
• Cost saving
• Consumer satisfaction
• Sustainable competitive edge

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MODULE – III
INTERNATIONAL MONETARYFUND
VISION
• Strive to promote sustained non-inflationary economic growth that benefits all people of the
world
• Be the centre of competence for the stability of the international financial system
• Focus on its core macroeconomic and finanicail areas of responsibility
• Be an open institution, learning and adaptive continuously to changing circustances
PURPOSES
• Promoting international monetary cooperation
• Facilitating expansion and balanced growth of international trade
• Promoting exchange stability, maintaining orderly exchange arrangements and avoiding
competitive exchange devaluation
• Making resources of fund temporarily available to the members
• Shortening the duration and lessening the degree of disequilibrium in the balance of payments of
member nations
• To promote exchange stability, to maintain orderly exchange arrangements among members and
to avoid competitive exchange depreciation
• To assist in the establishment of a multilateral system of pavements in respect of current
transactions between members and in the elimination of foreign exchange restrictions that hamper
the growth of world trade
• Monitors economic and financial developments and policies, in member countries and at the
global level, gives policies advice to its members based on its more than six decades of
experience
• Lends to members countries with balance of payment problems, not just to provide temporary
financing but to support adjustment and reform policies aimed at correcting the underlying
problems
• Provides the governments and central banks of its member countries with technical assistance and
training in tis areas of expertise
TECHNICAL ASSISTANCE BY IMF
• Designing and implementing fiscal and monitory policies
• Drafting and reviewing economic and finical legislation, regulations and procedures, thereby
helping to resolve difficulties that often lie at the heart of macroeconomic imbalances
• Institution and capacity buildng, such as in central banks, treasuries, tax and custom departments
and statistical services.

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WHEN CAN A COUNTRY BORROW FROM THE IMF
• A member country may request IMF financial assistance if it has an actualor potential balance of
payments need—that is, if it lacks or potentially lacks sufficient financing on affordable terms to
meet its net international payments (e.g.,imports, external debt redemptions) while maintaining
adequate reserve buffers going forward.
THE PROCESS OF IMF LENDING
• Upon request by a member country, IMF resources are usually made available under a lending
“arrangement,” which may, depending on the lending instrument used, specify the economic
policies and measures a country has agreed to implement to resolve its balance of payments
problem.
• The economic policy program underlying an arrangement is formulated by the country in
consultation with the IMF and is in most cases presented to the Fund’s Executive Board in a “
Letter of Intent” and is further detailed in the annexed “Memorandum of Understanding”.
IMF LENDING INSTRUMENTS
• The IMF’s various loan instruments are tailored to different types of balance of payments need
(actual, prospective, or potential; short-term or medium-term) as well as the specific
circumstances of its diverse membership.
• Low-income countries may borrow on concessional terms through facilities available under the
Poverty Reduction and Growth Trust (PRGT; see IMF Support for Low-Income Countries).
Concessional loans carry zero interest rates until the end of 2018.
NON-CONCESSIONAL LENDING
1. Stand-By Arrangements (SBA)
• The SBA is designed to help countries address short-term balance of payments problems.
Program targets are designed to address these problems and disbursements are made
conditional on achieving these targets (‘ conditionality’).
• The length of a SBA is typically 12–24 months, and repayment is due within 3¼-5 years of
disbursement.
2. Flexible Credit Line (FCL)
• The FCL is for countries with very strong fundamentals, policies, and track records of policy
implementation.
• FCL arrangements are approved, at the member country’s request, for countries meeting pre-
set qualification criteria.
• The length of the FCL is either one year or two years with an interim review of continued
qualification after one year
3. Precautionary and Liquidity Line (PLL)
• The PLL is for countries with sound fundamentals and policies, and a track record of
implementing such policies.
• Duration of PLL arrangements range from either six months or one- to two years. One-to-two
year PLL arrangements are subject to semi-annual reviews.

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4. Extended Fund Facility (EFF)
• This facility helps countries address medium- and longer-term balance of payments problems
reflecting extensive distortions that require fundamental economic reforms.
• Repayment is due within 4½–10 years from the date of disbursement.
5. Rapid Financing Instrument (RFI)
• The RFI was introduced to replace and broaden the scope of the earlier emergency assistance
policies.
• The RFI provides rapid financial assistance with limited conditionality to all members facing
an urgent balance of payments need.
CONCESSIONAL LENDING
1. Concessional Facilities For Low Income Countries (Lics)
• All facilities support country-owned programs aimed at achieving a sustainable
macroeconomic position consistent with strong and durable poverty reduction and growth.
• Better-positioned PRGT-eligible countries may receive “blended” Fund financial support that
mixes nonconcessional and concessional resources.
2. The Extended Credit Facility (ECF)
• It is the Fund’s main tool for medium-term support to LICs facing protracted balance of
payments problems.
• Financing under the ECF currently carries a zero interest rate,a grace period of 5½ years,and
a final maturity of 10 years.
3. The Standby Credit Facility (SCF)
• It provides financial assistance to LICs with short-term or potential balance of payments
needs.
• The SCF can be used in a wide range of circumstances,including on a precautionary basis.
• Financing under the SCF currently carries a zero interest rate,with a grace period of 4 years,
and a final maturity of 8 years.
4. The Rapid Credit Facility (RCF)
• It provides rapid financial assistance with limited conditionality to LICs facing an urgent
balance of payments need.
• The RCF streamlines the Fund’s emergency assistance for LICs,and can be used flexibly in a
wide range of circumstances.
• Financing under the RCF currently carries a zero interest rate,has a grace period of 5½ years,
and a final maturity of 10 years.
WORLD BANK
MEMBERSHIP
• The international bank for reconstruction and development (IBRD)-189
• The international development association (IDA)-169
• The international finance corporation(IFC)-182
• The multi lateral investment guarantee agency (MIGA)- 175
• The international center for settlement of investment disputes (ICSID)-144

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PURPOSE
• To assist in the reconstruction and development of the territories of the members
• To promote private foreign investment
• To promote the long-range balanced growth of international trade
WB POLICY ORIENTATIONS
• Investing in people-health and education
• Social development- poverty eradication
• Strengthen governments to deliver quality services- efficiently and transparently
• Protecting environment
• Supporting and encouraging private sector business
• Promoting reforms to create a stable macroeconomic environment, conductive to investment and
long-term planning
WB GUIDING PRINCIPLES
• The assess the repayment prospects of the loan
• Lend only for the projects which are economically and technically sound and with high priority
• Lending is done to manage foreign exchange
• Borrowing country can spend the money across the globe.
• Monitor the progress of the projects
• Promotes the local private enterprises
ACTIVITIES OF THE BANK
• Economic policy
• Education
• Energy
• Environment
• Financial sector
• Gender
• Governance
• Health, Nutrition and Population
• Law and justice
• Labour and social protections
• Industry
• Agriculture
• Mining
• Poverty reduction
• Rural development
• Urban development
• International economics and Trade
• Transport
• Water resources

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• Water supply and sanitation
LENDINGPROGRAMMES
• Structural adjustment lending
• Special action programme
• B-loan and export credit
• http://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/IFC+Sy
ndications/Overview_Benefits_Structure/Syndications/B+Loan+Structure+And+Benefits/
LOANS AND GRANTS
• Investment loans: provided as a support of economic and social development projects
• Policy development loans: provide a quick disbursing finance to support policy and institutional
reforms
• IBRD with low interest rate and IDA with zero interest rate
IDA GRANTS
• Debt relief in the most indebted and poverty stricken countries
• Improvement of sanitation and water supply
• Support of vaccination and immunization programmes for the reduction of communicable
diseases
• Combating the HIV/AIDS pandemics
• Support for civil society organization
UNCTAD
THE ORIGINS
• UNCTAD:1964
• The context of North-South and East-West tensions
• Non-Aligned Movement and Group of 77
• The link between trade and development (Prebisch thinking)
• 1st UNCTAD Ministerial Conference in Geneva;
• Permanent secretariat established
THE MANDATE
Integrated treatment of trade, investment and related issues = wide mandate
• Research on trade and development issues
• Consensus-building through intergovernmental machinery
• Technical cooperation on all the topics of UNCTAD work
THE FUNCTIONING
• Intergovernmental machinery linked to UN General Assembly and ECOSOC
• Secretariat part of the UN Secretariat (part of same budget)

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• Development-oriented and independent secretariat
• Political role (“soft law”)
• Automatic membership
• Wide participation of non-governmental stakeholders
THE IDEAS ON DEVELOPMENT
• Trade is one of the instruments leading to development…
• but no automatic links between trade liberalisation, poverty reduction, and development
• Multidimensional links between trade and development
• Special and differential treatment is key for all developing countries
• No “one size-fits-all” development models
STRENGHTS AND WEAKNESSES
• Trust and credibility among developing countries
• Independent research
BUT
• Only a political role (no “teeth”)
• Limited human and financial resources
SOME UNCTAD IDEAS (NOW USED OUTSIDE UNCTAD)
• Special and differential treatment for developing countries
• Coherence between national policies and international economic environment (MDG 8)
• Policy space and “no-one-size-fits-all”
• Links between investment, science and technology, ICTs and trade flows
• Link between trade and environment
• Role of commodities in international trade
• Development-friendly WTO rules on trade in services
• LDCs’ terms of WTO accession
• Work on debt reduction (HIPC) and debt sustainability
• Role of competition law and policies in development processes
• Work on trade facilitation
• Research on non-tariff barriers to market access
UNCTAD INTERGOVERNMENTAL MACHINERY:
• The Ministerial Conference (every 4 years),reports to the UN General Assembly and ECOSOC
• Executive body: the Trade and Development Board, one high level annual session, reports to the
UN General Assembly and Ecosoc
• Three annual Commissions on:
o Trade in goods and services,and commodities
o Investment, technology and related financial issues
o Enterprise, business facilitation and development

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• Several Expert Meetings on specific issues
UNIDO – UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
MISSION
• Every country achieves a higher level of industrialization in their economies, and benefits from
the globalization of markets for industrial goods and services.
• No one is left behind in benefiting from industrial growth, and prosperity is shared among women
and men, young and old, rural and urban dwellers alike, in all countries.
• Broader economic and social growth is supported within an environmentally sustainable
framework.
• Unique knowledge and resources are combined of all relevant development actors to maximize
the development impact of ISID(inclusive and sustainable industrial development).
FUNCTIONS
• Advancing economic competitiveness
• Creating shared prosperity
• Safeguarding the environment
• Cross-cutting services
1. Advancing Economic Competitiveness
• Upgrading businesses and industrial infrastructure
• Investing in technology and innovation
• Supporting small and medium industry clusters
• Setting up and supporting export consortia
• Meeting the standards
• Quality and compliance infrastructure
• Competitive trade capacities and corporate responsibility
• Entrepreneurship development
2. Creating shared prosperity
• Agribusiness and rural entrepreneurship development
• Women and youth in productive activities
• Human security, post-crisis rehabilitation and migration issues
3. Safeguarding the environment
• Resource-efficient and low-carbon industrial production
• Clean energy access for productive use
• Implementation of multilateral environmental agreements
4. Cross-cutting services
• Circular economy
• Green Industry
• Gender equality and the empowerment of women
• Industrial policy advice, research and statistics
• Partnerships for prosperity
• Standard-setting and compliance
• Technical cooperation

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ASIAN DEVELOPMENT BANK
• The Asian Development Bank (ADB) is a regional development bank established on 19
December 1966, Metro Manila, Philippines.
• ADB now has 67 members, of which 48 are from within Asia and the Pacific and 19 outside
• As of 31 December 2016, Japan and United States hold the largest proportion of shares at
15.607%. China holds 6.444%, India holds 6.331%, and Australia holds 5.786%.
FUNCTIONS OF ADB
• The external loans and equity investments to its developing member countries for their economic
and social development
• To provide technical assistance for planning and execution of development projects and
programmes and for advisory services
• To promote and facilitates investment of public and private capital and development
• To respond to request for assistance in coordinating development policies and plans of its
member (developing)countries
AIM OF ADB
• The ADB defines itself as a social development organization that is dedicated to reducing poverty
in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth,
and regional integration.
• This is carried out through investments – in the form of loans, grants and information sharing – in
infrastructure, health care services,financial and public administration systems, helping nations
prepare for the impact of climate change or better manage their natural resources,as well as other
areas.
FOCUS AREAS OF ADB
• Education
• Environment, Climate Change, and Disaster Risk Management
• Finance Sector Development
• Infrastructure,including transport and communications, energy, water supply and sanitation and
urban development
• Regional Cooperation and Integration
• Private Sector Lending
FINANCING
• The ADB offers "hard" loans on commercial terms primarily to middle income countries in Asia
and "soft" loans with lower interest rates to poorer countries in the region.
PRIVATE SECTOR INVESTMENTS
• ADB provides direct financial assistance,in the form of debt, equity and mezzanine finance to
private sector companies, for projects that have clear social benefits beyond the financial rate of
return.

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COFINANCING
• ADB partners with other development organizations on some projects to increase the amount of
funding available.
FUNDS AND RESOURCES
• More than 50 financing partnership facilities, trust funds, and other funds – totalling several
billion each year – are administered by ADB and put toward projects that promote social and
economic development in Asia and the Pacific.
CRITICISM
• Operating at a global and international level, these banks can undermine people's human rights
through projects that have detrimental outcomes for poor and marginalized communities
• Much of the growth has bypassed more than 70 percent of its rural population, many of whom are
directly dependent on natural resources for livelihoods and incomes
• ADB's large scale projects cause social and environmental damage due to lack of oversight
• The ADB has been accused by civil society of ignoring warnings leading up the crisis and also
contributing to it by pushing loan conditions that many say unfairly pressure governments to
deregulate and privatize agriculture, leading to problems such as the rice supply shortage in
Southeast Asia
• There has been considerable criticism of management for its reluctance to implement the Long
Term Strategic Framework
INTERNATIONAL TRADE CENTRE
• The International Trade Centre (ITC) is the only development agency that is fully dedicated to
supporting the internationalization of small and medium-sized enterprises (SMEs).
• This means that the agency enables SMEs in developing and transition economies to become
more competitive and connect to international markets for trade and investment, thus raising
incomes and creating job opportunities, especially for women, young people, and poor
communities.
• Established in 1964, the International Trade Centre (ITC) is the joint agency of the World Trade
Organization and the United Nations.
ITC MISSION
• ITC's mission is to foster inclusive and sustainable economic development, and contribute to
achieving the United Nations Global Goals for Sustainable Development.
• ITC works towards creating ‘trade impact for good’.
ITC GOALS
• Strengthen the integration of the business sector of developing countries and economies in
transition into the global economy
• Improve the performance of trade and investment support institutions for the benefit of SMEs
• Improve the international competitiveness of SMEs

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GEOGRAPHIC FOCUS
• ITC prioritizes project implementation in least developed countries (LDCs),landlocked
developing countries (LLDCs),small island developing states (SIDS) and sub-Saharan Africa.
• ITC has committed to spending 70% of its technical assistance budget on country-specific
support within these priority categories.
ITC'S SIX FOCUS AREAS
1. Providing Trade and Market Intelligence
• Access to trade and market intelligence is critical to international business success. The provision
of innovative, cutting-edge market information to enable improved business decision-making has
been at the heart of ITC’s mandate since its foundation in 1964.
• ITC’s work in the area of trade and market intelligence is focused on:
o Enhancing global public goods as the foundation for trade and market intelligence;
o Strengthening the skills of local partners in effectively using trade and market
intelligence to make business decisions;
o Working with local trade and investment support institutions to improve their trade and
market intelligence-related portfolio of services;
o Developing new and innovative approaches to intelligence, including competitive
intelligence;
o Facilitating evidence-based policy reform, with a focus on addressing non-tariff obstacles
to trade in goods and services.
2. Building a conducive business environment
• Policy and regulatory choices have a significant impact on SME competitiveness and play a
crucial role in determining whether SMEs are able to link to value chains.
• ITC supports developing countries in fostering a business environment that is conducive to
trade growth by facilitating the inclusion of the private sector perspective into the policy-
making process. T
• he agency assists in institutionalising public-private dialogue for the formulation of trade
strategy and policies at national and regional levels.
• Supporting policy makers, TSIs and the private sector to implement the WTO Trade
Facilitation Agreement;
• Supporting public and private sector partners to lead the development of export strategies,
and implementation management plans to make these strategies a reality;
• Facilitating the development of a stronger private sector voice in policy-making processes,
including the WTO accession process;
• Strengthening local institutions for a sustainable, home-grown approach that embeds public-
private partnerships in policy processes.
3. Strengthening trade and investment support institutions
• To deliver trade impact for good, ITC depends on a network of TSIs that are both
beneficiaries of the agency’s work and implementing partners,providing services to enhance
the international competitiveness of SMEs.

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• TSIs are organizations that support business, ranging from trade promotion organizations,
chambers of commerce,sector associations, enterprise development agencies, supply chain
management organizations, and others.
4. Connecting to International Value Chains
• Logistics and supply chain:
o Meeting customers’ product or service requirements through effective and efficient
production management, operations, procurement, sourcing of materials, inventory
management, as well as inbound, outbound and internal logistics.
• Export marketing:
o Designing services with differentiated features through marketing, branding,
innovative products/services, and packaging design.
• Meeting technical/quality requirements:
o Complying with standards, technical regulations, and sanitary and phyto-sanitary
(SPS) measures,organize after-sales services,and achieving internationally
recognized certification.
• Fostering market links:
o Communicate with current and potential customers through campaigns, identify
adequate distribution channels and modes of entry into foreign markets, identify and
close sales opportunities, and develop partnerships with larger firms to become part
of their supplier base. E-solutions and e-platforms play an important role in
expanding links to markets.
5. Promoting and mainstreaming inclusive and green trade
• Increased trade alone is not sufficient to improve livelihoods.
• The benefits of trade growth do not necessarily reach vulnerable groups such as women,
young people or marginalised communities, and excessive costs may be placed on the
environment.
• ITC works with its clients to integrate sustainable development objectives into all its trade
development programmes, while maintaining its focus on demand-led initiatives.
• The agency implements specific programmes focused on the economic empowerment of
women, promoting youth entrepreneurship, connecting poor communities to value chains,
and promoting green trade.
• ITC also integrates environmental sustainability and gender objectives across its entire
portfolio.
6. Supporting regional economic integration and South-South links
• Strengthening the institutional infrastructure for regional integration, with a focus on sub-
Saharan Africa;
• Connecting demand and supply between emerging markets;
• Exploring new modes of partnerships to enable growth markets to support trade development
in other developing countries.
MODULE – IV

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EXPORT-IMPORTDOCUMENTATIONIN INDIA
ROLE OF EXPORT DOCUMENTATION
• Export documentation plays a vital role in international marketing as it facilitates the smooth flow
of goods and payments thereof across national frontiers.
• Exporters are required to follow certain formalities and procedures,using a number of
documents.
• Each of these documents serves a specific purpose and hence carries its own significance.
• A clear understanding of all documents and their purpose, how to prepare these,number of copies
required, when and where to file, is a must for all export professionals.
Export Documentation in India
• Export Documentation in India has evolved a great deal of interest since 1990.
• Prior to 1990, documentation was manual and it lacked proper co-ordination.
• The result was lot of delays and mistakes, rendering the task very clumsy, tiresome, repetitive,
and truly frustrating.
• India adopted the ADS (Aligned Documentation System) in 1991 which is the Internationally
accepted documentation system
• Export documentation is complex in nature as the number of documents to be filled-in is very
large, so also is the number of the concerned authorities to whom the relevant documents to be
submitted.
• It is, therefore,advisable to take the help of shipping and forwarding agents who will obtain and
fill out the documents correctly as well as arrange for transportation.
• Proper Documentation will ensure smooth sailing with the requirements of the above agencies
and the resulting transaction will be a successfulone.
• Inaccurate or incomplete documentation will result in serious financial and goodwill losses.
• Such losses can be completely avoided by understanding clearly the documentation requirements
of all concerned parties and then meticulously planning to get the right documents in the right
numbers, at the right places and at the right time.
PARTIES: INTERESTED IN EXPORT DOCUMENTATION IN INDIA
1. Buyers and exporters,
2. Buying agents,
3. RBI,
4. Authorized dealers (where the exporter has his bank Account),
5. Buyer’s bank (foreign bank),
6. Directorate General of Foreign Trade
7. Customs and Port Authorities,
8. VAT and Excise Authorities,
9. Export Promotion Council,
10. Insurance Companies,

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11. Inspection Agencies,
12. Clearing and Forwarding Agents,
13. Shipping Companies/Airlines and Inland Carriers etc
CLASSIFICATIONOF EXPORT DOCUMENTS
 Export Documents can be classified into following four categories:
1. Commercial Documents
2. Regulatory Documents
3. Export Assistance Documents
4. Documents Required by Importing Countries
COMMERCIAL DOCUMENTS
• These documents are used by exporters/importers to discharge their respective legal and other
incidental responsibilities under sales contract.
• Commercial documents can be further sub-divided into:
 Principal Commercial Documents
 Auxiliary Commercial Documents
 Principal Commercial Documents: These documents serves the following purposes:
 To effect physical transfer of goods and title of the goods from exporter to the buyer.
 To realize export sales proceeds.
1. Principal Documents
• Commercial Invoice (and the invoice prescribed by the importer)
• Packing list
• Certificate of Inspection
• Certificate of Insurance/Insurance Policy
• Bill of Lading/Airway bill/Combined Transport Documents
• Certificate of Origin
• Bill of Exchange
• Shipment Advice
2. Auxiliary Commercial Documents
• These Documents are required to prepare /procure the principal commercial documents and
include:
• Proforma Invoice
• Shipping Instructions
• Insurance Declaration
• Intimation for Inspection
• Shipping Order
• Mates Receipt
• Application for Certificate of Origin
• Letter to bank for negotiation /collection of documents

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REGULATORY DOCUMENTS
• These are prescribed by various Government Departments/Bodies for compliance of formalities
under relevant laws governing export transactions.
• These include:
• Exchange Control Declaration Form-GR Form
• Freight Payment Certificate
• Insurance Premium Payment Certificate
• ARE I/ARE II Forms
• Shipping Bill/Bill of Export
• Port Trust Copy of Shipping Bill/Export Application/Dock Challan
• Receipt of Payment of Port Charges
• Vehicle Ticket.
EXPORT ASSISTANCE DOCUMENTS
• These are the documents which are required for claiming assistance under the various export
assistance measures as may be in operation from to time.
• Currently, these refer to drawbacks of central excise and customs duties, packing credit facilities
etc
DOCUMENTATION REQUIRED BY IMPORTINGCOUNTRIES
• These are the documents which are required by the importer in order to satisfy the requirements
of his Government.
• These include certificates of origin, consular invoice, quality control certificate etc.
COMMERCIAL DOCUMENTS
COMMERCIAL INVOICE
• It is the basic and most important document in an export transaction and extreme care has to be
taken by the exporter to prepare this document.
• This document requires the exporter to submit details such as
1. his own details,
2. Invoice number with date,
3. details of the consignee and buyer (if the buyer is other than consignee),
4. buyer’s order number with date,
5. country of origin of the goods,
6. country of final destination,
7. terms of payment and delivery,
8. pre-carriage details (Road/Rail),
9. vessel/flight number,
10. port of loading,
11. port of discharge,
12. final destination,
13. container number,

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14. number and kind of packaging,
15. detailed description of goods,
16. quantity,
17. rate and
18. total amount chargeable etc
• Therefore,a Commercial Invoice contains the complete details of the export order.
• Normally, the trade practice is to raise and send a Proforma Invoice to the buyer for his approval,
once the order has been finalized.
• On receipt of the approved Proforma Invoice, the exporter can use it as a part of the export
contract.
• The Commercial Invoice then becomes easier to prepare on the basis of the approved Proforma
Invoice.
PACKINGLIST
• This document provides the details of number of packages; quantity packed in each of them; the
weight and measurement of each of the package and the net and gross weight of the total
consignment.
• Net weight refers to the actual weight of the items and the gross weight means the weight of the
items plus the weight of the packing material.
• The packing list serves a useful purpose of the exporter while dispatching the consignment as a
cross check of goods sent.
• For the port personnel, it comes handy while planning the loading and offloading of cargo.
• It is also an essential document for the customs authorities as they as they can carry out the
physical examination of the cargo and conduct checks on the weight and measurements of the
goods smoothly against the declarations made by the exporter in the packing list.
CERTIFICATE OF INSPECTION
• This is the Certificate issued by the Export Inspection Agency after it has conducted the pre-
shipment inspection of goods for export provided the goods fall under the notified category of
goods requiring compulsory shipment of inspection.
CERTIFICATE OF INSURANCE/INSURANCE POLICY
• Insurance is an important area in the export business as the stakes are usually very high.
• Protection needs to be taken in the form of insurance cover for the duration of transit of goods
from the exporter to the importer.
BILL OF LADING
• This is issued when the goods are shipped using ocean (marine) transport.
• When the exporter finally hand over the goods to the shipping company for loading on board the
ship for transport to their final destination, the shipping company issues a set of Bills of Lading to
the exporter.

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AIRWAY BILL
• Airway Bill is a bill of lading when the goods are shipped using air transport.
• It is also known as air consignment note or airway bill of lading.
COMBINED TRANSPORT DOCUMENT
• This is also known as Multi-modal Transport Document.
• Ever since containers have become popular, the concept of Combined Transport Document has
gained solid ground.
CERTIFICATE OF ORIGIN
• This document serves as a proof of the country of origin of goods for the importer in his country.
• Imported countries usually require this to be produced at the time customs clearance of import
cargo.
• It also plays an important part in computing the liability and the rate of import duty in the
country of import.
• This certificate declares the details of goods to be shipped and the country where these goods are
grown, manufactured or produced.
• Such goods needs to have substantial value addition so as to become eligible to certification of
this nature.
BILL OF EXCHANGE
• Also known as Draft,this is an instruments for payment realization.
• It is a written unconditional order for payment from a drawer to a drawee,directing the drawee to
pay a specified amount of money in a given currency to the drawer or a named payee at a fixed or
determinable future date.
• The exporter is the drawer and he draws (prepares and signs) this unconditional order in writing
upon the importer (drawee) asking him to pay a certain sum of money either to himself or his
nominee (endorsee).
• This order could be made for payment on demand, called a bill of exchange at sight or payment at
a future date, called a usance bill of exchange.
SHIPPINGADVICE
• The exporter sends this document , called shipping advice, to the buyer soon after the shipment is
made to provide him all the shipment details.
• This serves as an advance intimation of the shipment and allows the importer to arrange for
delivery of the same.

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FRANCHISES, LICENSING, ANDSTRATEGIC ALLIANCES
FRANCHISE
• Established when one party licenses another party to use the franchisor’s trade name, trademarks,
commercial symbols, patents, copyrights, and other property in the distribution and selling of
goods and services
• Generally, the franchisor and the franchisee are established as separate corporations
ADVANTAGES TO FRANCHISING
• The franchisor can reach lucrative new markets
• The franchisee has access to the franchisor’s knowledge and resources while running an
independent business
• Consumers are assured of uniform product quality
PARTIES TO A TYPICAL FRANCHISE AGREEMENT
’

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TYPES OF FRANCHISES
1. Distributorship Franchise
• The franchisor manufactures a product and licenses a retail franchisee to distribute the
product to the public
• e.g., the Ford Motor Company manufactures automobiles and franchises independently
owned dealers to sell them to the public
2. Processing Plant Franchise
• The franchisor provides a secret formula or process to the franchisee
• The franchisee manufactures the product and distributes it to retail dealers
• e.g., the Coca-Cola Corporation licenses regional bottling companies to manufacture and
distribute soft drinks under the “Coca-Cola” and other brand names
3. Chain-Style Franchise
• The franchisor licenses the franchisee to make and sell its products or distribute services to
the public from a retail outlet serving an exclusive territory
• Most fast-food franchises use this form
• e.g., the Pizza Hut Corporation franchises independently owned restaurant franchises to make
and sell pizzas to the public under the “Pizza Hut” name
4. Area Franchise
• The franchisor grants the franchisee a franchise for an agreed-upon geographical area
• The franchise may determine where to locate the outlets in the designated area
• An area franchisee may be granted the authority to negotiate and sell franchises in the
designated area on behalf of the franchisor
• Franchisee is also called the subfranchisor
5. State Disclosure Laws

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• Many states have enacted statutes that require franchisors to make specific presale disclosures
to prospective franchisee
• Some states use a uniform disclosure statement called the Uniform Franchise Offering
Circular (UFOC)
6. Franchising Rule
• The rule requires franchisors to make presale disclosures to prospective franchisees
• The franchisor must disclose assumptions underlying any estimates and hypothetical data
• The franchisor must provide a mandated precautionary statement
7. Franchise Agreement
• An agreement that the franchisor and the franchisee enter into that sets forth the terms and
conditions of the franchise:
• Quality control standards
• Training requirements
• Covenant not to compete
• Arbitration clause
• Use of franchisor’s trade name, logo, and trademark
• Conditions for the termination of the franchise
8. Franchise Fees
• Franchise fees payable by the franchise are usually stipulated in the franchise agreement:
• Initial license fee
• Royalty fee
• Assessment fee
• Lease fee
• Cost of supplies
9. Breach of the Franchise Agreement
• A lawful franchise agreement is an enforceable contract
• Each party owes a duty to adhere to and perform under the terms of the franchise agreement
• If the agreement is breached,the aggrieved party can sue the breaching party for rescission of
the agreement,restitution, and damages
10. Trademarks
• A franchisor licenses the use of its trademarks and service marks to its franchisees in the
franchise agreement
• Anyone who uses a mark without authorization from the franchisor may be sued for
trademark infringement
• The franchisor can recover damages and obtain an injunction prohibiting further unauthorized
use of the mark
11. Misappropriation of Trade Secrets
• Anyone who steals and uses a franchisor’s trade secret is liable for misappropriation of a
trade secret
• The franchisor can recover damages and obtain an injunction prohibiting further unauthorized
use of the trade secret
12. Contract and Tort Liability
• Franchisors and franchisees are liable for their own contracts

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• Franchisors and franchisees are liable for their own tort liability
• e.g., if a person is injured by a franchisee’s negligence, the franchisee is liable
13. Independent Contractor Status
• If properly organized and operated, the franchisor and franchisee are separate legalentities
• The franchisor deals with the franchisee as an independent contractor
• A franchisee is not the agent of the franchisor
• The franchisor is not liable for the franchisee’s contracts and torts
14. Actual Agency
• An arrangement that occurs where a franchisor expressly or implicitly by its conduct makes a
franchisee its agent
• The franchisor is liable for the contracts entered into and torts committed by the franchisee
while acting within the scope of its agency
15. Apparent Agency
• Agency that arises when a franchisor creates the appearance that a franchisee is its agent
when in fact an actualagency does not exist
• The franchisor is liable for the contracts entered into and torts committed by the franchisee
acting as an apparent agent
16. Termination “For Cause”
• A franchisor can terminate a franchise agreement for “just cause”
• e.g., nonpayment of franchise fees by the franchisee
• e.g., continued failure to meet quality control standards
17. Termination at Will
• Most state and federal laws regarding franchising prohibit franchisors from terminating the
franchises at will
• Prevents a franchisor from taking advantage of the good will developed at the franchise
location by the franchisee
18. Wrongful Termination
• If a franchisor terminates a franchise agreement without just cause,the franchisee can sue the
franchisor for wrongful termination
• The franchisee can recover damages caused by the wrongful termination and recover the
franchise
LICENSING

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• An arrangement where a party that owns trademarks and other intellectual property (the licensor)
contracts to permit another party (the licensee) to use these trademarks and intellectual property
in the distribution of goods, services, software,and digital information
PARTIES TO A TYPICAL LICENSINGAGREEMENT
JOINT VENTURE
• An arrangement whereby two or more business entities combine their resources to pursue a single
project or transaction
• Joint Venturer – a party to a joint venture
• Joint venturers owe each other duty of fiduciary duty and loyalty
• If a joint venturer violates this duty, it is liable for the damages the breach causes
STRATEGIC ALLIANCE
• An arrangement between two or more companies in the same industry whereby they agree to ally
themselves to accomplish a designated objective
• It allows the companies to reduce risks, share costs,combine technologies, and extend their
markets

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• Strategic alliances do not have the same protection as mergers,joint ventures, or franchising, and
are sometimes dismantled
• Consideration must always be given to the fact that a strategic alliance partner is also a potential
competitor
FOREIGN DIRECT INVESTMENT
• International investment or capital flows
• It falls 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
governments.
• Foreign direct investment (FDI) pertains to international investment in which the investor obtains
a lasting interest in an enterprise in another country.
• 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.
• FDI tends to involve establishing more of a substantial, long-term interest in the economy of a
foreign country. Because of the significantly higher level of investment required,
• FDI is usually undertaken by multinational companies or venture capital firms.
• The nature of FDI, such as creating or acquiring a manufacturing facility, makes it much more
difficult to liquidate or pull out of the investment.
• FDI is usually undertaken with essentially the same attitude as establishing a business in one's
own country, with the intention to make the business profitable and to continue operating it
indefinitely.
• FDI includes having control over the business invested in and being able to manage it directly.
ADVANTAGES OF FOREIGN DIRECT INVESTMENT
• Economic Development Stimulation
• Easy International Trade
• Employment and Economic Boost
• Development of Human Capital Resources
• Tax Incentives

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• Resource Transfer
• Reduced Disparity Between Revenues and Costs
• Increased Productivity
• Increment in Income
DISADVANTAGES OF FOREIGN DIRECT INVESTMENT
• Hindrance to Domestic Investment
• Risk from Political Changes
• Negative Influence on Exchange Rates
• Higher Costs
• Economic Non-Viability
• Expropriation
• Negative Impact on the Country’s Investment
• Modern-Day Economic Colonialism
PROHIBITED SECTORS
• Lottery Business including Government/private lottery, online lotteries, etc.
• Gambling and Betting including casinos etc.
• Chit funds
• Nidhi company
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business or Construction of Farm Houses (Realestate business does not include
development of townships, construction of residential /commercial premises, roads or bridges )
• Manufacturing of tobacco or of tobacco substitutes
• Activities/sectors not open to private sector investment e.g. Atomic Energy and Railway
operations (other than permitted activities)
FOREIGN PORTFOLIO INVESTMENT (FPI)
• It 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.
• Stocks:
• dividend payments
• holder owns a part of a company
• possible voting rights
• open-ended holding period
• Bonds:
• interest payments
• ownership of bond rights only
• no voting rights
• specific holding period
• FPI typically has a shorter time frame for investment return than FDI.

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• Any equity investment, FPI investors usually expect to quickly realize a profit on their
investments
• FPI doesn't offer control over the business entity in which the investment is made. Because
securities are easily traded, the liquidity of FPIs makes them much easier to sell than FDIs.
• FPIs are more accessible for the average investor than FDIs,since they require much less
investment capital.
• When making foreign investments, investors have to consider economic factors as well as other
risk factors,such as political instability and currency exchange risk
FDI & PRODUCTIONLINKAGES
• FDI to host countries depends on the production linkages between foreign affiliates and domestic
firms
• Linkages cab be
• Backward:-foreign affiliates acquires good/services from domestic firms
• Forward:-foreign affiliates sells good/services from domestic firms
• Horizontal:-involves interactions with domestic firms engaged in competing activities
FOREIGN INVESTMENT IN INDIA
• Government Policy
• FERA
• FII(Foreign institutional investments)
RESTRICTIONS ON FOREIGN INVESTMENT IN INDIA
• Investment in sectors limited
• Foreign technological investments
• Selective in foreign capital
• Foreign equity participation is limited
• Payment on dividends limited by FERA,1973
• Corporate taxes
RECENT POLICY MEASURES
• 49% FDI under automatic route permitted in Insurance and Pension sectors
• Foreign investment up to 49% in defence sector permitted under automatic route. The foreign
investment in access of 49% has been allowed on case to case basis with Government approval in
cases resulting in access to modern technology in the country or for other reasons to be recorded
• FDI limit of 100% (49% under automatic route, beyond 49% government route) for defence
sector made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms
Act 1959
• FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable Networks,
Mobile TV, Headend-in- the Sky Broadcasting Service
• FDI up to 100% under automatic route permitted in Up-linking of Non-‘News & Current Affairs’
TV Channels, Down-linking of TV Channels

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• In case of single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products,
sourcing norms can be relaxed up to three years and sourcing regime can be relaxed for another 5
years subject to Government approval
• Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling
Services increased from 74% to 100% under the automatic route
• 100% FDI under automatic route permitted in Brownfield Airport projects
• FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and
regional Air Transport Service raised to 100%, with FDI upto 49% permitted under automatic
route and FDI beyond 49% through Government approval
• Foreign airlines would continue to be allowed to invest in capital of Indian companies operating
scheduled and nonscheduled airtransport services up to the limit of 49% of their paid up capital
• In order to provide clarity to the e-commerce sector,the Government has issued guidelines for
foreign investment in the sector. 100% FDI under automatic route permitted in the marketplace
model of e-commerce
• 100% FDI under Government route for retail trading, including through e-commerce,has been
permitted in respect of food products manufactured and/or produced in India
• 100% FDI allowed in Asset Reconstruction Companies under the automatic route
• 74% FDI under automatic route permitted in brownfield pharmaceuticals. FDI beyond 74% will
be allowed through government approval route
• FDI limit for Private Security Agencies raised to 74% (49% under automatic route, beyond 49%
and upto 74% under government route)
• For establishment of branch office, liaison office or project office or any other place of business
in India if the principal business of the applicant is Defence,Telecom, Private Security or
Information and Broadcasting, approval of Reserve Bank of India would not be required in cases
where FIPB approval or license/permission by the concerned Ministry/Regulator has already been
granted
• Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding of
dogs), Pisciculture, Aquaculture and Apiculture has been waived off
TYPES OF INVESTORS
• Individual:
• FVCI (Foreign Venture Capital Investors)
• Pension/Provident Fund
• Financial Institutions
• Company:
• Foreign Trust
• Sovereign Wealth Funds
• NRIs (Non Resident Indians)/ PIOs (Persons of Indian Origin)
• Foreign Institutional Investors:
• Private Equity Funds
• Partnership / Proprietorship Firm
• Others

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ENTRY STRUCTURES
1. Incorporating a company in India:
• It can be a private or public limited company.
• Both wholly owned & joint ventures are allowed.
• Private limited company requires minimum of 2 shareholders.
2. Limited liability partnerships:
• Allowed under the Government route in sectors which has 100% FDI allowed under the
automatic route and without any conditions.
3. Sole proprietorship/partnership firm:
• Under RBI approval. RBI decides the application in consultation with Government of India.
4. Extension of foreign entity:
• Liaison office, Branch office (BO) or Project Office (PO).
• These offices can undertake only the activities specified by the RBI.
• Approvals are granted under the Government and RBI route.
• Automatic route is available to BO/PO meeting certain conditions.
STEPS INVOLVED IN INVESTMENT
• Identification of structure
• Central Government approval if required
• Setting up or incorporating the structure
• Inflow of funds via eligible instruments and following pricing guidelines
• Meeting reporting requirements of RBI and respective Act
• Registrations/obtaining key documents like PAN etc.
• Project approval at State/UT level
• Finding ideal space for business activity based on various parameters like incentives, cost,
availability of man power etc.
• Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM), some
of the industries may also require industrial license.
• Construction/renovation of unit.
• Hiring of manpower.
• Obtaining licenses if any.
• Other state & centrallevel registrations.
• Meeting annual requirements of a structure,paying taxes etc.
FOREIGN EXCHANGE MARKET
• Foreign exchange market: a market for converting the currency of one country into the currency
of another.
• Exchange rate:the rate at which one currency is converted into another
• Foreign exchange risk: the risk that arises from changes in exchange rates
• Market in which currencies are bought and sold and their prices are determined
• Conversion: To facilitate sale or purchase, or invest directly abroad
• Hedging: Insure against potential losses from adverse exchange-rate changes
• Arbitrage: Instantaneous purchase and sale of a currency in different markets for profit

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• Speculation: Sequential purchase and sale (or vice-versa) of a currency for profit
FUNCTIONS OF THE FOREIGN EXCHANGE MARKET
• The foreign exchange market serves two main functions:
• Convert the currency of one country into the currency of another
• Provide some insurance against foreign exchange risk
• Foreign exchange risk: the adverse consequences of unpredictable changes in the exchange rates
CURRENCY CONVERSION
• Consumers can compare the relative prices of goods and services in different countries using
exchange rates
• International business have four main uses of foreign exchange markets
• To exchange currency received in the course of doing business abroad back into the
currency of its home country
• To pay a foreign company for its products or services in its country’s currency
• To invest excess cash for short terms in foreign markets
• To profit from the short-term movement of funds from one currency to another in the
hopes of profiting from shifts in exchange rates,also called currency speculation
INTERNATIONAL MONETARYSYSTEM
• Rules and procedures by which different national currencies are exchanged for each other in
world trade.
• Such a system is necessary to define a common standard of value for the world's currencies.
• Refer to the institutional arrangements that countries adopt to govern exchange rates
• Floating
• Pegged exchange rate
• Dirty float
• Fixed exchange rate
• Floating exchange rates occur when the foreign exchange market determines the relative value of
a currency
• The world’s four major currencies – dollar, euro, yen, and pound – are all free to float against
each other
• Pegged exchange rates occur when the value of a currency is fixed relative to a reference
currency
• Dirty float occurs when countries hold the value of their currency within a range of a reference
currency
• Fixed exchange rate occurs when a set of currencies are fixed against each other at some mutually
agreed upon exchange rate
• Pegged exchange rates,dirty floats and fixed exchange rates all require some degree of
government intervention

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EVOLUTION OF INTERNATIONAL MONETARY SYSTEM
The Gold Standard
• In place from 1700s to 1939
• a monetary standard that pegs currencies to gold and guarantees convertibility to gold
• It was thought that gold standard contained an automatic mechanism that contributed to the
simultaneous achievement of a balance-of-payments equilibrium by all countries.
• The gold standard broke down during the 1930s as countries engaged in competitive devaluations
• Roots in old mercantile trade
• Inconvenient to ship gold, changed to paper- redeemable for gold
• Want to achieve ‘balance-of-trade equilibrium
Between The Wars
• Post WWI, war heavy expenditures affected the value of dollars against gold
• US raised dollars to gold from $20.67 to $35 per ounce
• Dollar worth less?
• Other countries followed suit and devalued their currencies
Bretton Woods
• In 1944, 44 countries met in New Hampshire
• Countries agreed to peg their currencies to US$ which was convertible to gold at $35/oz
• Agreed not to engage in competitive devaluations for trade purposes and defend their currencies
• Weak currencies could be devalued up to 10%
• Created the IMF and World Bank
COLLAPSE OF THE FIXED EXCHANGE SYSTEM
• The system of fixed exchange rates established at Bretton Woods worked well until the late
1960’s
• The US dollar was the only currency that could be converted into gold
• The US dollar served as the reference point for all other currencies
• Any pressure to devalue the dollar would cause problems through out the world
• Factors that led to the collapse of the fixed exchange system include
• President Johnson financed both the Great Society and Vietnam by printing money
• High inflation and high spending on imports
• On August 8, 1971, President Nixon announces dollar no longer convertible into gold
• Countries agreed to revalue their currencies against the dollar
• On March 19, 1972, Japan and most of Europe floated their currencies
• In 1973, Bretton Woods fails because the key currency (dollar) is under speculative
attack

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THE FLOATINGEXCHANGE RATE
• The Jamaica agreement revised the IMF’s Articles of Agreement to reflect the new reality of
floating exchange rates
• Floating rates acceptable
• Gold abandoned as reserve asset
• IMF quotas increased
• IMF continues role of helping countries cope with macroeconomic and exchange rate problems
EXCHANGE RATES SINCE 1973
• Exchange rates have been more volatile for a number of reasons including:
• Oil crisis -1971
• Loss of confidence in the dollar - 1977-78
• Oil crisis – 1979, OPEC increases price of oil
• Unexpected rise in the dollar - 1980-85
• Rapid fall of the dollar - 1985-87 and 1993-95
• Partial collapse of European Monetary System - 1992
• Asian currency crisis - 1997
FIXED VERSUS FLOATINGEXCHANGE RATES
• Floating:
• Monetary policy autonomy
• Restores control to government
• Trade balance adjustments
• Adjust currency to correct trade imbalances
• Fixed:
• Monetary discipline
• .Speculation
• Limits speculators
• Uncertainty
• Predictable rate movements
• Trade balance adjustments
• Argue no link between exchange rates and trade
• Link between savings and investment
EXCHANGE RATE REGIMES
• Pegged Exchange Rates
• Peg own currency to a major currency ($)
• Popular among smaller nations
• Evidence of moderation of inflation
• Currency Boards
• Country commits to converting domestic currency on demand into another currency at a
fixed exchange rate

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• Country holds foreign currency reserves equalto 100% of domestic currency issued
EXCHANGE-RATE ARRANGEMENTS
• IMF permitted countries to select and maintain an exchange-rate arrangement of their choice
• IMF surveillance and consultation programs
• designed to monitor exchange-rate policies
• determine whether countries were acting openly and responsibly in exchange-rate
policy
DETERMINATION OF EXCHANGE RATES
• Floating rate regimes—allow changes in the exchange rates between two currencies to occur for
currencies to reach a new exchange-rate equilibrium
• Currencies that float freely respond to supply and demand conditions
• No government intervention to influence the price of the currency
ECONOMIC THEORIES OF EXCHANGE RATE DETERMINATION
• Exchange rates are determined by the demand and supply of one currency relative to the demand
and supply of another
• Price and exchange rates:
• Law of One Price
• Purchasing Power Parity (PPP)
• Money supply and price inflation
• Interest rates and exchange rates
1. Law of One Price
• In competitive markets free of transportation costs and trade barriers, identical products
sold in different countries must sell for the same price when their price is expressed in
terms of the same currency
• Example: US/French exchange rate: $1 = .78Eur
• A jacket selling for $50 in New York should retail for 39.24Eur in Paris (50x.78)
2. Purchasing Power Parity
• By comparing the prices of identical products in different currencies, it should be
possible to determine the ‘real’ or PPP exchange rate - if markets were efficient
• In relatively efficient markets (few impediments to trade and investment) then a ‘basket
of goods’ should be roughly equivalent in each country
3. Money Supply and Inflation
• PPP theory predicts that changes in relative prices will result in a change in exchange
rates
• A country with high inflation should expect its currency to depreciate against the
currency of a country with a lower inflation rate
• Inflation occurs when the money supply increases faster than output increases
DETERMINATION OF EXCHANGE RATES
• Fisher Effect - links inflation and interest rates

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• nominal interest rate in a country is the real interest rate plus inflation
• because the realinterest rate should be the same in every country, the country with the
higher interest rate should have higher inflation
• International Fisher Effect (IFE) - links interest rates and exchange rates
• the interest-rate differential is a predictor of future changes in the spot exchange rate
• interest-rate differential based on differences in interest rates
• currency of the country with the lower interest rate will strengthen in the future
• Other factors affecting exchange rate movements
• Confidence—safe currencies considered attractive in times of turmoil
• Technical factors
• release of national statistics
• seasonaldemands for a currency
• slight strengthening of a currency following a prolonged weakness
FORECASTING EXCHANGE-RATE MOVEMENTS
• Managers should be concerned with the timing, magnitude, and direction of an exchange-rate
movement
• Prediction is not a precise science
• Fundamental forecasting
• uses trends in economic variables to predict future rates
• Use econometric model or more subjective bases
• Technical forecasting
• uses past trends in exchange rates to spot future trends in the rates
• Assumes that if current exchange rates reflect all facts in the market, then under
similar circumstances future rates will follow the same patterns
• Good treasurers and bankers develop their own forecasts
• Use fundamental and technical forecasts for corroboration
• Factors to monitor
• managers can monitor factors used by governments to manage their currencies
• Institutional setting – float or managed?
• Fundamental analysis – economics indicator
• Confidence factors
• Events
• Technical analysis
BUSINESS IMPLICATIONS OF EXCHANGE-RATE CHANGES
• Marketing decisions
• exchange rates affect demand for a company’s products at home and abroad
• Production decisions
• choice of location for production facilities depends on strength of currency
• Financial decisions
• exchange rates influence the sourcing of financial resources,the cross-border remittance
of funds, and the reporting of financial results

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IMPLICATIONS FOR MANAGERS
• It is critical that international businesses understand the influence of exchange rates on the
profitability of trade and investment deals
• Adverse changes in exchange rates can make apparently profitable deals unprofitable
• The risk introduced into international business transactions by changes in exchange rates is
referred to as foreign exchange risk
• Foreign exchange risk is usually divided into three main categories: transaction exposure,
translation exposure, and economic exposure
IMPLICATIONS FOR MANAGERS
• Transaction exposure: the extent to which the income from individual transactions is affected by
fluctuations in foreign exchange values
• Translation exposure: the impact of currency exchange rate changes on the reported financial
statements of a company
• Economic exposure: the extent to which a firm’s future international earning power is affected by
changes in exchange rates