Module – 1

Introduction to International Business

What is international Business?

International business refers to the trade of goods, services, technology, capital and/or
knowledge across national borders. It involves cross-border transactions of goods and
services between two or more countries.
Example

Rock Salt (From

Pakistan Rs 20/KG)

India Needs Money

Rock Salt

Rock Salt (From

Rock Salt Bhutan Rs 15/KG)

Nature of International Business

 Involves 2 or more than 2 countries

 Large Volume Business
 Deals with environment (Uncontrollable) of countries involved in trade
 Risk Involved
 Competition is intense

Scope of International Business

 Export, Import and Re-Export

 Currency Exchange
 International HR
 Licensing, Franchising and other options
 Growth Opportunities
Importance of International Trade

 Market Expansion
 Brings Foreign Exchange
 Increased Employment Opportunities
 Improved International Relations
 Improved Living Standards via access to quality and innovations
 Sharing Risk

Driving Forces

 Limited Home Market: When the size of the home market is limited either due to
the smaller size of the population or due to the lower purchasing power of all people
or both, the companies internationalize their operations. Similarly, A company, which
is mature in its domestic market, is driven to sell in more than one country because
the sales volume achieved in its own domestic market is not large enough to fully
capture the manufacturing economies of scale. For example, ITC Indian cigarette
major captured the European market.
 Excess of Production: Some of the domestic companies expand their production
capacities more than the demand for the product in the domestic market. In such
cases, these companies are forced to sell their extra production in foreign developed
countries. For example, Nokia is an international company based in Finland whose
production capabilities were very large compared to the population of Finland.
Similarly, Toyota of Japan has a large export market.
 Global Marketplace: International business has become easier since the advent of
the internet and the emergence of e-business. In order to do business internationally, a
company must have a good product, the right strategy, and an appetite to take a risk at
the global marketplace.
 Emerging Markets: Compared to developed countries, developing countries are
growing at a healthy pace, thus reducing the barriers of trade. Emerging markets
provide an unexplored marketplace with unlimited potential and scope for business.
 Growth in Market Share: Some companies would like to enhance their market share
in the global market by expanding & intensifying their operations in various foreign
 countries. The Smaller companies expand internationally for survival while the larger
companies expand to increase their market share.
 Higher Rate of Profits: The main objective of any business is to achieve profits.
When the domestic markets don’t promise a higher rate of profits,
 Political Stability: The Political stability means that continuation of the same policies
of the Government for a quite long period. Business firms prefer to enter the
politically stable countries & are restrained from locating their own business
operations in politically unstable countries.
 Technology and Communication: Technology is the principal drivers of international
business. The Availability of advanced technology & competent human resources in
some countries acts like pulling factors for business firms from other countries.
Advanced information technology has transformed our economic life as well as in the
businesses sector. Advanced communication technology, such as the internet allowed
the customer to get information for new goods and services easily. Besides, falling
communication costs allow information move quickly and inexpensively.
 Transportation: The transport systems has reduced the travelling time and increase
the efficiency of transferring goods. The lower unit cost of shipping products around
the global economy helps to bring prices in the country of manufacture closer to those
in export markets.
 Changing Demographics: Most developed countries face challenges in sourcing
workforce as the average age of the population is getting older. In the next 10 years,
most of the industrialized nations will have to depend on sourcing its workforce from
countries like India, China and other countries, where the population is young, with an
abundance of skilled labour. India is the chief source of workforce with English
speaking graduates and other diploma holders.
 Liberalization of Economic Policies: Most of the countries around the globe
liberalized their economies &opened their countries to the rest of the globe. Old forms
of non-tariff protection such as import licensing and foreign exchange controls have
gradually been dismantled. Borders have opened, and average import tariff levels
have fallen. These change in the policies attracted multinational companies to the
extent their operations to these countries.
 Trading Blocs: Formation of various regional and international trading blocs like the
European Union, World Trade Organisation, South Asian Free Trade Agreement and
 the North American Free Trade Agreement have resulted in increased regional
cooperation. These trading blocs promote business within their scope by facilitating
free trade zones, which literally eliminates any trade or investment barriers. Regional
trading blocs like SAARC also facilitate easy movement of goods, services, and
human resources within the region, thus providing a uniform opportunity to all the
countries (in the region) for proper allocation of resources.
 Differences in Tax System: The desire of businesses to benefit from lower unit
labour costs and other favourable production factors abroad has encouraged countries
to adjust their tax systems to attract foreign direct investment (FDI). Many countries
have started tax holiday schemes for foreign investment projects.
 Cultural exchange: People travel to different countries and share their cultural
beliefs and practices with each other. Through this process, cultural assimilation takes
place which drives globalization and international business. McDonald’s and KFC
were unknown to India a few years back, now they have become part of India’s life.

Restraining Forces

There are many Problems in International Business. The restraining forces slow down the
progress of companies that take up International Business. The restraining forces are :

1. First Main Problem in International Business is Culture: The culture of the nation and the
companies should have an international vision. The long term perspective of companies
should be to move wherever market opportunities are good. Inward-looking culture makes
companies remain local.
2. Another main problem in International Business is Market Competition in Host Country:
If the best global companies enter the markets, the competition goes intense, and
accordingly, inefficient companies have to close their shops.
3. Another main problem in International Business is Costs: The competition calls for
marketing quality products at competitive prices. If prices are high the market rejects the
products.
4. One of the main problems in International Business is National Controls: The nation-build
barriers for outside country manufacturers by increasing trade barriers. Trade barriers will
be direct by way of high customs duties. Indirect barriers will be licensing procedures,
quota system, inspection, certification, and tedious paperwork.
5. Another main problem in International Business is Nationalization: Due to Ideological
differences, some nations do not trade with nations of their dislike.
6. Another main problem in International Business is War and Terrorism: The political
uncertainties and war-like situation are blockages to the growth of trade.
7. One of the main problems in International Business is Shortsightedness of Management:
Some management ignores vast business opportunities across national borders. The
companies do not wish to go beyond national borders. If a company does not adapt to
local conditions it does not survive.
8. One of the main problems in International Business is Organization History: The
companies who are contended and like to remain within a nation.
9. Another main problem in International Business is Domestic Forces: The government or
social restrictions imposed on commerce and industry become a hurdle in a company
going global.
10. One of the main problems in International Business is Conflict within companies and
within the international organization: Difference of opinion in strategies to be adopted
between different management levels in international business. If support is inadequate the
international business proposal fails.

Domestic to International Business (Internationalization)

Internationalization is the practice of designing products, services and internal operations to

facilitate expansion into international markets. Internationalization describes the process of
designing products to meet the needs of users in many countries or designing them so they
can be easily modified, to achieve this goal

Stages of Internationalization

 Domestic-market establishment - The domestic market is often an appropriate place

to test products and fine-tune performance before tackling the complexities of
international trade. It can also give a good indication of performance.
 Export research and planning - Undertaking appropriate international-market-
research and planning activities is that by creating a written document, potential
problems and weaknesses can be identified more easily. This enables exporters to
foresee potential challenges prior to making the investment of time and money that
will be required for successful export-market development.
 Initiate Export - During this stage, the exporter should use initial shipments to
become familiar with the mechanics of exporting. These mechanics include
documentation, distribution channels, transportation and collections as well as
learning about regulations that might affect the business.
 Expansion of international sales - This stage is usually accompanied by intensified
market research, more aggressive participation in international trade shows and other
marketing activities and greater emphasis on strengthening networks and contacts in
the target market.
 Investment abroad - If sales are brisk, profits encouraging and opportunities
promising, the company may choose to expand its presence in the target market
through investment.

Modes of Entry to International Business

 Export
 Import
 Re-Export
 Sourcing
 Licensing and Franchising
 Turnkey Projects and Contracts

What is Globalisation?

Globalisation enables the coming together of individuals, corporations and resources from
different countries. The unique characteristics of globalisation have allowed people with
diverse backgrounds to interact freely. It is the vehicle that has helped global trade scale new
heights in the last few decades.

Characteristics of Globalisation

This concept has enabled economies of scale for companies in production and distribution. It
has also encouraged outsourcing and technology transfer among companies and countries,
thus increasing their interdependence on each other. The main characteristics of globalisation
are listed below:
1. Free Trade – Globalisation has helped improve trade volumes between nations with
minimal interference. The reason is that governments are not micromanaging every
minute aspect of business transactions. The Gross Domestic Product (GDP) of
countries that have accepted globalisation has also increased significantly, thus
bringing in greater prosperity. It has also resulted in better cooperation between
governments that leads to further improvement in trade.
2. Liberalization – One of the main characteristics of globalisation is the improvement
in the business climate for corporations. It has helped entrepreneurs to set up
businesses and transact both within and outside the country. The rules and regulations
for companies are relaxed significantly to allow for more trade between nations due to
globalisation. Flexibility in trade regulations pushes governments to make further
concessions to industries. Both Liberalization and Globalisation are dependent on
each other.
3. Increase in Employment – Every industry is responsible for generating both direct
and indirect jobs. And when production increases, it has a positive effect on
employment. Globalisation helps companies increase their production capacity and set
up operations in different parts of the world. It also helps boost work opportunities in
countries where these corporations have set up operations.
4. Increased connectivity between nations – Globalisation has helped countries
improve trade relations with each other. It has increased interaction between people
and businesses. Better connectivity also boosts a country’s economy and enhances the
standard of living for its citizens.
5. Interdependence – With the advent of globalisation, countries have become more
reliant on each other. Businesses get the opportunity to import cheaper raw materials
to produce their commodities. They are also being allowed to export to countries that
have more demand for their finished goods. It has helped reduce trading barriers and
build overall economic prosperity.
6. Cultural Exchange – Improvement in people to people contacts have encouraged the
intermingling of cultural practices and customs. It has allowed people to exchange
ideas, behaviours and values with other countries. Communities are less isolated as a
result of globalisation. For example, several American eateries have penetrated
different parts of the world. Similarly, cuisine from far off countries is now readily
available in the United States.
 7. Urbanization – One of the consequences of globalisation is the increase in urban
centres. When many foreign/local companies set up businesses in a particular area, it
becomes a hotbed of economic activity. The people who work in those companies
need infrastructure near their workplace in terms of housing, transport, shops and
other establishments. Globalisation leads to the building of urban centres in and
around industrial areas.
8. Standard of Living – With increased economic activity and opportunities for
employment, people have more money in their pockets. They also have more options
to choose from because of improved job opportunities. It is one of the main reasons
why globalisation allows more and more people to improve their standard of living.
9. Production Cost – In a globalized world, companies are free to establish their
operations in areas where the cost of production is low. The cheap availability of land,
labour and raw materials has become very important. So it makes sense for companies
to go where these resources are present in abundant quantities and at discounted rates.
It helps them gain over their rivals by lowering costs and improving profit margins.
10. Outsourcing – One of the characteristics of globalisation is that it allows companies
to bring in third parties from outside the country to manage specific processes. They
take this step to reduce internal costs, improve the quality of services or both.
Outsourcing is a boon for several human resource-rich countries that are looking to
generate employment. Countries like India and the Philippines have benefitted
immensely as a result of this practice.

Factors Driving Globalization

The media and almost every book on globalization and international business speak about
different drivers of globalization and they can basically be separated into five different
groups:
 Technological drivers - Technology shaped and set the foundation for modern
globalization. Innovations in the transportation technology revolutionized the
industry. The most important developments among these are the commercial jet
aircraft and the concept of containerisation in the late 1970s and 1980s. Inventions in
the area of microprocessors and telecommunications enabled highly effective
computing and communication at a low-cost level. Finally the rapid growth of the
 Internet is the latest technological driver that created global e-business and e-
commerce.
 Political drivers - Liberalized trading rules and deregulated markets lead to lowered
tariffs and allowed foreign direct investments in almost all over the world. The
institution of GATT (General Agreement on Tariffs and Trade) 1947 and the WTO
(World Trade Organization) 1995 as well as the ongoing opening and privatization in
Eastern Europe are only some examples of latest developments.
 Market drivers - As domestic markets become more and more saturated, the
opportunities for growth are limited and global expanding is a way most organizations
choose to overcome this situation. Common customer needs and the opportunity to
use global marketing channels and transfer marketing to some extent are also
incentives to choose internationalization.
 Cost drivers - Sourcing efficiency and costs vary from country to country and global
firms can take advantage of this fact. Other cost drivers to globalization are the
opportunity to build global scale economies and the high product development costs
nowadays.
 Competitive drivers - With the global market, global inter-firm competition
increases and organizations are forced to “play” international. Strong
interdependences among countries and high two-way trades and FDI actions also
support this driver.
Advantages and Disadvantages of Globalization

Advantages of Globalization

 Access to New Markets - Globalization gives businesses the opportunity to expand

into new markets, reach international buyers, and increase revenue. Over time,
companies can experience saturation for demand of their products or services
domestically. By expanding globally, they can continue growing by meeting foreign
demand.
 Spread of Knowledge and Technology - In order to cooperate globally, companies
must share similar technology and a technological structure. E-commerce, for
example, allows companies to sell products worldwide through Amazon.com.
 Enhanced Global Cooperation and Tolerance - Globalization enhances cooperation
by enabling countries to specialize. This allows them to leverage their economic
 strengths and trade those products for other resources. For example, a country in
South America that specializes in sugar cane can export it to a developed country in
exchange for manufactured goods.
 Promotes Economic Growth - Studies have found that globalization enhances
economic growth by distributing resources more efficiently because countries can
specialize in activities with comparative advantages. It also promotes growth
indirectly through complementary reforms in terms of capital and financial
development.

Disadvantages of Globalization

 Increased Competition - Although free trade can increase a nation’s wealth, it also
increases competition. Local businesses must compete with multinational
corporations that produce cheaper goods at lower costs, which puts them at a
disadvantage.
 Exploitation of Labor and Resources
 Imbalanced Trade - A trade imbalance, also known as a trade deficit, occurs when a
country spends more on imports than it makes on exports. This creates a shortfall in
capital that the country must make up for either by borrowing money from foreign
lenders or permitting foreign investments in its assets.
 Domestic Job Loss

Stages of Globalization
Characteristics and Role of MNC`S
 Advantages and Disadvantages of MNC`s

Advantages / Role of MNC`s

 Foreign Capital: Developing countries suffer from shortage of capital required for

rapid industrialization. MNCs bring in capital for the development of these countries.

Direct foreign investment speeds up the process of economic development.

 Advanced Technology: Developing countries are technologically backward. They do

not have sufficient resources to carry on research and development. MNCs bring

advanced technology to developing countries. Through continuous research and

development, MNCs serve as a source of inventions and innovations.

  Employment Opportunities: Developing countries face unemployment problem.

MNCs create large scale employment opportunities in host countries. TNCs increase

the investment level and thereby the employment level.

 Foreign Exchange: Most of the developing countries face adverse balance of

payment position. MNCs help the host countries to increase their exports and reduce

their dependence on imports. As a result, balance of payment position of host

countries improves.

 Development of Human Resources: MNCs employ modern management techniques

and trained managers. MNCs help to professionalism management in host countries.

As carriers of knowledge and experience, MNCs build up knowledge base and

thereby assist the development of human resources in host countries.

 Healthy Competition: MNCs increase competition and thereby break domestic

monopolies. MNCs compel the domestic companies to improve their efficiency or

withdraw from the market. For example, many Indian companies acquired ISO-9002

quality certification due to competition from multinational corporations after 1991.

 Growth of Domestic Firms: MNCs stimulate the growth of local enterprises. In

order to support its other operations, a MNCs may assist domestic suppliers and

ancillary units.

 Standard of Living: MNCs provide superior products and services and help to

improve living standards in host countries.

 World Economy: MNCs help to integrate national economies into a world economy.

MNCs encourage international brotherhood and cultural exchanges through

international business. Different MNCs operate in different countries. As a MNCs

offers many benefits to each of the host countries, these countries are getting united.

Cultural differences between them are reducing and they are gradually moving

towards a single i.e. global economy.

Disadvantages to Host Country:
 Disregard of National Goals: MNCs invest in the most profitable sectors e.g.

consumer goods disregarding MNC`s the goals and priorities of host country. MNCs

do very little for underdeveloped strategic sectors and regions. Due to their capital-

intensive technology and profit maximization approach, MNCs have failed to help in

solving the problems of unemployment and poverty.

 Threat to National Sovereignty: MNCs pose a danger to the independence of host

countries. To promote their interests MNCs tend to interface in the political affairs of

host countries. Some MNCs are accused of overthrowing governments in countries

such as Chile.

 Alien Culture: MNCs bring not only capital and technology, but their own culture

also. TNCs tend to vitiate the cultural heritage of local people and propagate their

own culture to sell their products. For example, MNCs have encouraged the

consumption of soft drinks, packaged food etc. in India.

 Obsolete Technology: MNCs often transfer outdated technology to their

collaborators in host countries. In a number of cases technology transferred by MNCs

was found unsuitable causing waste of scarce capital. Repetitive imports of similar

technology led to excessive royalty payments without adding to technical knowledge

in host countries. Sometimes machinery available locally was imported or it remained

idle for want of repairs and maintenance facilities. MNCs have failed to develop local

skills and talents.

 Excessive Remittance: MNCs remit huge amount to the home country by way of

royalty, technical fee, dividend, licensing fee etc. This puts severe pressures on the

foreign exchange reserves and balance of payments of host countries.

 Creation of Monopoly: MNCs give rise to monopoly and concentration of economic

power in host countries by exploiting their strategic advantages like patents, superior

technology etc. MNCs kill indigenous enterprises for example, Parle Soft Drinks and

Kwality Ice Cream Co. had to sell themselves to foreign MNCs in India.
  Restrictive Clauses: Due to strong bargaining power, MNCs introduce restrictive

clauses in collaboration agreements. According to these restrictive clauses,

technology cannot be passed to their parties or pricing of products will be by the

MNCs, or exports from host country will be restricted or managerial posts will be

filled by parent company. MNCs do not transfer R&D, training and other facilities to

host countries.

 Depletion of Natural Resources: MNCs have caused rapid depletion of some of the

non-renewable natural resources in host countries.

International Business Environment

Framework for analysing International Business Environment

 Domestic Environment – Environment of Domestic Country

 Foreign Environment – Environment of the country to which you are trading
 Global Environment – Global Uncontrollable Environment
In the figure, innermost circle represents firm's business strategy and decisions with
regard to production, finance, marketing, human resources and research activities. Since these
strategies and decisions are made by the firm, they are called controllable. Firm can change
them but ‘within the constraints of various environmental factors.

The next circle represents domestic environment and it consists of factors such as
competitive structure, economic climate, and political and legal forces which are essentially
uncontrollable by a firm. Besides profound effect on the firm's domestic business, these
factors exert influence on the firm’s foreign market operations. Lack of domestic demand or
intense competition in the domestic market, for instance, have prompted many Indian firms to
plunge into international business. Export promotion measures and incentives in country have
been other motivating factors for the firms to internationalize their business operations. Since
these factors operate at the national level, firms are generally familiar with them and are able
to readily react to them.

The third circle represents foreign environment consisting of factors like geographic and
economic conditions, socio-cultural traits, political and legal forces, and technological and
ecological facets prevalent in a foreign country. Because of being operative in foreign
market, firms are generally not cognizant of these factors and their influence on business
activities. The firm can neglect them only at the cost of losing business in the foreign h
markets. The problem gets more complicated with increase in number of foreign markets in
which a firm operates. Differences exist not only between domestic and foreign
environments. But also among the environments prevailing in different foreign markets.
Because of environmental differences, business strategies that are successful in one nation
might fail miserably in other countries. Foreign market operations, therefore, require an
increased sensitivity to the environmental differences and adaptation of business strategies to
suit the differing market situations.

The upper most circles, viz., circle four, represents the global environment. Global
environment transcends national boundaries and is not confined in its impact to just one
country. Global environment exerts influence over domestic as well as foreign countries and
comprises of forces like world economic conditions, international financial system,
international agreements and treaties, and regional economic groupings. World-wide
economic recession; international financial liquidity or stability; working of the international
organisations such as World Trade Organisation (WTO), International Monetary Fund (IMF),
World Bank and the United Nations Conference on Trade and Development (UNCTAD);
Agreement on Textiles and Clothing (ATC); Generalized System of Preferences (GSP);
International Commodity Agreements; and initiatives taken at regional levels such as
European Union (EU), North American Free Trade Association (NAFTA) and Association of
South East Asian Nations (ASEAN) are some of the examples of global environmental forces
having world-wide or regional influences on business operations.
 Module - 2

International Trade Theories

 Mercantilism - This theory was popular in the 16th and 18th Century. During that time the
wealth of the nation only consisted of gold or other kinds of precious metals so the theorists
suggested that the countries should start accumulating gold and other kinds of metals more
and more. A country will strengthen only if the nation imports less and exports more. Though,
Mercantilism is one the most old-fashioned theory, it still remains a part of contemporary
thinking. Countries like China, Taiwan, Japan still favor Protectionism. Almost every
country, has implemented protectionist policy in one way or another.
 Absolute Cost Advantage - This theory was developed by Adam Smith. This theory came
out as a strong reaction against the protectionist mercantilist views on international trade.
Adam Smith supported the necessity of free trade as the only assurance for expansion of
trade. He said that a country should only produce those products in which they have an
absolute advantage. According to Smith, free trade promoted international division of labour.
By specialization and division of labour producers with different absolute advantages can
always gain over producing in remoteness.
 Comparative Cost Advantage Theory - The comparative cost theory was first given by
David Ricardo. It was later polished by J. S. Mill, Marshall, Taussig and others. Ricardo said
absolute advantage is not necessary. He also said a country will produce where there is
comparative advantage. The theory suggests that each country should concentrate in the
production of those products in which it has the utmost advantage or the least disadvantage.
Comparative advantage arises when a country is not able to yield a commodity more
competently than another country; however, it has the resources to manufacture that
commodity more proficiently than it does other commodities.
 Hecksher 0hlin Theory (H-0 Theory) - In 1900s, two economists, Eli Hecksher and Bertil
Ohlin, fixated on how a country could profit by making goods that utilized factors that were
in abundance in the country. They found out that the factors that were in abundance in
relation to the demand would be cheaper and that the factors in great demand comparatively
to its supply would be more expensive.
 National Competitive Theory or Porter's diamond- The diamond theory was given by
Micheal Porter. A nation’s competitiveness depends on the capacity of its industry to innovate
and upgrade. Companies gain advantage against the world’s best competitors because of
pressure and challenge. They benefit from having strong domestic rivals, aggressive home-
based suppliers, and demanding local customers. According to porter, the development of
internationally competitive products depends on their domestic factors mentioned below
he latest theory is the national
competitive advantage that
states a nation's
competitiveness in a
certain industry depends on the
ability of that nation to
innovate and upgrade that
industry. This
theory takes into account the
resources of the country and,
in addition, the skills of the
country
and technological abilities.
The national competitive
advantage concentrates on
improvements in
technology and worker
processes and worker training
and development
The latest theory is the
national competitive advantage
that states a nation's
competitiveness in a
certain industry depends on the
ability of that nation to
innovate and upgrade that
industry. This
theory takes into account the
resources of the country and,
in addition, the skills of the
country
and technological abilities.
The national competitive
advantage concentrates on
improvements in
technology and worker
processes and worker training
and development.
The latest theory is the
national competitive advantage
that states a nation's
competitiveness in a
certain industry depends on the
ability of that nation to
innovate and upgrade that
industry. This
theory takes into account the
resources of the country and,
in addition, the skills of the
country
and technological abilities.
The national competitive
advantage concentrates on
improvements in
technology and worker
processes and worker training
and development.
 Factor Condition;
 Demand Conditions;
 Related and Supporting Industries;
 Firm Strategy, Structure, and Rivalry;
 Chance
 Government
 Product Life Cycle Theory - Raymond Vernon, a Harvard Business School professor,
developed the product life cycle theory in the 1960s. The theory, originating in the field of
marketing, stated that a product life cycle has three distinct stages: (1) new product, (2)
maturing product, and (3) standardized product. The theory assumed that production of the
new product will occur completely in the home country of its innovation.
 Stage I: New Product- The stage begins with introducing a new product in the market. A
corporation will begin from developing a new good. The market for which will be small and
sales will be comparatively low. Vernon assumed that innovation or invention of products
will mostly be done in developed nations, because of the economy of the nation. To balance
the effect of less sales, corporations would keep the manufacturing local. As the sales would
increase, the corporations would start to export the goods to different nations in order to
increase the revenue and sales.
Stage II: Mature Product Stage- The product enters this stage when it has established
demand in developed nations. The manufacturer, would need to open manufacturing plants in
each nation where the product has demand. Due to local production, labour costs and export
costs will decline which will in result reduce the per unit cost and increase the revenue.
Stage III: Standardized Product Stage - In this stage exports to nations various developed
and under developed nations will begin. Foreign product competition will reach its peak due
to which the product will start losing its market. The demand in the nation from where the
product originated will start declining and eventually diminishes as a new product grabs the
attention of the people. The market for the product is now completely finished.

Theories of international investments

The theories of international investments seek to explain the reasons for international
investments. Theories of international investment can essentially be divided into two
categories: Micro (industrial organization) theories and Macro (cost of capital) theories.

The micro economic orientations differed between the earlier and subsequent literature’s.
The early literature that explains international investment in micro economic terms focuses
on market imperfections, and the desire of multinational enterprises to expand
their monopolistic power. Subsequent literature centered more on firm-specific
advantages owing to product superiority or cost advantages, stemming from economies of
scale, multi-plants economies and advanced technology, or superior marketing
and distribution. According to this view, multinationals find it cheaper to expand directly in a
foreign country rather than through trade in cases where the advantages associated with cost
or product are based on internal, indivisible assets based on knowledge and technology.
Alternative explanations for international investment have focused on regulatory restrictions,
including tariffs and quotas that either encourage or discourage cross-border acquisitions,
depending on whether one considers horizontal or vertical integration’s.
Studies examining the macro economic effects of exchange rate on international investment
centered on the positive effects of an exchange rate depreciation of the host country on
international investment in-flows, because it lowers the cost of production and investment in
the host countries, raising the profitability of foreign direct investment. The wealth effect is
another channel through which a depreciation of the real exchange rate could raise
international investment. By raising the relative wealth of foreign firms, a depreciation of the
real exchange rate could make it easier for those firms to use retained profits to finance
investment abroad and to post a collateral in borrowing from domestic lenders in the host
country.

Cost of Capital Movement Theory – The international trade and movement of productive
resources such as labour, capital and technology etc are substitute for one another. A relative
capital abundant country can export either capital intensive commodity or capital itself. The
capital scarce countries import either capital intensive commodity or may require investment
to expand their production. The movement or flow of financial resources from one country to
another either for the adjustment of the disequilibrium in BOP or for expanding the
production frontier in a country denotes International flow of capital. The cost of capital is
based on the economic principle of substitution. An investor will not invest in an asset if a
comparable asset exists that is more attractive, including consideration for risk. This means
that an investor will buy the asset with the highest return for a given level of risk, or the
lowest risk for a given level of return. This presumes that more risk is associated with more
reward. Investors must evaluate investment opportunities with an eye toward making sure
there is an appropriate reward for the risk they take. Investors vary in their risk appetites but
all seek to earn a proper payoff.

Market Imperfection Theory

The imperfect market is characterized by information asymmetry, government intervention,

barriers to entry and exit of firms, and differentiated products. It involves strategic decision
making on the part of individual firms to invest with a risk factor (Mankiw 2009). In other
words, the imperfect market is a market that fails to the standards set by Marshall for perfect
markets.

Internationalization Theory - Internationalization theory shifts the focus of the

international investment theory from country-specific to industry-level. It focuses more
on the determinants of foreign direct investment to generate business. Internationalization
theory is also explained as internalization theories in the literature. These theories lead to
a reduction in costs by increasing the number of transactions within subsidiaries.

A firm may choose to internalize by integrating backward and forward linkage. The
output of one subsidiary can be used as an input to the production of another. Similarly,
technology generated by one subsidiary can be input to another subsidiary (Nayak &
Choudhury 2014). When internalization involve operations in different countries then it is
known as foreign direct investment. This theory is combined with other principles like
organizational behavior, location of the firm’s operations and theories of innovation
which help firms to achieve greater benefits (Buckley & Casson 2009). Such theories are
more market-driven and take advantage of transfer pricing, reduce risks, and increase
profits.

Location Specific Advantage Theory - Location advantage is advantages enjoyed by a firm

that derive from the places in which it operates. These can be advantages such as the natural
resources or its labour resources. It can also be its location around particular markets which
provide certain advantages to businesses there.

Location-specific advantages or LSAs are those location-specific market features and/or

factors of production that enable a firm to achieve an improved financial outcome from the
provision of the same product or service relative to alternative locations. The concept may
include access to skilled labor, incentives, market premium, access to growing markets,
superior infrastructure, and cost savings. The new guidelines focus on two types of LSAs:
Location savings: These arise from cost savings due to differences in the cost of operations
(arising from lower labor costs, real estate costs, etc.) between high-cost and low-cost
jurisdictions.
Other local market features: These are attributes of local markets (such as purchasing
power and product preferences of households in the market, growth rate of the economy
adding to increased demand for the products, and degree of competition in the market) that
may allow a company to obtain a price premium for its products and/or gain access and
proximity to growing local and regional markets, allowing it to gain a competitive advantage
through scale economies in sale or production.

These factors account for the fact that the demand and production parameters in some
countries can be significantly different than those in other countries. These differences may
allow a multinational enterprise (MNE) to take advantage of better cost/demand conditions to
remain competitive or edge out potential competitors

Eclectic Theory:
The eclectic paradigm theory proposed by Dunning 1980, suggested that a firm will invest
in foreign countries under three conditions:

1. There are relative ownership advantages in comparison to other firms. Owner

advantages specific to firms such as skills, R&D, marketing, scientific and
technical works optimally utilized can overcome the additional costs of
establishing production facilities. These advantages must be excludable to
compete in a foreign market.

2. The advantages of internalization are more beneficial than transferring them to

foreign firms through lease or selling.

3. Prevalence of locational advantages by ownership. This can be in terms of a large

market to benefit from large scale economies, cheaper cost of production, superior
infrastructure. Similarly, the presence of non-transferable advantages that can be
used simultaneously by firms will also lead to the flow of funds in foreign
countries (Ghosh 2014).

Trade Protectionism

Cost of potato Production in USA – Rs 20/KG (Seed – Rs.5, Electricity – Rs.5,

Transportation – Rs. 5, Fertilizers – Rs. 5)

Cost of potato Production in India – Rs 20/KG (Seed – Rs.5, Electricity – Rs.5,

Transportation – Rs. 5, Fertilizers – Rs. 5)

If Government of USA provides subsidy and wave off charges of electricity then a who
will export ?
Protectionism is the economic policy of restricting imports from other countries through
methods such as tariffs on imported goods, import quotas, and a variety of other government
regulations.

Tools of Trade Protectionism

 Tariffs
 Subsidies
 Import Quotas
 Voluntary Export Restraints
 Administrative Policy
 Anti-dumping Policy

Free Trade

Free trade, also called laissez-faire, a policy by which a government does not discriminate
against imports or interfere with exports by applying tariffs (to imports) or subsidies (to
exports)

Free Trade Area

A free trade area is a region in which a group of countries has signed a free trade
agreement and maintain little or no barriers to trade in the form of tariffs or quotas between
each other.

Advantages

 Increased efficiency - The good thing about a free trade area is that it encourages
competition, which consequently increases a country’s efficiency, in order to be on
par with its competitors. Products and services then become of better quality at a
lower cost.
 Specialization of countries - When there is intense competition, countries will tend
to produce the products or goods that they are most efficient at. Efficient use of
resources means maximizing profit.
 No monopoly - When there is free trade, and tariffs and quotas are eliminated,
monopolies are also eliminated because more players can come in and join the
market.
  Lowered prices - When there is competition, especially on a global level, prices will
surely go down, allowing consumers to enjoy a higher purchasing power.
 Increased variety - With imports becoming available at a lower cost, consumers gain
access to a variety of products that are inexpensive
 Technology Transfer
 Quality goods at competitive pricing

Disadvantages

 Threat to intellectual property - When imports are freely traded, domestic

producers are often able to copy the products and sell them as knock-offs without fear
of any legal repercussions. Therefore, unless the FTA includes provisions for
intellectual property laws and enforcement there are no protections for exporting
companies.
 Unhealthy working conditions - Outsourcing jobs in developing countries can
become a trend with a free trade area. Because many countries lack labor protection
laws, workers may be forced to work in unhealthy and substandard work
environments.
 Disrespect to national goals
 Over utilization of natural resources
 Dependence of foreign capital
 Obstacles in development of home industry
 Increased rivalry
 Transfer of obsolete technology ( Mostly)

Module – 3

International Marketing

International marketing is “the performance of business activities that direct the flow of
goods and services to consumers or users in more than one nation.” It is different from
domestic marketing in as much as the exchange takes place beyond the frontiers, thereby
involving different markets and consumers who might have different needs, wants and
behavioural attributes.

It is concerned with integrating and standardizing marketing actions across a number of

geographic markets
 Significance

Expand Target Market - The target market of a marketing organization will be limited if it
just concentrates on the domestic market. When an organization thinks globally, it looks for
overseas opportunities to increase its market share and customer base.

Boost Brand Reputation - International marketing may give boost to a brand’s reputation.
Brand that sold internationally is perceived to be better than the brand that sold locally.
People like to purchase products that are widely available. Hence, international marketing is
important to boost brand reputation.

Connect Business with World - Expanding business into an international market gives a
business an advantage to connect with new customers and new business partners. Apple the
tech giant designs its iPhone in California; outsources its manufacturing jobs to different
countries like Mongolia, China, Korea, and Taiwan; and markets them across the world.

Open Door For Future Opportunities - International marketing can also open door for
future business opportunities. International marketing not only increases market share and
customer base, but it also helps the business to connect to new vendors, a larger workforce
and new technologies and ways of doing business.

.Nature / Characteristics of International Marketing

 Large Scale Operations - International marketing consists of large-scale operations

to be performed by businesses for promoting their products in many countries. It
requires huge amount of labor and capital for meeting out the needs of large peoples
at international level.
 Broader Market - It provides wider platform for advertising products at an
international level. Business can target their products among large populations
residing in different nations. Marketing is not limited to any local area or nation but is
free for all across the globe.
 Intense Competition - International marketing faces an intense competition due to
the presence of both domestic and international competitors. Organizations at a global
level have to compete with both of these competitors which leads to stiff competition
in international market.
 Higher Risk and Challenges - Marketing at an international level involves a large
amount of risk and challenges as it is dependent upon various factors and conditions.
 These risks arise due to political factors, cultural and regional differences, language
barriers, changing styles and fashions of customers, sudden war or changes in
government regulations.
 International Restrictions - Organizations in international market need to follow all
tariff and non-traffic constraints. There are various restrictions imposed due to
differences in rules and regulations among nations at the global level. All nations
perform import and export following the restrictions imposed in the international
market.
 Controlling Nature - The international market is dominated by developed countries
and multinational corporations due to their global presence. Developed countries due
to the presence of advanced technology and worldwide reach are able to perform
business operations efficiently everywhere.

International Marketing Orientation (EPRG Framework)

EPRG framework was introduced by Wind, Douglas and Perlmutter. This framework
addresses the way strategic decisions are made and how the relationship between
headquarters and its subsidiaries is shaped. It consists of four stages in the international
operations evolution. These stages are discussed below

 Ethnocentric Orientation - The practices and policies of headquarters and of the

operating company in the home country become the default standard to which all
subsidiaries need to comply. Such companies do not adapt their products to the needs and
wants of other countries where they have operations. There are no changes in product
specification, price and promotion measures between native market and overseas markets.
The general attitude of a company's senior management team is that nationals from the
company's native country are more capable to drive international activities forward as
compared to non-native employees working at its subsidiaries. The exercises, activities
and policies of the functioning company in the native country becomes the default
standard to which all subsidiaries need to abide by
 Polycentric Orientation - In this approach, a company gives equal importance to every
country’s domestic market. Every participating country is treated solely and individual
strategies are carried out. This approach is especially suitable for countries with certain
financial, political and cultural constraints.
 Regiocentric Orientation - In this approach a company finds economic, cultural or
political similarities among regions in order to satisfy the similar needs of potential
 consumers. For example, countries like Pakistan, India and Bangladesh are very similar.
They possess a strong regional identity.
 Geocentric Orientation - Geocentric approach encourages global marketing. This does
not equate superiority with nationality. Irrespective of the nationality, the company tries
to seek the best men and the problems are solved globally within the legal and political
limits. Thus, ensuring efficient use of human resources by building strong culture and
informal management channels. The main disadvantages are that national immigration
policies may put limits to its implementation and it ends up expensive compared to
polycentrism. Finally, it tries to balance both global integration and local responsiveness.

International Market Segmentation

Macro-segmentation:

Macro-segmentation or country-based segmentation identifies clusters of countries

that demand similar products. Macro-segmentation uses geographic, demographic
and socioeconomic variables such as location, GNP per capita, population size or
family size to group countries intro market segments, and then selects one or more
segments to create marketing strategies for each of the selected segments. This
strategy enables a company to centralize its operations and save on production,
sales, logistics and support functions. However, macro-segmentation doesn’t take
into consideration consumer differences within each country and among the
country markets that are clustered together, and fails to acknowledge the existence
of segments that go beyond the borders of a particular geographic region

Macro-segmentation bases
 Source: Adapted from Hassan, Craft and Kortam (2003)

Micro-segmentation:

Micro-segmentation or consumer-based segmentation involves grouping

consumers based on common characteristics using psychographic and/or
behavioristic segmentation variables such as cultural preferences, values and
attitudes, lifestyle choices.

Micro-segmentation bases
 International Product Life Cycle

The international product lifecycle (IPL) is an abstract model briefing how a company
evolves over time and across national borders. This theory shows the development of a
company’s marketing program on both domestic and foreign platforms. International product
lifecycle includes economic principles and standards like market development and economies
of scale, with product lifecycle marketing and other standard business models.

The four key elements of the international product lifecycle theory are −

 The layout of the demand for the product

 Manufacturing the product
 Competitions in international market
 Marketing strategy

The marketing strategy of a company is responsible for inventing or innovating any new
product or idea. These elements are classified based on the product’s stage in the traditional
product lifecycle. These stages are introduction, growth, maturity, saturation, and decline.

IPL Stages

The lifecycle of a product is based on sales volume, introduction and growth. These remain
constant for marketing internationally and involves the effects of outsourcing and foreign
production. The different stages of the lifecycle of a product in the international market are
given below −

Stage one (Introduction) - In this stage, a new product is launched in a target market where
the intended consumers are not well aware of its presence. Customers who acknowledge the
presence of the product may be willing to pay a higher price in the greed to acquire high
quality goods or services. With this consistent change in manufacturing methods, production
completely relies on skilled laborers. Competition at international level is absent during the
introduction stage of the international product lifecycle. Competition comes into picture
during the growth stage, when developed markets start copying the product and sell it in the
domestic market. These competitors may also transform from being importers to exporters to
the same country that once introduced the product.
 Stage two (Growth) - An effectively marketed product meets the requirements in its target
market. The exporter of the product conducts market surveys, analyze and identify the market
size and composition. In this stage, the competition is still low. Sales volume grows rapidly in
the growth stage. This stage of the product lifecycle is marked by fluctuating increase in
prices, high profits and promotion of the product on a huge scale.
Stage three (Maturity) - In this level of the product lifecycle, the level of product demand
and sales volumes increase slowly. Duplicate products are reported in foreign markets
marking a decline in export sales. In order to maintain market share and accompany sales, the
original exporter reduces prices. There is a decrease in profit margins, but the business
remains tempting as sales volumes soar high.
Stage four (Saturation) - In this level, the sales of the product reach the peak and there is no
further possibility for further increase. This stage is characterized by Saturation of sales. (at
the early part of this stage sales remain stable then it starts falling). The sales continue until
substitutes enter into the market. Marketer must try to develop new and alternative uses of
product.
Stage five (Decline) - This is the final stage of the product lifecycle. In this stage sales
volumes decrease and many such products are removed or their usage is discontinued. The
economies of other countries that have developed similar and better products than the original
one export their products to the original exporter's home market. This has a negative impact
on the sales and price structure of the original product. The original exporter can play a safe
game by selling the remaining products at discontinued items prices.
International Staffing Approaches

Policy elements
There are four approaches to international recruitment: ethnocentric, polycentric geocentric,
regiocentric. We’re mainly a [geocentric company/ polycentric company/ etc.] but we may
occasionally shift to other approaches based on our needs.

Ethnocentric staffing- The ethnocentric approach to recruitment means that we hire people
from our parent country to fill positions all over the world.

 Relocate one of our existing employees who’s a permanent resident of our parent country.
 Hire a person from our parent country who lives or wants to live in the host country.
 We use the ethnocentric method when [opening a new branch at a new country, so it’d be
easier for our company’s policies and procedures to be transferred from the parent country to
the new branch]. As a rule, expatriates from our parent country should comprise less than
[20%] of a foreign office so that we minimize the total hiring costs and avoid missing the
pulse of the local community.

Polycentric staffing - The polycentric approach to recruitment means that we hire locals to
fill our positions in a host country. For example, we could advertise on local job boards or
create a contract with a local recruitment agency.
We use the polycentric approach when [we need the skills of locals to conduct our business.
For example, if we want to expand our clientele to a specific country, we’d hire a local
professional who knows the market and can coordinate our sales operations.] We’ll apply one
of the other approaches if we haven’t found qualified candidates after [four months].
Regiocentric Staffing - The regiocentric approach to recruitment means that we hire or
transfer people within the same region (like a group of countries) to fill our open positions.
For example, we might decide to transfer employees within Scandinavian countries. So if we
want to hire someone in Sweden (a host country) we could transfer one of our employees
from Denmark, a host country in the same region.
We use the regiocentric approach when [the costs of transferring an employee from a host
country are lower than transferring them from the parent country.] When deciding to use this
approach, take into account any language or cultural barriers that may exist.

Geocentric staffing - Geocentric approach to recruitment is hiring the best people to fill our
positions without regard to where they come from or where they live. This means:

 Hiring remote employees. We use this option when we want to hire someone at a place
where we don’t have offices. For example, if we want a customer support agent in another
time zone to support our customers there.
 Relocating our employees. This includes both bringing foreign talent into our parent country
and relocating people to a new host country. We use this approach when we need someone to
be physically present at a specific location, but the best person for the job is living elsewhere.
 To use the geocentric approach, we need to have a global outlook on recruitment. For
example, whenever a position opens at a host country or our parent country, the hiring team
could:

 Advertise on global job boards first, before using local job boards mentioning the location of
the job clearly. Also, advertise on job boards focused on remote work when possible.
 Source candidates online without looking at their current location.
 Check our global employee database to find internal candidates who may wish to relocate.
 Ask recruiters to suggest candidates they met at international career fairs or events.
 Ask for referrals from our existing employees, as they may have someone in their network
who could fit in this position and be willing to relocate.

Expatriate Management

An expatriate, or ex-pat are the employee who are sent to work abroad on a long-term job
assignment such as employees who need populate a new office or senior managers who need
to manage or set up a new branch. Expatriate employees generally receive additional benefits,
such as cost of living and hardship allowances as well as housing or education and sometimes
even paid education for their children.

Basis of selection of Expatriate

There are many factors including both personal and professional that decides who becomes
an expat. They should
 Be competent and have the ability to sustain in a different work setting both by a
cultural as well as location point of view.
 Have the desire to be an expat.
 Have an adaptable family.
 Have superior technical, managerial, and interpersonal skills.
Immigration - Immigration should always be the first step to consider when planning to send
an employee to work overseas. The inability to obtain relevant work permits (which can be
down either to the individual / country combination or to the costs involved being
prohibitive) may become a real showstopper in allowing any type of expatriate arrangement
to be put in place.
Expatriate Policies - A major consideration in setting up an expatriate management process
and an assignment package is the degree of tax assistance the employer intends to give to the
individual. One of the main reasons why tax assistance is given is to ensure that employees
do not have to pay more taxes as a result of their overseas workdays, which in turn impacts
the net salary received.

Expatriate Remuneration package - The foundation of any compensation package is the

base salary, reflecting the value associated with the position, determined by a combination of
the position and employer’s philosophy in regard to that market. As explained in the previous
section, a well written assignment letter will also detail benefits and allowance to ensure there
are no misunderstandings on what the expatriate overall compensation may or may not
include. In designing a fair and competitive compensation package some companies choose
to run cost projections either themselves internally or with the help of a third party provider.
The importance of running a cost projection cannot be underestimated as it is invaluable to
many businesses to have a clear picture of how much the entire operation is going to cost
them.

Logistics - No expatriate management programme should be implemented without thought

being given to the actual logistics in connection with relocating for work abroad. This is
where companies may choose to approach relocation vendors in order to facilitate their
employee in finding suitable accommodation, a school for their children, shipment of their
goods and other important logistic aspects in connection with the move

Expatriate Compliance - Many expatriate employees are not familiar with the requirements
of the host country tax system and companies provide this support not only as a benefit to the
employees themselves to help them comply, but also to ensure that as a company
representative, the employee is not exposing the business to non-compliance risks. This
protects the company from potential reputational damage for failure to ensure fiscal
compliance and it’s considered good expatriate management practice.

Special tax regimes planning and social security analysis - No comprehensive expatriate
management process would leave out the identification of potential tax or social security
contributions saving opportunities.

Expatriate payroll mechanism - In terms of expatriate management, choosing a suitable payroll

arrangements is incredibly important. The options available usually are:
  Home or Host payrolls
 Split Payrolls
 Dummy (Shadow) payroll arrangements.

Industrial Relations at International Level

Governments

Confederations of Free
Global Employees Trade Unions (Intl.)

Global Employers like MNC / Industrial Relations ILO

International/ transnational

Employer Associations and International Tribunals or

Organizations at International associations
Level
 Module - 4

Foreign exchange, or forex, is the conversion of one country's currency into another. In a
free economy, a country's currency is valued according to the laws of supply and demand. In
other words, a currency's value can be pegged to another country's currency, such as the U.S.
dollar, or even to a basket of currencies

Foreign Exchange Rate is defined as the price of the domestic currency with respect to
another currency. The purpose of foreign exchange is to compare one currency with another
for showing their relative values. Foreign exchange rate can also be said to be the rate at
which one currency is exchanged with another or it can be said as the price of one currency
that is stated in terms of another currency.

Exchange rates of a currency can be either fixed or floating. Fixed exchange rate is
determined by the central bank of the country while the floating rate is determined by the
dynamics of market demand and supply.

Factors Affecting the Exchange Rate

Exchange rate is impacted by some factors which can be economic, political or psychological
as well. The economic factors that are known to cause variation in foreign exchange rates are
inflation, trade balances, government policies.

Political factors that can cause a change in the foreign exchange rate are political unrest or
instability in the country and any kind of political conflict.

Psychological factors that impact the forex rate is the psychology of the participants involved
in foreign exchange.

Types of Exchange Rate Systems

There are three types of exchange rate systems that are in effect in the foreign exchange
market and these are as follows:

1. Fixed exchange rate System or Pegged exchange rate system: The pegged exchange
rate or the fixed exchange rate system is referred to as the system where the weaker currency
of the two currencies in question is pegged or tied to the stronger currency.
Fixed exchange rate is determined by the government of the country or central bank and is
not dependent on market forces.

To maintain the stability in the currency rate, there is purchasing of foreign exchange by the
central bank or government when the rate of foreign currency increases and selling foreign
currency when the rates fall.

This process is known as pegging and that’s why the fixed exchange rate system is also
referred to as the pegged exchange rate system.

Advantages of Fixed Exchange Rate System

Following are some of the advantages of fixed exchange rate system

1. It ensures stability in foreign exchange that encourages foreign trade.

2. There is a stability in the value of currency which protects it from market fluctuations.
3. It promotes foreign investment for the country.
4. It helps in maintaining stable inflation rates in an economy.
Disadvantages of Fixed Exchange Rate System

Following are some of the disadvantages of the fixed exchange rate system

1. There is a constant need for maintaining foreign reserves in order to stabilise the economy.

2. The government may lack the flexibility that is required to bounce back in case an
economic shock engulfs the economy.

2. Flexible Exchange Rate System: Flexible exchange rate system is also known as the
floating exchange rate system as it is dependent on the market forces of supply and demand.
There is no intervention of the central banks or the government in the floating exchange rate
system.

Advantages of Floating Exchange Rate System

Following are the advantages of the floating exchange rate system

1. There is no need to maintain foreign reserves in this exchange system.

2. Any deficiencies or surplus in Balance of Payment is automatically corrected in this

system.

Disadvantages of Floating Exchange Rate System

Following are some of the disadvantages of the floating exchange rate system

1. It encourages speculation that may lead to fluctuations in the exchange rate of currencies in
the market.

2. If the fluctuations in exchange rates are too much it can cause issues with movement of
capital between countries and also impact foreign trade.

3. It will discourage any type of international trade and foreign investment.

3. Managed floating exchange rate system: Managed floating exchange rate system is the
combination of the fixed (managed) and floating exchange rate systems. Under this system
the central banks intervene or participate in the purchase or selling of the foreign currencies.

Foreign Exchange Rate Determination

Foreign Exchange Rate is the amount of domestic currency that must be paid in order to get a
unit of foreign currency. According to Purchasing Power Parity theory, the foreign exchange
rate is determined by the relative purchasing powers of the two currencies.

Example: If a Mac Donald Burger costs $20 in the USA and Re 100 in India, then the
exchange rate between India and the USA will be (100/20=5), 1 $ = 5 Re.

Forces Behind Exchange Rate Determination

Foreign Exchange is a price of one country currency in relation to other country currency,
which like the price of any other commodity is determined by the demand and supply factors.
The demand and supply of the foreign exchange rate come from the residents of the
respective countries.

Demand for Foreign Exchange (Foreign Supply of Foreign Exchange (Foreign

Money goes out) Money Comes in)
Foreign Currency is needed to carry out
The source of foreign currency available to the
transactions in foreign countries or for the
domestic country are foreigners purchasing
purchase of foreign goods and services
our goods and services (Exports).
(IMPORTS).
Foreign currency is needed to invest in foreign Foreigners investing in Indian Stock markets,
 country assets/shares/bonds etc. Assets, Bonds etc. (FPIs and FDIs)
Foreign currency is needed to make transfer
Transfer payments. Example: Indian working
payments. Example: Indian Parents sending
in the USA, sending money to his/her old aged
Money to his/her son/daughter studying in the
parents.
USA.
Indians holding money in overseas Banks Foreigners holding assets in Indian Banks.
Indians Travelling abroad for Tourism Purpose. Foreigners travelling to India.

 The DD curve represents the demand for foreign exchange by India. The SS curve represents
the supply of foreign exchange to India.
 The point where both DD and SS curves intersect is the point of equilibrium. At this point
demand for foreign exchange is exactly equal to the supply of foreign exchange.
 At equilibrium point E0, the exchange rate is 1 $ equal to 5 Re.
 In normal day to day functioning of markets, the exchange rate may fluctuate. If at any point
in time, the exchange rate is at E1, then the demand for foreign exchange falls short of supply
of foreign exchange, as a result at this point Indians are demanding less foreign currency due
 to which Re will appreciate vis-à-vis foreign currency. The appreciation mainly occurs due to
a favourable balance of payment situation (Surplus).
 By the same token at point E2, demand for foreign exchange is greater than the supply of
foreign exchange, at this point Indians are demanding excess foreign exchange than what the
foreigners are willing to supply, as a result, at E2 Re will depreciate vis-à-vis foreign
currency. The depreciation mainly occurs due to the unfavourable balance of payments
situation(Deficits).

Types of Exchange Rate Regimes

 Fixed Exchange Rate versus Floating Exchange Rate

Fixed Exchange Rate Floating Exchange Rate
Under this system, there is complete government Under this system, the market is allowed to
intervention in the foreign exchange markets. determine the value of exchange rate freely.
The government or central bank determines the
The exchange rate is determined by the
official exchange rate by linking exchange rate to
forces of demand and supply.
the price of gold or major currencies like US dollar.
If due to any reason exchange rate fluctuates,
If due to any reason, the exchange rate fluctuates,
the government never intervenes and allows
government intervenes and make sure that
the market to function and determine the true
equilibrium pre-determined level is maintained.
value of exchange rate.
The only merit of fixed exchange rate system is that The only demerit of floating exchange rate
it assures the stability of exchange rate. It prevents system is that exchange rate fluctuates a lot
both currency appreciation and depreciation. on day to day basis.
The many disadvantages of such a system are: It The advantages of such a system are: the
puts a heavy burden on governments to maintain exchange rate is determined in well-
exchange rate. This especially happens during the functioning foreign exchange markets with
time of deficits, as the governments need to infuse a no government interference.
lot of money to maintain exchange rate. The exchange rate reflects the true value of
The foreign investors avoid investing in such the domestic currency which helps in
countries as they fear to lose their investments establishing the trust among foreign investor.
because they believe that exchange rate does not A country can easily access funds/ loans
reflect the true value of the economy. from IMF and other international institutions
 if the exchange rate is market determined.
 Managed Floating Exchange rate

Manage Floating exchange rate lies in between of the two extremes of fixed and floating
exchange rate. Under such a system, the exchange is allowed to move freely and determined
by the forces of the market (Demand and Supply). But when a difficult situation arises, the
central banks of the country can intervene to stabilise the exchange rate.

There are mainly three sub categories under managed floating exchange rate:

1. Adjusted Peg System: In this system, a country should try to hold on to a fixed exchange rate
system for as long as it can, i.e. until the country’s foreign exchange reserves got exhausted.
Once the country’s foreign exchange reserves got exhausted, the country should undergo
devaluation of currency and move to another equilibrium exchange rate.
2. Crawling Peg System: In this system, a country keeps on adjusting its exchange rate to new
demand and supply conditions. The system requires that instead of devaluing currency at the
time of crisis, a country should follow regular checks at the exchange rate and when require
must undertake small devaluations.
3. Clean Floating: In the clean float system, the exchange rate is determined by market forces of
demand and supply. The exchange rate appreciates or depreciates as per market forces and
with no government intervention. It is identical to floating exchange rate.
4. Dirty Floating: In the dirty float system, the exchange rate is to a very large extent is
determined by the market forces of demand and supply (so far identical to clean floating), but
occasionally the central banks of the countries intervene in foreign exchange markets to
smoothen or remove excessive fluctuations from the foreign exchange markets.

History of Indian Rupee

1540-45 Sher Shah Suri issued a Silver coin which was in use during the Mughal period,
Maratha era and British India.

1770-1832 The earliest paper rupees were issued by Bank of Hindostan (1770– 1832), General
Bank of Bengal and Bihar (1773–75), and Bengal Bank (1784–91).

1 Apr 1935 Reserve Bank of India is set up.

Jan 1938 Reserve Bank issues first note of Rs 5

Feb-Jun RBI issues Rs 10, Rs 100, Rs 1,000 and Rs 10,000 notes.

1938

Aug 1940 Rs 1 note reintroduced. Rs 1 was first introduced on 30 Nov 1917, followed by Rs 2
and 8 annas, and was discontinued on 1 Jan 1926.

Mar 1943 Rs 2 note introduced

1950 RBI issues first post-Independence coins in 1 pice, 1.2, one and two annas, 1.4, 1.2
and Rs 1 denominations.

1953 Hindi language features prominently on the new notes, and plural of rupaya was
decided to be rupiye

1954 High denomination notes of Rs 1,000, Rs 5,000, and Rs 10,000 reintroduced.

1957 Rupee is decimalised and divided into 100 naye paise.

1957-67 Aluminium coins of denomination of one, two-, three-, five- and ten-paise are
introduced.

1967 Note sizes reduce due to the lean period of the early Sixties.

1980 New notes issued with symbols of science & tech (Aryabhatta on Rs 2 note), progress
(oil rig on Rs 1 and farm mechanisation on Rs 5) and Indian art forms on Rs 20 and
Rs 10 notes (Konark wheel, peacock).

Oct 1987 Rs 500 note introduced due to the growing economy and fall in purchasing power

1988 Stainless steel coins of 10, 25 and 50 paise introduced.

1992 Rs 1 and Rs 5 coins in stainless steel introduced

1996 The Mahatma Gandhi series of notes issued, starting with Rs 10 and Rs 500
notes. This series has replaced all notes of the Lion capital series. A changed
 watermark, windowed security thread, latent image and intaglio features for the
visually handicapped were the new features.

2005-8 New 50 paise, Rs 1, Rs 2 and Rs 5 stainless steel coins introduced.

2009 The printing of Rs 5 notes (which had stopped earlier) resumed.

July 2010 New symbol ‘₹’ is officially adopted

2011 25 paise coin and all paise coins below it demonetised. New series of 50 paise coins
and Rs 1, Rs 2, Rs 5 and Rs 10 notes with the new rupee symbol introduced.

2012 New ‘₹’ sign is incorporated in notes of the Mahatma Gandhi series in denominations
of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1,000

Nov 2016 Rs 500 and Rs 1,000 notes discontinued and new Rs 500 and Rs 2,000 notes
introduced.

Module - 5
 WTO

Headquarters: Geneva, Switzerland

Membership: 164 member
Founded: 1 January 1995
Director-General: Ngozi Okonjo-Iweala
Official languages: English, French, Spanish

What is WTO
The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. The goal is to help producers of
goods and services, exporters, and importers conduct their business

Brief History

From 1948 to 1994, the GATT provided the rules for much of world trade and presided over
periods that saw some of the highest growth rates in international commerce. It seemed well-
established but throughout those 47 years, it was a provisional agreement and organization.
The WTO’s creation on 1 January 1995 marked the biggest reform of international trade
since the end of the Second World War. Whereas the GATT mainly dealt with trade in goods,
the WTO and its agreements also cover trade in services and intellectual property. The birth
of the WTO also created new procedures for the settlement of disputes.

Purpose behind formation of WTO

 To protect the interests of small and weak countries against discriminatory trade
practices of large and powerful countries. (The WTO’s most-favoured-nation and
national-treatment articles stipulate that each WTO member must grant equal market
access to all other members and that both domestic and foreign suppliers must be
treated equally)
 The rules require members to limit trade only through tariffs and to provide market
access not less favourable than that specified in their schedules (i.e., the commitments
that they agreed to when they were granted WTO membership or subsequently).
 Third, the rules are designed to help governments resist lobbying efforts by domestic
interest groups seeking special favours.
Objectives

 To set and enforce rules for international trade

 To provide a forum for negotiating and monitoring further trade liberalization,
 To resolve trade disputes
 To increase the transparency of decision-making processes
 To cooperate with other major international economic institutions involved in global
economic management
 To help developing countries benefit fully from the global trading system

Simplified Structure of WTO

Functions of WTO

 Trade Negotiations - The WTO facilitates trade negotiations among countries by

providing a framework to structure the agreements, as well as providing dispute
resolution mechanisms. It creates an international legal framework that ensures the
smooth exchange of goods and services among the member countries.
 Implementation and Monitoring - Once the agreements are negotiated, the job of the
WTO is to ensure that the signatory countries adhere to their commitments in practice.
It also produces research based on the impact of the agreements on the economies of
the countries involved.
 Dispute Settlement - The WTO also acts as a dispute settlement body when there
is a trade conflict between its member states. The members of the WTO can file
complaints against other member states if they feel the trade and economic policies of
a country are divergent from their commitments under one of the agreements of the
WTO. Following the complaint, there are formal hearings like a court until a
settlement is reached.
 Building Trade Capacity - The WTO runs special programs to support developing
countries by helping them build the capacity to participate in free trade with more
developed countries. It also gives concessions under certain agreements to low-
development countries to ease them into free trade with other countries.
 Outreach - WTO carries out lobbying and outreach across the world as a part of its
larger objectives to promote free trade. They try to persuade governments to reduce
barriers to trade to free, fair, and open markets around the world.
 International Business and Economic Integration

Economic integration refers to the collaboration of two or more countries to limit or eliminate trade
restrictions and encourage political and economic cooperation. It allows global markets to function
more steadily with less government intervention, giving countries a chance to make the greatest use of
their resources.

Economic integration meaning describes the collaboration of two or more economies to lower or
remove trade barriers and create a shared market and business opportunities for one another.
Economic integration aims to reduce costs for both consumers and producers and to increase trade
between the countries involved in the agreement.

Levels of Economic ntegration

 Free trade. Tariffs (a tax imposed on imported goods) between member countries are
significantly reduced, and some are abolished altogether. Each member country keeps its
tariffs regarding third countries, including its economic policy. The general goal of free trade
agreements is to develop economies of scale and comparative advantages, promoting
economic efficiency.
 Custom union. Sets common external tariffs among member countries, implying that the
same tariffs are applied to third countries; a common trade regime is achieved. Custom unions
are particularly useful to level the competitive playing field and address the problem of re-
 exports where importers can be using preferential tariffs in one country to enter (re-export)
another country with which it has preferential tariffs. Movements of capital and labor remain
restricted
 Common market. Services and capital are free to move within member countries, expanding
scale economies and comparative advantages. However, each national market has its own
regulations, such as product standards, wages, and benefits.
 Economic union (single market). All tariffs are removed for trade between member
countries, creating a uniform market. There are also free movements of labor, enabling
workers in a member country to move and work in another member country. Monetary and
fiscal policies between member countries are harmonized, which implies a level of political
integration. A further step concerns a monetary union where a common currency is used, such
as the European Union (Euro).
 Political union. Represents the potentially most advanced form of integration with a common
government and where the sovereignty of a member country is significantly reduced. Only
found within nation-states, such as federations where a central government and regions
(provinces, states, etc.) have a level of autonomy over well-defined matters such as education.

Benefits and Challenges of Economic Integration

Benefits of Economic Integration

 Helps developing nations take advantage of economies of scale by integrating with developed
nations.
 Expands production capacity and creates new opportunities.
 Supports international specialization.
 Leads to the development of new products with quality output.
 Free flow of labor, capital, and goods.
 Increases bargaining power, efficiency, and productivity levels of small countries.
 Creates political harmony between member countries.

Challenges of Economic Integration

 Developing countries become dependent on more developed nations, thus becoming

depressed regions.
 Member nations must follow trade regulations and monetary and fiscal policies set by non-
member nations.
 Increased competition may harm high-cost producers.
 Can lead to a political disturbance and rivalry between two nations.
 Arguments surrounding Economic Integration

Economic integration strives to harmonize economic policies among member nations to promote
mutual trade and economic and political interests. It, along with little government interference, creates
more business prospects worldwide. As a result, it is a crucial component of regional and global
economic developments. International commerce allows countries to make the best use of their
resources while also granting their trading partners access to new markets.

 Peace and security - The most prevalent example of an economic integration emerging as part
of an effort to ensure peace and security is the European Union (EU)
 Efficiency - The defensive character of many integration projects is in some cases eclipsed by
a desire to reduce transaction costs within a regional space that is seeing growth in
transnational production structures
 The Regulation of Working Conditions and Globalization of Production

Regional trading agreements

Regional trading agreements refer to a treaty that is signed by two or more countries to encourage the
free movement of goods and services across the borders of its members. The agreement comes with
internal rules that member countries follow among themselves. When dealing with non-member
countries, there are external rules in place that the members adhere to Quotas, tariffs, and other forms
of trade barriers restrict the transport of manufactured goods and services. Regional trading
agreements help reduce or remove the barriers to trade.

Types of Regional Trading Agreements

Regional trading agreements vary depending on the level of commitment and the arrangement among
the member countries.
 Free Trade Area - In a free trade agreement, all trade barriers among members are
eliminated, which means that they can freely move goods and services among themselves.
When it comes to dealing with non-members, the trade policies of each member still take
effect.
 Customs Union - Member countries of a customs union remove trade barriers among
themselves and adopt common external trade barriers.
 Common Market - A common market is a type of trading agreement wherein members
remove internal trade barriers, adopt common policies when it comes to dealing with non-
members, and allow members to move resources among themselves freely.
 Economic Union - An economic union is a trading agreement wherein members eliminate
trade barriers among themselves, adopt common external barriers, allow free import and
export of resources, adopt a set of economic policies, and use one currency.
 Political union. Represents the potentially most advanced form of integration with a common
government and where the sovereignty of a member country is significantly reduced. Only
found within nation-states, such as federations where a central government and regions
(provinces, states, etc.) have a level of autonomy over well-defined matters such as education.

Objectives of Regional Trading Agreements

 To Boosts Economic Growth - Member countries benefit from trade agreements,
particularly in the form of generation of more job opportunities, lower unemployment
rates, and market expansions. Also, since trade agreements usually come with
investment guarantees, investors who want to invest in developing countries are
protected against political risk.
 To increase the Volume of Trade - Businesses in member countries enjoy greater
incentives to trade in new markets, thanks to attractive trading conditions due to the
policies included in the agreements.
 To improve the Quality and Variety of Goods - Trade agreements open a lot of doors
for businesses. As they gain access to new markets, the competition becomes more
intense. The increased competition compels businesses to produce higher-quality
products. It also leads to more variety for consumers. When there is a wide variety of
high-quality products, businesses can improve customer satisfaction.\
 To create more jobs. The wider market encourages businesses to increase production.
They end up creating more jobs and income in the domestic economy. When free
flow includes production factors, workers can find work in other member countries,
increasing their mobility.
  Better access to cheaper and more abundant capital. If capital flows freely between
member countries, it makes it easier for companies to raise cheaper funds to finance
investments.
 Stronger position in international treaty negotiations. The formation of an economic
union, for example, increases the size and strength of the European Union economy. It
increases its bargaining power in non-member country trade agreements.
 To ease the international Trade
 To improve quality and innovation

NAFTA

The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United
States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed
between the U.S. and Canada since 1989; NAFTA broadened that arrangement.) On that day,
the three countries became the largest free market in the world-;the combined economies of
the three nations at that time measured $6 trillion and directly affected more than 365 million
people. NAFTA was created to eliminate tariff barriers to agricultural, manufacturing, and
services; to remove investment restrictions; and to protect intellectual property rights.

Highlights

 Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or

higher on export goods to Mexico were common, as were long delays caused by
paperwork. Additionally, Mexican tariffs on U.S.-made products were, on average,
250 percent higher than U.S. duties on Mexican products. NAFTA addressed this
imbalance by phasing out tariffs over 15 years. Approximately 50 percent of the
tariffs were abolished immediately when the agreement took effect.
 Elimination of nontariff barriers by 2008. This includes opening the border and
interior of Mexico to U.S. truckers and streamlining border processing and licensing
requirements.
 Establishment of standards. The three NAFTA countries agreed to toughen health,
safety, and industrial
 Tariff reduction for motor vehicles and auto parts and automobile rules of origin.

 Expanded telecommunications trade.

  Reduced textile and apparel barriers.

 Expanded trade in financial services.

 Opening of insurance markets.

 Increased investment opportunities.

 Liberalized regulation of land transportation

Supporters championed NAFTA because it opened up Mexican markets to U.S. companies

like never before. The Mexican market is growing rapidly, which promises more export

opportunities, which in turn means more jobs.

SAFTA

The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South Asian
Association for Regional Cooperation (SAARC). The agreement came into force in 2006,
succeeding the 1993 SAARC Preferential Trading Arrangement. SAFTA signatory countries are
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

The South Asian Free Trade Area was signed in 2004 and came in to effect on January 1st
2006. The members of SAARC signed the agreement in order to promote and sustain mutual
trade and economic cooperation within the region. SAFTA required the developing countries
in South Asia (India, Pakistan and Sri Lanka) to bring their duties down to 20 per cent in the
first phase of the two-year period ending in 2007.

While the least developing countries (LDC) consisting of Nepal, Bhutan, Bangladesh,
Afghanistan and the Maldives had an additional three years to reduce tariffs

The basic principles regarding SAFTA are as follows:

1. Reciprocity and mutuality of advantages in order to benefit equally by considering the

level of economic trade, industrial development and trade and tariff systems
2. Negotiation of tariff reform which will be implemented in successive stages through
periodic reviews.
3. Recognition of the special needs of the Least Developed countries and agreement on
concrete preferential measures in their favour
4. Inclusion of all products, manufactures and commodities in their raw forms
The purpose of the SAFTA is to encourage and elevate common contract among countries
such as medium and long-term contracts. Contracts involving trade operated by states, supply
and import assurance in respect of specific products etc.

The objective of the South Asian Free Trade Area

The primary objective of the agreement is to promote competition in the region while
providing proper benefits to the countries involved. The agreement will benefit the people of
South Asia by bringing transparency and integrity among the nations by reducing tariff and
trade barriers. Ultimately it establishes a robust framework for regional cooperation

The instruments to help fulfil these objectives are as follows:

1. Trade Liberalisation Programme

2. Rules of origin
3. Institutional Arrangements
4. Consultations and Dispute Settlement Procedures
5. Safeguard Measures
6. Any other instrument that may be agreed upon

Association of Southeast Asian Nations or ASEAN

Association of Southeast Asian Nations or ASEAN is an organisation formed by the

governments of Malaysia, Indonesia, the Philippines, Thailand, and Singapore in 1967 to
promote economic growth, peace, security, social progress and cultural development in the
Southeast Asian region.

ASEAN was established on 8th August 1967 in Bangkok, Thailand with the signing of the
Bangkok Declaration (a.k.a ASEAN Declaration) by the founding fathers of the countries of
Indonesia, Malaysia, Thailand, Singapore, and the Philippines. The preceding organisation
was the Association of Southeast Asia (ASA) comprising of Thailand, the Philippines, and
Malaysia.

Five other nations joined the ASEAN in subsequent years making the current membership to
ten countries.
ASEAN Members

 Thailand (founding member)

 The Philippines (founding member)

 Malaysia (founding member)

 Singapore (founding member)

 Indonesia (founding member)

 Brunei (joined in 1984)

 Vietnam (joined in 1995)

 Lao PDR (joined in 1997)

 Myanmar (joined in 1997)

 Cambodia (joined in 1999)

There are two observer States namely, Papua New Guinea and Timor Leste (East Timor).

ASEAN Purpose

1. Accelerating economic growth, cultural development, and social progress in the

region by joint initiatives in the spirit of partnership and equality to cement the
foundation for a peaceful and strong community of SE Asian countries.
2. Promoting peace and stability in the region by incorporating respect for justice and
the rule of law in the relationships between nations and adherence to the United
Nations principles.
3. Promoting active collaboration and mutual assistance in subjects of common interest
in social, economic, cultural, administrative, scientific, and technical domains.
4. Assisting member countries via training and research facilities in the educational,
administrative, technical, and professional domains.
5. Cooperating for better usage of agriculture and industries, trade expansion (including
studying the problem of international commodity trade), improving communication
and transportation facilities, and improving living standards among the people.
6. Promoting SE Asian studies.
7. Exploring more avenues for further cooperation among themselves, and maintaining
close and advantageous cooperation with other international groupings of similar
objectives.
ASEAN Fundamental Principles

1. Mutual respect for the independence, sovereignty, equality, territorial integrity, and
national identity of all nations;
2. The right of every State to lead its national existence free from external interference,
subversion or coercion;
3. Non-interference in the internal affairs of one another;
4. Settlement of differences or disputes by peaceful manner;
5. Renunciation of the threat or use of force; and
6. Effective cooperation among themselv

European Union

History - The EU began as the European Coal and Steel Community, which was founded in
1950 and had just six members: Belgium, France, Germany, Italy, Luxembourg, and the
Netherlands. It became the European Economic Community in 1957 under the Treaty of
Rome and, subsequently, became the European Community (EC). The early focus of the
EC was a common agricultural policy as well as the elimination of customs barriers. The EC
initially expanded in 1973 when Denmark, Ireland, and the United Kingdom. A directly
elected European Parliament took office in 1979

European Union (EU), international organization comprising 27 European countries and

governing common economic, social, and security policies. Originally confined to
western Europe, the EU undertook a robust expansion into central and eastern Europe in the
early 21st century.
Members - The EU’s members are Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, and Sweden. The United Kingdom, which had been a founding
member of the EU, left the organization in 2020.
The EU was created by the Maastricht Treaty, which entered into force on November 1,
1993. The treaty was designed to enhance European political and economic integration by
creating a single currency (the euro), a unified foreign and security policy, and common
citizenship rights and by advancing cooperation in the areas of immigration, asylum, and
judicial affairs. The EU was awarded the Nobel Prize for Peace in 2012, in recognition of the
organization’s efforts to promote peace and democracy in Europe.

Objectives of EU

 To promote peace and the well-being of EU citizens

 To offer EU citizens freedom, security and justice, without internal borders, while
also controlling external borders
 To work towards the sustainable development of Europe, promoting equality and
social justice
 To establish an economic union, with the euro as its currency
 To contribute to the sustainable development, peace and security of the Earth

General Governance - Three bodies run the EU. The EU Council represents national
governments. The EU Parliament is elected by the people. The European Commission is
the EU staff. They make sure all members act consistently in regional, agricultural,
Economical, and social policies. Contributions of 120 billion euros a year from member
states fund the EU.

Law Governance of EU –

 The European Parliament is the directly elected law-making body of the EU.
 The Council of the European Union represents the governments of the member
states.
 The European Commission is the executive of the EU. It is responsible for
proposing new legislation and making sure that member states follow EU law.
 The Court of Justice of the European Union interprets EU law and settles legal
disputes. Decisions of the CJEU are binding on member states.
 The European Council makes decision about the policy direction of the EU, but
does not have the power to pass laws.

Process
 The European Commission proposes new legislation. The commissioners serve a five-
year term.
  The European Parliament gets the first read of all laws the Commission proposes. Its
members are elected every five years.7
 The European Council gets the second read on all laws and can accept the
Parliament’s position, thus adopting the law. The council is made up of the Union’s
27 heads of state, plus a president

Currency - The euro is the common currency for the EU area. It is the second most
commonly held currency in the world, after the U.S. dollar. It replaced the Italian lira, the
French franc etc. The value of the euro is free-floating instead of a fixed exchange rate. As a
result, foreign exchange traders determine its value each day.

Economy - The EU's trade structure has propelled it to become the world's second-largest
economy after China. In 2018, its gross domestic product was $22 trillion, while China's was
$25.3 trillion. The United States was third, producing $20.5 trillion. The EU's top three
exports in 2018 were petroleum, medication, and automobiles; while its top imports are
petroleum, communications equipment, and natural gas. Its top export partner is the United
States and its top import partner is China.

BRICS

BRICS is an acronym for 5 emerging economies of the world viz. – Brazil, Russia, India,
China, and South Africa. The term BRIC was coined by Jim O’Neil, the then chairman of
Goldman Sachs in 2001. The first BRIC summit took place in the year 2009 in Yekaterinburg
(Russia). In 2010, South Africa formally joined the association making it BRICS.

History of BRICS

O’Neill published a research paper titled “Building Better Global Economic BRICs,” which
laid the foundation of BRICS. Due to their quick economic growth, massive populations and
vast resources, O’Neill saw Brazil, Russia, India, China and South Africa as 21st-century
economic powerhouses.

 The first formal BRIC summit took place in 2009, leading to the establishment of a platform
for regular dialogue.
 South Africa joined the group in 2011, expanding it to the BRICS and adding diversity.
 BRICS holds annual summits to discuss various issues, including trade, finance,
development, energy and technology.

 BRICS has established mechanisms such as the New Development Bank (NDB) and the
Contingent Reserve Arrangement (CRA) for economic development and financial stability.

 BRICS represents a significant portion of the world’s population, landmass and economic
output.

 It advocates for a more equitable international order and greater representation of emerging
economies in global governance.

 Challenges and differing priorities exist among member countries, but BRICS remains an
important forum for cooperation and pursuing common interests.

Objectives of BRICS

Cooperation, development, and influence in world affairs are at the heart of the BRICS goals.
The following are a few of the main BRICS goals:

 Economic cooperation: encouraging trade, cooperation and growth among members, as well
as improving BRICS economies’ access to markets.
 Development financing: Creating institutions such as the CRA and the NDB to finance
infrastructure and development projects in member nations.

 Political coordination: Strengthening political discourse and coordination on international

issues, such as modifying institutions of global governance to take into account the shifting
global economic landscape and to provide rising economies with a stronger voice and
representation.

 Social and cultural exchanges: Promoting interpersonal relationships and mutual respect for
one another’s cultures while also boosting social and cultural exchanges between member
nations.

 Technology and innovation: Strengthening international collaboration in the fields of science,

technology and innovation to promote knowledge exchange, capacity building and
technological advancements among member nations.
 Sustainable development: Promoting environmentally friendly and sustainable development
methods while working together to achieve sustainable development goals.

 Peace and security: Promoting peace, stability and security locally and internationally while
addressing shared security issues and risks, such as terrorism.

 South–South cooperation: Strengthening cooperation and collaboration among developing

countries, sharing best practices, and supporting initiatives that contribute to the overall
development of the Global South