Master of Business

Administration (MBA)
Semester 4
MB0053- INTERNATIONAL BUSINESS
MANAGEMENT 4 Credits

(Book ID: B1724)

Name: Preeti
Roll No: 1405010280

Question1:- Why is Comparative Cost Theory considered as an

improvement upon Absolute cost Advantage theory? Explain Porters
Model?
Answer 1:- In one of the most notable book Wealth of Nations in 1776, Adam
Smith attacked the mercantilism and argued that countries differ in their ability to
produce goods and services efficiently due to variety of reasons. At that time,
England, by virtue of their superior manufacturing processes, were the worlds most
efficient textile manufacturers of the world. This was due to combination of several
factors such as favorable climate, good soils, skilled manpower and accumulated
experience and expertise in textile production. On the other hand, the French had
one of the most efficient wine industries of the world. Thus, England had an
absolute advantage in the manufacturing of textiles and France had an absolute
advantage in the production of wine. Adam Smith argued that a country has an
absolute advantage if it has one of the most efficient and cost effective product in
comparison to any other country producing it.
Smith argued that countries should specialise in production and
manufacturing of goods and services in which they have an absolute advantage.
Such cost effective and efficient products can be traded with goods from other
countries in which that country has an absolute advantage. According to Smith,
England should specialise in the production of textiles and France should specialise
in the production of wine. Countries should exchange such products of absolute
advantage with each other, i.e. England should sell textiles to France and France
should sell wine to England.
The crux of Smiths absolute advantage theory is that a country should not produce
goods at home in which it does not have cost advantage; instead it should import
from other countries. Absolute advantage theory was based on positive sum game
where countries benefit from trade unlike mercantilism theory which was based on
zero game. Caselet tabled as under illustrates the benefits of absolute advantage
theory.
Comparative advantage theory
David Ricardo, in his notable book Principles of Political Economy published in 1817
came up with an improvement on Adam Smiths absolute advantage theory.
Ricardo argued what might happen if one country has an absolute advantage in the
production of all goods. Adam Smiths theory suggests that such a country might
not have benefitted from international trade as trade is positive sum game and
countries prosper only if they exchange the goods in which they have absolute
advantage.
Porters diamond model
In 1990, Michael Porter analysed the reason behind some nations success and
others failure in international competition. His thesis outlined four broad attributes

that shape the environment in which local firms compete and these attributes
promote the creation of competitive advantage. They are explained as follows:

Factor endowments Characteristics of production were analysed in detail.

There are basic factors like natural resources, climate, and location and so on
and advanced factors like communications infrastructure, research facilities.

Demand conditions The role of home demand in improving competitive

advantage is emphasised since firms are most sensitive about the needs of
their closest customers. For example, the Japanese camera industry which
caters to a sophisticated and knowledgeable local market.

Relating and supporting industries The presence of suppliers or related

industries is advantageous since the benefits of investment in advanced factors of
production spill over to these supporting industries. Successful industries within a
country tend to be grouped into clusters of related industries. For example Silicon
Valley.

Firm strategy, structure and rivalry Domestic rivalry creates pressure

to innovate, improve quality, and reduce costs which in turn helps create
world-class competitors.
He said that these four attributes constituted the diamond and he argued
that firms are most likely to succeed in industries where the diamond is most
favorable. He also stated that the diamond is a mutually reinforcing system
and the effect of one attribute depends on the state of others. For example,
favorable demand conditions will not result in a competitive advantage
unless the state of rivalry is enough to elicit a response from the firms.

Question2:- Explain Hofstedes Cultural dimension.

Answer2:- According to Dr. Geert Hofstede, Culture is more often a source of
conflict than of synergy. Cultural differences are a trouble and always a disaster.
Professor Hofstede carried out a detailed study of how values in the workplace are
influenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At
that time he gathered and analysed data from many people in several countries.
Professor Hofstede established a model using the results of the study which
identifies four dimensions to differentiate cultures. Later, a fifth dimension called
long-term outlook was added. The following are the five cultural dimensions:

Power Distance Index (PDI) This focuses on the level of equality or

inequality between individuals in a nations society. A country with high
power distance ranking depicts that inequality of power and wealth has been
allowed to grow within the society. These societies follow caste system that
does not allow upward mobility of its people. A country with low power
distance ranking depicts a society which de-emphasizes the differences
between its peoples power and wealth. In these societies equality and

opportunity is stressed for everyone. Countries with high PDI index are Arab
countries, Russia, India and China. Those with low score are Australia and
Japan.

Individualism This dimension focuses on the extent to which the society

reinforces individual or collective achievement and interpersonal
relationships. A high individualism ranking (western countries, Canada,
Hungary) depicts that individuality and individual rights are dominant within
the society. Individuals in these societies form a larger number of looser
relationships. A low individualism ranking (Asian and African countries like
Indonesia and Colombia) characterizes societies of a more collective nature
with close links between individuals. These cultures support extended
families and collectives where everyone takes responsibility for fellow
members of their group.

Masculinity This focuses on the extent to which the society supports or

discourages the traditional masculine-work role model of male achievement,
power, and control. A country with high masculinity ranking (like Japan,
Venezuela, Hungary) shows the country experiences high level of gender
differentiation. In these cultures, men dominate the society and power
structure, with women being controlled and dominated by men. A country
with low masculinity ranking (like Norway and Sweden) shows a low level of
differentiation and discrimination between genders women are treated
equal to men in all aspects of the society.

Uncertainty Avoidance Index (UAI) This focuses on the degree of

tolerance for uncertainty and ambiguity within the society. A country with
high uncertainty avoidance ranking shows that the country has low tolerance
for uncertainty and ambiguity. A rule-oriented society that incorporates rules,
regulations, laws, and controls is created to minimize the amount of
uncertainty. A country with low uncertainty avoidance ranking shows that the
country has fewer concerns about ambiguity and uncertainty and has high
tolerance for a variety of opinions. A society which is less rule-oriented,
readily agrees to changes, and takes greater risks. Latin American countries,
Germany, Belgium, Japan and Eastern Europe score high on this. Countries
with low UAI score are Sweden, Denmark and China.
Long-Term Orientation (LTO) It describes the range at which a society
illustrates a pragmatic future oriented perspective instead of a conventional
historic or short term point of view. The Asian countries (China, Japan, Honk
Kong) score high on this dimension. These countries have a long term
orientation, believe in many truths, accept changes easily, and have thrift for
investment. Cultures recording little on this dimension, trust in absolute truth,
are conventional and traditional. They have a small term orientation and a
concern for stability. Many western cultures score considerably low on this
dimension.

Question3:- An Economic union comprises of a common market and a

custom union. Explain.

Answer3:- An economic union is a type of trade bloc which is composed of a common market with
a customs union. The participant countries have both common policies on product regulation, freedom of
movement of goods, services and the factors of production (capital and labour) and a common external
trade policy. When an economic union involves unifying currency it becomes a economic and monetary
union.
Purposes for establishing an economic union normally include increasing economic efficiency and
establishing closer political and cultural ties between the member countries. Regional economic
integration has enabled countries to focus on issues that are relevant to their stage of development as well
as encourage trade between neighbours.
There are four main types of regional economic integration.

1.

Free trade area. This is the most basic form of economic cooperation. Member countries remove
all barriers to trade between themselves but are free to independently determine trade policies with nonmember nations. An example is the North American Free Trade Agreement (NAFTA).

2.

Customs union. This type provides for economic cooperation as in a free-trade zone. Barriers to
trade are removed between member countries. The primary difference from the free trade area is that
members agree to treat trade with non-member countries in a similar manner. The Gulf Cooperation
Council (GCC) is an example.

3.

Common market. This type allows for the creation of economically integrated markets between
member countries. Trade barriers are removed, as are any restrictions on the movement of labour and
capital between member countries. Like customs unions, there is a common trade policy for trade with
non-member nations. The primary advantage to workers is that they no longer need a visa or work permit
to work in another member country of a common market. An example is the Common Market for Eastern
and Southern Africa (COMESA).

4.

Economic union. This type is created when countries enter into an economic agreement to
remove barriers to trade and adopt common economic policies. An example is the European Union (EU).
In the past decade, there has been an increase in these trading blocs with more than one
hundred agreements in place and more in discussion. A trade bloc is basically a free-trade zone,
or near-free-trade zone, formed by one or more tax, tariff, and trade agreements between two or
more countries. Some trading blocs have resulted in agreements that have been more
substantive than others in creating economic cooperation. Of course, there are pros and cons
for creating regional agreements.

Customs Unions and Single Markets are examples of deeper economic

integration between countries

Different stages of economic integration

Different
stages

of

No

Commo

Factor

Commo

economic

Internal

and

integration

Trade

External

Asset

Currenc

between

Barriers

Tariff

Mobility

countries

Free

Trade

Area

Customs Union

Single Market

Common
Economi
c Policy

Monetary
Union

Economic
Union

Question 4:Management.

Explain

the

Components

of

International

Financial

Answer4:- Components of International Financial Management

The components like foreign exchange market, foreign currency derivatives,
international monetary markets and international financial markets which are
essential to the international financial management are discussed in this section. .
Foreign exchange market
The foreign exchange or the forex markets facilitates the participants to obtain,
trade, exchange and speculate foreign currency. The foreign exchange market
consists of banks, central banks, commercial companies, hedge funds, investment
management firms and retail foreign exchange brokers and investors. It is
considered to be the leading financial market in the world. It is vital to realise that
the foreign exchange is not a single exchange, but is created from a global network
of computers that connects the participants from all over the world.
The foreign exchange market is quite big and includes various functions including
funding of cross-border investment, loans, trade in goods, trade in services and
currency speculation. The participant in a foreign exchange market will normally ask
for a price.
The trading in the foreign exchange market may take place in the following forms:

Outright cash or ready foreign exchange currency deals that take place
on the date of the deal.

Next day foreign exchange currency deals that take place on the next
working day.

Swap Simultaneous sale and purchase of identical amounts of currency for

different maturities.

Spot and Forward contracts A spot contract is a binding obligation to

buy or sell a definite amount of foreign currency at the existing or spot

market rate. A forward contract is a binding obligation to buy or sell a definite

amount of foreign currency at the pre-agreed rate of exchange, on or before a
certain date.

Foreign currency derivatives

Currency derivative is defined as a financial contract that seeks to swap two
currencies at a predetermined rate. It can also be termed as the agreement
where the value can be determined from the rate of exchange of two
currencies at the spot. The currency derivative trades in markets that
correspond to the spot (cash) market. Hence, the spot market exposures can
be enclosed with the currency derivatives. The main advantage from
derivative hedging is the basket of currency available. Currency derivatives
like the currency features, currency options and currency swaps are usually
traded. The standard agreement made in order to buy or sell foreign
currencies in future is termed as currency futures. These are usually traded
through organised exchanges. The authority to buy or sell the foreign
currencies in future at a specified rate is provided by currency option. These
will help the businessmen to enhance their foreign exchange dealings. The
agreement undertaken to exchange cash flow streams in one currency for
cash flow streams in another currency in future is provided by currency
swaps. These will help to increase the funds of foreign currency from the
cheapest sources.

Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are:
Credit risk takes place, arising from the parties involved in a contract.

Market risk occurs due to adverse moves in the overall market.

Liquidity risks occur due to the requirement of available counterparties to

take the other side of the trade.

Settlement risks similar to the credit risks occur when the parties involved in
the contract fail to provide the currency at the agreed time.

Operational risks are one of the biggest risks that occur in trading derivatives
due to human error.
Legal risks pertain to the counterparties of currency swaps that go into
receivership while the swap is taking place.

International monetary systems

The international monetary systems represent the set of rules that are agreed
internationally along with its conventions. It also consists of set of rules that govern
international scenario, supporting institutions which will facilitate the worldwide
trade, the investment across cross-borders and the reallocation of capital between
the states.
International monetary systems provide the mode of payment acceptable between
buyers and sellers of different nationality, with addition to deferred payment. The
global balance can be corrected by providing sufficient liquidity for the variations
occurring in trade. Thereby it can be operated successfully.

The gold and gold bullion standards

The first modern international system was the gold standard, which operated
between the late 19th and early 20th centuries. It enabled nations using gold coins
of standard specification to enjoy free circulation. Under the system, the gold
happened to be the only standard. The stabilising influence of gold is what gives the
system its advantages. Any nation which had more exports than imports would be
paid in gold for its balance payment. This in turn has resulted in the lowered value
of domestic currency. The higher prices lead to the decreased demands for exports.
The sudden increase in the supply of gold may be due to the discovery of rich
deposit, which in turn will result in the increase of price abruptly.
In the 1920s the gold bullion standard replaced the gold standard leading to the
cessation of gold coins being minted. Their currencies instead were with gold bullion
which was bought and sold at a fixed price. This system was ended by the next
decade.
The gold-exchange system
Trading was conducted internationally with respect to the gold-exchange standard
following World War II. In this system, the value of the currency is fixed by the
nations with respect to some foreign currency but not with respect to gold. Most of
the nations fixed their currency to the US dollar funds in the United States. With a
view to maintain a stable exchange rate at the global level, the International
Monetary Fund (IMF) was created at the Bretton Woods International Conference

held in 1944. Until the 1970s the US gold reserves continued to be drained. When
the US discarded the gold convertibility in 1971, the world was devoid of a single
international monetary system.
Floating exchange rates and recent development
After the abundance of the gold convertibility by the US, the IMF in 1976 decided to
be in agreement on the float exchange rates. The gold standard was suspended and
the values of different currencies were determined in the market. The Japanese Yen
and the German Deutschmark strengthened and turned out to be increasingly
important in international financial market; at the same time the US dollar
diminished in importance. In 1999 the Euro replaced the currencies and became the
most commonly used currency in the international market second only to the dollar.
The better exchange rates enticed many large companies to choose the Euro over
the Dollar when in bond trading. Very recently some of the members of Organisation
of Petroleum Exporting Countries (OPEC) such as Saudi Arabia, Iraq have opted to
trade petroleum in Euro than in Dollar..
International financial markets
Independent markets that are not under the authority of any one country and the
financial markets of each country are linked by international foreign markets. What
governs the heart of the international financial market is the market where
international trade and investment dominates foreign currency As a result the
purchase of currency preceeds the purchase of services and goods.
The purpose of international securities markets, international capital markets,
international money markets and foreign currency markets is stated below:
The foreign currency markets An international market that has no central
place for trading to take place or is familiar in structure may be also called a foreign
currency market. The market is actually the telecommunications like among
financial institutions around the globe and opens for business at any time. The
greater part of the worlds that deal in foreign currencies is still taking position in the
cities where international financial activity is centered.

International money markets A market for accounts, deposits or

deposits that include maturities of one year or less may be conventionally
said to be an international money market. An example of this is the Euro
currency markets which make up a huge financial market that does not fall
under the governance and supervision of world governmental and financial
authorities.. The Euro currency market is a money market for depositing and
borrowing money located outside the country where that money is officially
permitted tender. Further, Euro currencies are bank deposits and loans
existing outside any particular country.

International capital markets The capital markets of individual countries

are linked by international capital. . It also comprises a separate market of
their own, the capital market that flows in to the Euro markets. The firms
enjoy the freedom to raise capital, debit, fixed or floating interest rates and

maturities varying from one month to thirty years in an international capital

markets.

International security markets The continued opportunity to provide

large portion of the international financial needs of the government and
business have allowed the banks to experience the greatest growth in the
past decade. The international security market includes private placements,
bonds and equities.

The enormous growth in the trading of foreign currency can be attributed to

the following:

Deregulation of international capital flows Most of the deregulation

that has characterised the past ten to fifteen years has made the movement
of currencies and capital around the globe very easy.

Gain in technology and transaction cost efficiency In addition to the

performance of exchange and trading, advancements in technology is also
taking place in the distribution of information. This has greatly impacted the
capacity of individuals in these markets to accomplish instantaneous
arbitrage.

Market upswings Over recent years the financial markets have become
increasingly volatile. Adding to the enthusiasm for moving further capital at faster
rates are the faster swings in interest rates and faster swings in the stock values.

Question 5:- What are the differences between International Accounting

standards and Domestic Accounting Standards?
Answer5:- Difference Between International Accounting
Different countries whether domestic or international, have different accounting
standards. A common belief is that these differences reduce the quality and
importance of accounting information. Accounting standards determine the financial
reporting quality and provides separately verified information about an
organisation's financial performance to investors creditors.
Though there are differences in accounting methods, domestic businesses are not
affected. The accounting system of a domestic Organisation must meet the
specialized and regulatory standards of its home country. But, an MNC and its
subsidiaries must meet differing accounting and auditing standards of all the
countries in which it operates. This leads to a need for comparability between
businesses in the group. In order to successfully manage and organised their
operations, local managers require accounting information, which should be
prepared according to the local accounting concepts and denomination in the local
currency. Yet, for financial controllers, to measure the foreign subsidiarys
performance and worth, the subsidiarys accounts must be translated into the
organisations home currency. This translation is done using accounting concepts
and measures, which are detailed by the Organisation. Investors worldwide look for

the highest possible returns on their capital, in order to interpret the track record,
though they use a currency and an accounting system of their own. The
Organisation also has to pay taxes to the countries where it does business, based
on the accounting statements prepared in these countries. Besides this, when a
parent corporation tries to combine the accounting records of its subsidiaries to
produce consolidated financial statements, extra complexities occur because of the
changes in the value of the host and home currencies.
There are many differences between International Accounting Standards (IAS) and
Domestic Accounting Standards (DAS). On the basis of difference between the two,
two indices, namely 'divergence' and 'absence', are created. Absence is the
difference between DAS and IAS; the rules on certain accounting issues are missed
out in DAS and covered in IAS. Divergence represents the differences between DAS
and IAS; the rules on the same accounting issue differ in DAS and IAS.
Measurement of differences between International Accounting Standards
and Domestic Accounting Standards
You can measure the differences between IAS and DAS in the following way:

Literature on international accounting differences Referring to earlier

reports on international accounting could give more information about the
subject. Most of the earlier reports understand international accounting
differences as various options adopted by nations for the similar accounting
problems, which correspond to divergence concept.
Framework of analysis Links between variations in accounting standards
and financial reporting quality of various countries could be clearly seen from
the reports published earlier. We should consider the institutional
determinants of accounting differences such as legal origin, governance
structure, economic development, and equity market.

Question 6:- Explain the key components of International Strategic

Management.
Answer6:- Key Components of International Strategic Management

Strategic Management
The nature of strategic management plays a vital role in the international business
world. It is important to understand the term strategic management before
discussing its nature.
The term strategic management refers to the complete range of strategic-decision
making activity in an Organisation. Strategic management identifies and
comprehends the environmental factors to control the plans accordingly. It has
evolved as a concept over time and will continue to evolve.
Nature of international strategic management
Strategic management focuses on the process of formulating, implementing, and
evaluating strategies, to achieve the objectives of an Organisation. The concept of
strategic management process in an MNC is similar to that of any other
Organisation. However, major complicating factor is that before considering various
strategic options, the strategic management process has to analyses and
understands the environmental needs from a regional and country perspective.
Both time and effort is required to identify and evaluate external trends and events
in MNCs. Communication between home offices and overseas operations become
complicated because of cultural and national differences, geographic distances and
variations in business practices. The strategy implementation becomes difficult as
different cultures have different norm values and work ethics.
Strategic management holds significance in international business. An MNC has to
keep track of their various operations in a continuously altering international
environment.
Strategic objectives
Strategic objectives assist in the implementation process of the organisations
objectives or goals. While implementing an international strategy, an Organisation
has to identify the opportunities present in these countries, explore the various
resources available, their strengths and capabilities and plan to work on their core
competencies. The objective should be formed in a way that it is not deficient or
immeasurable. The strategic objectives must help the Organisation to achieve their
mission and vision.
Most strategic objectives focus on generating greater profits and returns for the
business owners; others focus on customers or society at large. The strategic
objectives (SMART) are as follows:

Specific: A clear message as to what needs to be achieved must be

provided.

Measurable: There must be at least one indicator to measure progress

against fulfilling the objective.

Appropriate: The objectives must be consistent with the given vision and
mission of the Organisation.

Realistic: The objectives must be achievable given the organisations

abilities and opportunities in the environment. This means that the objectives
must be challenging and attainable.

Timely: To accomplish the objective there must be a time frame.

Two more aspects have been added to the objectives and it has now become
SMARTER. They are Ethical and Recorded.
When strategic objectives are thoroughly implemented, it will result in strategic
competitiveness that improves the performance and innovation of these
organizations. The advantages of preparing strategic objectives are:

First, they guide employees of an Organisation towards achieving the

common goals. This aids the Organisation to concentrate and conserve
valuable resources and work together in a timely manner.

Second, challenging objectives encourage and inspire employees to

demonstrate higher levels of commitment and effort. A research has
supported the concept that individuals work harder when they are motivated
towards a specific goal, rather than being asked to simply do their best.

Third, different parts of an Organisation always have the potential to follow

their own goals rather than the overall company goals. Though the intentions
are good.