INTERNATIONAL BUSINESS

1. What is Balance of Payment? Discuss about the key components of balance of payment. Short
note on Balance of payment disequilibrium, states reason leading to disequilibrium in balance of
payment.

Ans:

Meaning of Balance of Payment:

A Balance of Payment Account is a systematic record of all economic transactions between residents of a
country and the rest of the world carried out in a specific period of time.

Balance of Payment Account is a summary of international transactions of a country for a given period’
(i.e., financial year). It records a country’s transactions with the rest of the world involving inflow and
outflow of foreign exchange. In short BOP Account is a summary statement of transactions in foreign
exchange in a year.

Components of Balance of payment:

1. Current Account
2. Capital Account
3. Reserve Account
4. Errors & Omissions

Current Account Balance

• BOP on current account is a statement of actual receipts and payments in short period.
• It includes the value of export and imports of both visible and invisible goods. There can be either
surplus or deficit in current account.
• The current account includes:- export & import of services, interests, profits, dividends and unilateral
receipts/payments from/to abroad.
• BOP on current account refers to the inclusion of three balances of namely – Merchandise balance,
Services balance and Unilateral Transfer balance.

Types of Balances
Trade Balance
 Merchandise: exports - imports of goods
 Services: exports - imports of services

Income Balance
 Net investment income: net income receipts from assets
 Net international compensation to employees: net compensation of Employees

Net Unilateral Transfers

 Gifts from foreign countries minus gifts to foreign countries.

Capital Account Balance

It is difference between the receipts and payments on account of capital account. It refers to all financial
transactions. The capital account involves inflows and outflows relating to investments, short term
borrowings/lending, and medium term to long term borrowing/lending. There can be surplus or deficit in
capital account.
It includes: - private foreign loan flow, movement in banking capital, official capital transactions,
reserves, gold movement etc.
These are classifies into two categories Direct foreign investments
Portfolio investments
Other capital

The Reserve Account

Three accounts: IMF, SDR, & Reserve and Monetary
Gold are collectively called as The Reserve Account.

Errors & Omissions

The entries under this head relate mainly to leads and lags in reporting of transactions
It is of a balancing entry and is needed to offset the overstated or understated components.

Disequilibrium In The Balance Of Payments

A disequilibrium in the balance of payment means its condition of Surplus Or deficit
A Surplus in the BOP occurs when Total Receipts exceeds Total Payments. Thus,
BOP= CREDIT>DEBIT
A Deficit in the BOP occurs when Total Payments exceeds Total Receipts. Thus,
BOP= CREDIT<DEBIT

Causes of Disequilibrium In The Bop

 Cyclical fluctuations
 Short fall in the exports
 Economic Development
 Rapid increase in population
 Structural Changes
 Natural Calamites
 International Capital Movements

2. Write about term IF and its nature and features. What is role of IMF in International Finance?
Write about any one institution involved in international finance? What different components
indicate about international finance of country? Distinguish between country level finance and finance
at international level.

ANS:

International finance is the branch of economics that studies the dynamics of foreign exchange, foreign
direct investment and how these affect international trade. Also studies the international projects,
international investment and the international capital flow. International Finance can be broadly defined,
as the study of the financial decisions taken by a multinational corporation in the area of international
business i.e. global corporate finance.

Nature and scope of international financial management

1. Multinational finance is multidisciplinary in nature, while an understanding of economic theories and

principles is necessary to estimate and model financial decisions, financial accounting and management
accounting help in decision making in financial management at multinational level.

2. Because of changing nature of environment at international level, the knowledge of latest changes in
forex rates, volatility in capital market, interest rate fluctuations, macro level charges, micro level
economic indicators, savings, consumption pattern, interest preference, investment behaviour of investors,
export and import trends, competition, banking sector performance, inflationary trends, demand and
supply conditions etc. is required by the practitioners of international financial management.

Features of International Finance:

1. Foreign Exchange Risk (self-explanatory)
2. Political Risk (self-explanatory)
3. Expanded opportunity sets
When firms go global, they also tend to benefit from expanded opportunities which are available now.
They can raise funds in capital markets where cost of capital is the lowest. In addition, firms can also gain
from greater economies of scale when they operate on a global basis.
4. Market imperfections
The final feature of international finance that distinguishes it from domestic finance is that world markets
today are highly imperfect. There are profound differences among nations’ laws, tax systems, business
practices and general cultural environments. Imperfections in the world financial markets tend to restrict
the extent to which investors can diversify their portfolio. Though there are risks and costs in coping with
these market imperfections, they also offer managers of international firms abundant opportunities.

Role of IMF in IF:

The International Monetary Fund (IMF) is an international organization headquartered in Washington,

D.C., consisting of "189 countries working to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment and sustainable economic growth, and
reduce poverty around the world." Formed in 1945 at the Bretton Woods Conference. It came into formal
existence in 1945 with 29 member countries and the goal of reconstructing the international payment
system. It now plays a central role in the management of balance of payments difficulties and
international financial crises.

1. Exchange Stability:
The first important function of IMF is to maintain exchange stability and thereby to discourage any
fluctuations in the rate of exchange. The Found ensures such stability by making necessary arrangements
2. Eliminating BOP Disequilibrium:
The Fund is helping the member countries in eliminating or minimizing the short-period equilibrium of
balance of payments either by selling or lending foreign currencies to the members.
4. Stabilize Economies:
The IMF has an important function to advise the member countries on various economic and monetary
matters and thereby to help stabilize their economies.
5. Credit Facilities:
IMF is maintaining various borrowing and credit facilities so as to help the member countries in
correcting disequilibrium in their balance of payments. These credit facilities include-basic credit facility,
extended fund facility for a period of 3 years
6. Maintaining Balance Between Demand and Supply of Currencies:
IMF is also entrusted with important function to maintain balance between demand and supply of various
currencies. Accordingly the fund can declare a currency as scarce currency which is in great demand and
can increase its supply by borrowing it from the country concerned or by purchasing the same currency in
exchange of gold.
7. Technical Assistance:
The IMF is also performing an useful function to provide technical assistance to the member countries.
Such technical assistance in given in two ways, i.e., firstly by granting the members countries the services
of its specialists and experts and secondly by sending the outside experts.
8. Reducing Tariffs:
The Fund also aims at reducing tariffs and other restrictions imposed on international trade by the
member countries so as to cease restrictions of remittance of funds or to avoid discriminating practices.
9. General Watch:
The IMF is also keeping a general watch on the monetary and fiscal policies followed by the member
countries to ensure no flouting of the provisions of the charter.

INTERNATIONAL FINANCE AND COUNTRY LEVEL FINANCE

POINTS INTERNATIONAL FINANCE COUNTRY LEVEL FINANCE
FOREIGN It’s an additional risk which a In domestic financial
EXCHANGE finance management the finance
RISK manager is required to cater to manager is required to deal in
under an domestic currency only,
International Financial there is no need to deal with
Management setting. Foreign foreign exchange, so there is no
exchange risk refers to the risk of currency exchange risk.
fluctuating prices of currency
which has the potential to convert a
profitable deal into a loss making
one.
USE OF In international financial In domestic financial
DERIVATIVES management we use derivatives management manager do not
INSTRUMENT instrument to hedge the risk. use derivatives because there is
less risk.
LEGAL AND The other important aspect to look In domestic financial
TAX at is the legal and tax front of a management the finance
ENVIRONMENT country. Tax impacts directly to manager have to deal with
your product costs or net profits i.e. domestic country’s legal rules
‘the bottom line’ for which the and tax structure. He is more
whole story is written. International familiar with the laws of
finance manager will look at the domestic country.
taxation structure to find out
whether the business which is
feasible in his home country is
workable in the foreign country or
not. The manager has to deal with
different tax structure and legal
laws & it’s difficult to manage this.
MACRO An international business is In domestic financial
BUSINESS exposed to altogether a different management the manager is
ENVIRONMENT economic and political well aware the local macro
environment. All trade policies are business environment and he
different in different countries. have to deal with macro
Financial manager has to critically business environment of single
analyze the policies to make out the country.
feasibility and profitability of their
business propositions.
DIFFERENT Managing the reporting task is In domestic financial
STANDARDS OF another big difference. The management have to deal with
REPORTING financial manager or his team reporting standard
needs to be familiar with of domestic country only.
accounting standards of different
countries.
CAPITAL In an MNC, the financial managers In domestic financial
 MANAGEMENT have ample options of raising the
capital. A number of options create
more challenge with respect to the
selection of the right source of
capital to ensure the lowest
possible cost of capital.
BANKING The international financial
REGULATION management have to deal and
follow the banking regulations of
different countries. The different
banking rule and regulations may
negatively impact the international
financial management.
CULTURAL The international financial
DIFFERENCES management deals with cultural
differences of different countries,
values, traditions etc differ country
to country. It effects the
international financial management
THE DIFFERENT It is not only which along matters,
GROUP OF there are other things which carry
STAKEHOLDERS greater importance as the group of
suppliers, customers, lenders,
shareholders etc.All they carry
altogether a different culture, a
different set values and most
importantly the language also may
different. All this effect the
international financial
management.
management, there is single
market to raise capital, there is
no option go outside the
domestic boundaries.
The domestic financial
management have to deal with
banking rules and regulations of
domestic country. There is more
familiarity with banking rules
and regulations
The domestic financial
management deals with cultural
environment of domestic
country, so there is less risk due
to cultural differences.
The domestic financial
management deals with
stakeholders of single country
and more information available
about their
like,dislike,preferences etc.

3. Write in brief about UCPDC as regards documentary credit operations. Write note on
Documentary credit operations?

Refer: page number: 221

4. State factors influencing Rate of exchange.

Ans: Foreign Exchange rate (ForEx rate) is one of the most important means through which a country’s
relative level of economic health is determined. A country's foreign exchange rate provides a window to
its economic stability, which is why it is constantly watched and analyzed. If you are thinking of sending
or receiving money from overseas, you need to keep a keen eye on the currency exchange rates.
The exchange rate is defined as "the rate at which one country's currency may be converted into another."
It may fluctuate daily with the changing market forces of supply and demand of currencies from one
country to another. For these reasons; when sending or receiving money internationally, it is important to
understand what determines exchange rates.

1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation
rate than another's will see an appreciation in the value of its currency. The prices of goods and services
increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate
exhibits a rising currency value while a country with higher inflation typically sees depreciation in its
currency and is usually accompanied by higher interest rates.

2. Interest Rates
Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and
inflation are all correlated. Increases in interest rates cause a country's currency to appreciate because
higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes
a rise in exchange rates.

3. Country’s Current Account / Balance of Payments

A country’s current account reflects balance of trade and earnings on foreign investment. It consists of
total number of transactions including its exports, imports, debt, etc. A deficit in current account due to
spending more of its currency on importing products than it is earning through sale of exports causes
depreciation. Balance of payments fluctuates exchange rate of its domestic currency.

4. Government Debt
Government debt is public debt or national debt owned by the central government. A country with
government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell
their bonds in the open market if the market predicts government debt within a certain country. As a
result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade
Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to
import prices. A country's terms of trade improves if its exports prices rise at a greater rate than its
imports prices. This results in higher revenue, which causes a higher demand for the country's currency
and an increase in its currency's value. This results in an appreciation of exchange rate.

6. Political Stability & Performance

A country's political state and economic performance can affect its currency strength. A country with less
risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from
other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an
appreciation in the value of its domestic currency. A country with sound financial and trade policy does
not give any room for uncertainty in value of its currency. But, a country prone to political confusions
may see a depreciation in exchange rates.

7. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to
acquire foreign capital. As a result, its currency weakens in comparison to that of other countries,
therefore lowering the exchange rate.

8. Speculation
If a country's currency value is expected to rise, investors will demand more of that currency in order to
make a profit in the near future. As a result, the value of the currency will rise due to the increase in
demand. With this increase in currency value comes a rise in the exchange rate as well.
Conclusion:
All of these factors determine the foreign exchange rate fluctuations. If you send or receive money
frequently, being up-to-date on these factors will help you better evaluate the optimal time for
international money transfer. To avoid any potential falls in currency exchange rates, opt for a locked-in
exchange rate service, which will guarantee that your currency is exchanged at the same rate despite any
factors that influence an unfavourable fluctuation.

5. .What is Trade settlement and state it’s Significance in international business. Explain two methods
of trade settlement with its merits and demerits.” Letter of credit is a facilitator of international
business “Appraise the statement.

What is letter of credit? What are its types? Give their merits and suitability. How letter of credit
acts as a backbone of export trade? Give its characteristics from trade settlement point of view?
ANS:

To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer
their customers attractive sales terms supported by appropriate payment methods. Because getting paid in
full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen
carefully to minimize the payment risk while also accommodating the needs of the buyer.

Methods of Trade settlement:

1. Cash-in-Advance

With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received
before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly
used cash-in-advance options available to exporters. However, requiring payment in advance is the least
attractive option for the buyer, because it creates cash-flow problems. Foreign buyers are also concerned
that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment
method as their sole manner of doing business may lose to competitors who offer more attractive payment
terms.

2. Letters of Credit

Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is
a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that
the terms and conditions stated in the LC have been met, as verified through the presentation of all
required documents. The buyer pays his or her bank to render this service. An LC is useful when reliable
credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the
creditworthiness of the buyer’s foreign bank. An LC also protects the buyer because no payment
obligation arises until the goods have been shipped or delivered as promised.

3. Documentary Collections

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a
payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s
bank), along with instructions for payment. Funds are received from the importer and remitted to the
exporter through the banks involved in the collection in exchange for those documents. D/Cs involve
using a draft that requires the importer to pay the face amount either at sight (document against payment)
or on a specified date (document against acceptance). The draft gives instructions that specify the
documents required for the transfer of title to the goods. Although banks do act as facilitators for their
clients, D/Cs offer no verification process and limited recourse in the event of non-payment. Drafts are
generally less expensive than LCs.

4. Open Account

An open account transaction is a sale where the goods are shipped and delivered before payment is due,
which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer
in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. Because of
intense competition in export markets, foreign buyers often press exporters for open account terms since
the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are
reluctant to extend credit may lose a sale to their competitors. However, the exporter can offer
competitive open account terms while substantially mitigating the risk of non-payment by using of one or
more of the appropriate trade finance techniques, such as export credit insurance.

A letter of credit is a financial document provided by a third party (with no direct interest in the
transaction), mostly a bank or a financial institution, that guarantees the payment of funds for goods and
services to the seller once the seller has submitted the required documents. Other financial institutions to
issue these letters of credit in addition to a bank are mutual funds or insurance companies but in very few
cases. A letter of credit has three important elements – the beneficiary/ seller who is paid the credit, the
buyer/ applicant who buys the goods or services and the issuing bank that issues the letter of credit on the
buyer’s request. There might be another bank involved as an advising bank that advises the beneficiary.
1. TRANSFERABLE LC
A letter of credit that allows a beneficiary to further transfer all or a part of the payment to another
supplier in the chain. This generally happens when the beneficiary is just an intermediary for the
actual supplier. Such letter of credit allows the beneficiary to provide its own documents but
transfer the money further.

2. UN-TRANSFERABLE LC
A letter of credit that doesn’t allow transfer of money to any third parties. The beneficiary is the
only recipient of the money and cannot further use the letter of credit to pay anyone.

3. REVOCABLE LC
A letter of credit that can be altered any time by the issuing bank or the buyer without any
notification to the seller/ beneficiary. Such types of letters are not used frequently as the
beneficiary is not provided any protection.

4. IRREVOCABLE LC
A letter of credit that does not allow the issuing bank to make any changes without the approval of
the beneficiary.

5. CONFIRMED LC
A letter of credit where an advising bank also guarantees the payment to the beneficiary. Only the
irrevocable letters of credit are confirmed by the advising bank. The beneficiary has two promises
to pay – one from the issuing bank and the other from the advising bank.
 6. UNCONFIRMED LC
A letter of credit that is assured only by the issuing bank and does not need a guarantee by the
second bank. Mostly the letters of credit are an unconfirmed letter of credit.

7. BACK TO BACK LC
A letter of credit which is commonly used in a transaction including an intermediary. There are
two letters of credit, the first issued by the bank of the buyer to the intermediary and the second
issued by the bank of an intermediary to the seller

8. SIGHT LC
A letter of credit that demands payment on the submission of the required documents. The bank
reviews the documents and pays the beneficiary if the documents meet the conditions of the letter.

Letter of credit advantages for the seller

 The seller has the obligation of buyer's bank's to pay for the shipped goods;
 Reducing the production risk, if the buyer cancels or changes his order
 The opportunity to get financing in the period between the shipment of the goods and receipt of
payment (especially, in case of deferred payment).
 The seller is able to calculate the payment date for the goods.
 The buyer will not be able to refuse to pay due to a complaint about the goods

Letter of credit advantages for the buyer

 The bank will pay the seller for the goods, on condition that the latter presents to the bank the
determined documents in line with the terms of the letter of credit;
 The buyer can control the time period for shipping of the goods;
 By a letter of credit, the buyer demonstrates his solvency;
 In the case of issuing a letter of credit providing for delayed payment, the seller grants a credit to
the buyer.
 Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

6. Note on FDI. Which are the modes and instruments in which country can invite FDI? What are
its advantages and demerits? Comment on FDI inflow because of make in India and its impact on
balance of payment.

Foreign direct investment (FDI) is an important factor in acquiring investments and grow the local
market with foreign finances when local investment is unavailable. t has been proved that FDI can be a
win-win situation for both the parties involved. The investor can gain cheaper access to
products/services and the host country can get valuable investment unattainable locally. FDI, in its
classic definition, is termed as a company of one nation putting up a physical investment into building a
facility (factory) in another country. The direct investment made to create the buildings, machinery, and
equipment is not in sync with making a portfolio investment, an indirect investment.

In recent years, due to fast growth and change in global investment patterns, the definition has been
expanded to include all the acquisition activities outside the investing firm’s home country.
In 2014, Prime Minister Narendra Modi launched the “Make in India” initiative with the objective to
increase the skill level of workers/employees and job opportunities for the burgeoning youth population.
Although the call to manufacture in India was partly to entice domestic entrepreneurs, it is more
focussed on attracting foreign money and technology to expand the manufacturing sphere.

FDI, therefore, may take many forms, such as direct acquisition of a foreign firm, constructing a facility,
or investing in a joint venture or making a strategic alliance with one of the local firms with an input of
technology, licensing of intellectual property.
Methods

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the
following methods:

 by incorporating a wholly owned subsidiary or company anywhere

 by acquiring shares in an associated enterprise
 through a merger or an acquisition of an unrelated enterprise
 participating in an equity joint venture with another investor or enterprise

What are its advantages and demerits (refer pg no 62-64)

7. Distinguish between International and Domestic Business Environment. What is the nature of
business environment at global level? Write in detail about two factors.

Business Environment:

The term ‘business environment’ connotes external forces, factors and institutions that are beyond the
control of the business and they affect the functioning of a business enterprise. These include customers,
competitors, suppliers, government, and the social, political, legal and technological factors etc. While
some of these factors or forces may have direct influence over the business firm, others may operate
indirectly. It may also be defined as the set of external factors, such as economic factors, social factors,
political and legal factors, demographic factors, technical factors etc., which are uncontrollable in nature
and affects the business decisions of a firm.

DOMESTIC BUSINESS INTERNATIOANL BUSINESS

Geographic area
It is carried out within the national or geographic It is carried out across borders and national
borders of the country territories of a country
Restrictions
Tariffs and quotas are not present Many restrictions are imposed while doing
and very few local restrictions are business internationally or entering a foreign
imposed on a domestic business market e.g. Tariff and non-tariff barriers, exchange
controls, local taxes etc.
Culture
There is less difference in the market culture of The market culture widely varies among different
local areas and regions within a country. The market nations and regions
culture is relatively uniform
Risk
Risk factor is less Risk factor is high
Currency
A domestic business deals in a single currency An international business deals in multiple
currencies
Human Resource
A domestic business can succeed with human Multilingual, multi-strategic and multicultural
resource with minimum skill and knowledge human resource is necessary for smooth operations
of an international business
Cost Advantage
Do not enjoy Cost advantage Advantage of location economies and cheap
resources are available
Environment
A domestic business is only affected by the Domestic, foreign and international environment
variables in the domestic environment factors affect an international business

The main features of business environment are:

1. All the external forces:
Business Environment includes all the forces, institutions and factors which directly or indirectly affect
the Business Organizations.
2. Specific and general forces:
Business environment includes specific forces such as investors, customers, competitors and suppliers.
Non-human or general forces are Social, Legal, Technological, Political, etc. which affect the Business
indirectly.
3. Inter-relation:
All the forces and factors of Business Environment are inter-related to each other. For example with
inclination of youth towards western culture, the demand for fast food is increasing.
4. Uncertainty:
It is very difficult to predict the changes of Business Environment. As environment is changing very fast
for example in IT, fashion industry frequent and fast changes are taking place.
5. Dynamic:
Business environment is highly flexible and keep changing. It is not static or rigid that is why it is
essential to monitor and scan the business environment continuously.
6. Complex:
It is very difficult to understand the impact of Business environment on the companies. Although it is
easy to scan the environment but it is very difficult to know how these changes will influence Business
decisions. Some-time change may be minor but it might have large impact. For example, a change in
government policy to increase the tax rate by 5% may affect the income of company by large amount.
7. Relativity:
The impact of Business environment may differ from company to company or country to country. For
example, when consumer organisation CES published the report of finding pesticides in cold drinks,
resulted in decrease in sale of cold drinks, on the other hand it increased the sale of juice and other drinks.

Write in detail about two factors.

(WRITE PESTAL IN THIS PART)

8.. Discuss the chaceristics of global business in respect of volume, product service, and finance etc.

ANS: International Business conducts business transactions all over the world. These transactions include
the transfer of goods, services, technology, managerial knowledge, and capital to other countries.
International business involves exports and imports.
International Business is also known, called or referred as a Global Business or an International
Marketing.

An international business has many options for doing business, it includes,

1. Exporting goods and services.

2. Giving license to produce goods in the host country.
3. Starting a joint venture with a company.
4. Opening a branch for producing & distributing goods in the host country.
5. Providing managerial services to companies in the host country.

The nature and characteristics or features of international business are:-

1. Large scale operations: In international business, all the operations are conducted on a very huge
scale. Production and marketing activities are conducted on a large scale. It first sells its goods in
the local market. Then the surplus goods are exported.
2. Integration of economies : International business integrates (combines) the economies of many
countries. This is because it uses finance from one country, labour from another country, and
infrastructure from another country. It designs the product in one country, produces its parts in
many different countries and assembles the product in another country. It sells the product in
many countries, i.e. in the international market.
3. Dominated by developed countries and MNCs : International business is dominated by developed
countries and their multinational corporations (MNCs). At present, MNCs from USA, Europe and
Japan dominate (fully control) foreign trade. This is because they have large financial and other
resources. They also have the best technology and research and development (R & D). They have
highly skilled employees and managers because they give very high salaries and other benefits.
Therefore, they produce good quality goods and services at low prices. This helps them to capture
and dominate the world market.
4. Benefits to participating countries : International business gives benefits to all participating
countries. However, the developed (rich) countries get the maximum benefits. The developing
(poor) countries also get benefits. They get foreign capital and technology. They get rapid
industrial development. They get more employment opportunities. All this results in economic
development of the developing countries. Therefore, developing countries open up their
economies through liberal economic policies.
5. Keen competition : International business has to face keen (too much) competition in the world
market. The competition is between unequal partners i.e. developed and developing countries. In
this keen competition, developed countries and their MNCs are in a favourable position because
they produce superior quality goods and services at very low prices. Developed countries also
have many contacts in the world market. So, developing countries find it very difficult to face
competition from developed countries.
6. Special role of science and technology: International business gives a lot of importance to science
and technology. Science and Technology (S & T) help the business to have large-scale production.
Developed countries use high technologies. Therefore, they dominate global business.
International business helps them to transfer such top high-end technologies to the developing
countries.
7. International restrictions : International business faces many restrictions on the inflow and outflow
of capital, technology and goods. Many governments do not allow international businesses to
enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions,
etc. All this is harmful to international business.
 8. Sensitive nature: The international business is very sensitive in nature. Any changes in the
economic policies, technology, political environment, etc. has a huge impact on it. Therefore,
international business must conduct marketing research to find out and study these changes. They
must adjust their business activities and adapt accordingly to survive changes.

9. What is forex market and its characeristics?

Answer: The forex market is the market in which participants can buy, sell, exchange, and speculate on
currencies. The forex market is made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors. The currency market is
considered to be the largest financial market with over $5 trillion in daily transactions, which is more than
the futures and equity markets combined.

The forex market is made up of two levels;

The interbank market and the over-the-counter (OTC) market.

The interbank market is where large banks trade currencies for purposes such as hedging, balance sheet
adjustments, and on behalf of clients.

The OTC market is where individuals trade through online platforms and brokers.

Operating hours

From Monday morning in Asia, to Friday afternoon in New York, the forex market is a 24-hour market,
meaning it does not close overnight. This differs from markets such as equities, bonds, and commodities,
which all close for a period of time, generally in the New York late afternoon. However, as with most
things there are exceptions. Some emerging market currencies closing for a period of time during the
trading day.

Characteristic of forex market:

1. Most Liquid Market in the World:

In view of the huge trading volume in the forex market, under normal conditions, you can buy or sell
currency at your desired price in a mere matter of seconds with just a simple click of the mouse. You can
even setup an online trading platform to buy and sell (place order) at the right price so that you can
control your profit margin and cut losses. The trading platform will execute everything for you
automatically. It is fast and simple.

2. Most Dynamic Market in the World:

It is a Twenty-Four Hour Market: Other than the weekends when it is closed, the forex market is open 24
hours a day. There is no need to wait for the market to open and you can trade anytime you like. This
flexibility has enabled many working professionals to take on forex trading as a side job. They can trade
in the morning, afternoon, night or whenever they are free. The best thing is that this also means that no
one can monopolize the market!

The forex market is so huge that no single entity, be it an organization, a group, a central bank or even the
government can control the market trend.
1. Market Transparency: Price transparency is very high in the FX market and the evolution of online
foreign exchange trading continues to improve this, to the benefit of traders. One of the biggest
advantages of trading foreign exchange online is the ability to trade directly with the market maker. A
reputable forex broker will provide traders with streaming, executable prices. It is important to make a
distinction between indicative prices and executable prices.

2. International Network of Dealers: The market is made up of an international network of dealers. The
market consists of a limited number of major dealer institutions that are particularly active in foreign
exchange, trading with customers and (more often) with each other. Most, but not all, are commercial
banks and investment banks. These dealer institutions are geographically dispersed, located in numerous
financial centers around the world. Wherever located, these institutions are linked to, and in close
communication with, each other through telephones, computers, and other electronic means.

3. Most Widely Traded Currency is the Dollar: The dollar is by far the most widely traded currency.
According to the 1998 survey, the dollar was one of the two currencies involved in an estimated 87
percent of global foreign exchange transactions, equal to about $1.3 trillion a day. In part, the widespread
use of the dollar reflects its substantial international role as – “investment” currency in many capital
markets, “reserve” currency held by many central banks, “transaction” currency in many international
commodity markets, “invoice” currency in many contracts, and “intervention” currency employed by
monetary authorities in market operations to influence their own exchange rates.

4. Leverage

In forex trading, only a small margin is needed to purchase a contract of a much higher value. Leverage
enables you to earn high returns while minimizing capital risks.

13. Note on Country Risk Analysis. Explain the factors you will consider while making country risk
analysis.

Country risk refers to the risk of investing or lending in a country, arising from possible changes in the
business environment that may adversely affect operating profits or the value of assets in the country.

For example, financial factors such as currency controls, devaluation or regulatory changes, or stability
factors such as mass riots, civil war and other potential events contribute to companies' operational risks.
Country risk represents the potentially adverse impact of a country’s environment on the MNC’s cash
flows.

COUNTRY RISK ANALYSIS CAN BE USED

 To monitor countries where the MNC is presently doing business;
 As a screening device to avoid conducting business in countries with excessive risk; and
 To improve the analysis used in making long term investment or financing decisions.

There are many factors from which risk can be analysed.

1. POLITICAL RISK FACTORS

 Attitude of Consumers in the Host Country. Some consumers may be very loyal to homemade
products.
 Attitude of Host Government :The host government may impose special requirements or taxes,
restrict fund transfers, subsidize local firms, or fail to enforce copyright laws.
  Blockage of Fund Transfers Funds that are blocked may not be optimally used.
 Currency Inconvertibility The MNC parent may need to exchange earnings for goods.
 War: Internal and external battles, or even the threat of war, can have devastating effects.
Bureaucracy
 Bureaucracy can complicate businesses. Corruption Corruption can increase the cost of
conducting business or reduce revenue.

2. ECONOMIC FACTORS

 Diversification of the economy

 Degree of reliance on a few key exports and the effects of a decline in the worldwide prices of
those exports
 Exchange rate devaluation
 Frequency of government intervention in the money market and the ceilings of interest rates
 Possibility of recession

3. SUBJECTIVE FACTORS:

Country’s attitude towards private enterprise

• Risk of currency devaluation

• Risk of government`s income reduction

• External flows dependence,

• Productivity restrictions

• Social pressures

• Attitude of consumers in the host country

4. TERRORISM

5. EXCHANGE RISK FACTOR: Exchange Risk is an unexpected adverse movement in the exchange
rate. Exchange risk includes an unexpected change in currency regime such as a change from a fixed to a
floating exchange rate.

• A country's exchange rate policy may help isolate exchange Risk. Managed floats, where the
government attempts to control the currency in a narrow trading range, tend to possess higher risk than
fixed or currency board systems.

5. LOCATION RISK FACTORS

Location or Neighbor hood Risk includes spillover effects caused by problems in a region, in a country's
trading partner, or in countries with similar perceived characteristics.

6. FINANCIAL RISK FACTORS

14. Discuss the role of MNC in international business.

Multinational corporations are those large firms which are incorporated in one country but which own,
control or manage production and distribution facilities in several countries. Therefore, these
multinational corporations are also known as transnational corporations.

Role of Multinational Corporations in the Indian Economy:

Prior to 1991 Multinational companies did not play much role in the Indian economy. In the pre-reform
period the Indian economy was dominated by public enterprises. To prevent concentration of economic
power industrial policy 1956 did not allow the private firms to grow in size beyond a point. By definition
multinational companies were quite big and operate in several countries.

While multinational companies played a significant role in the promotion of growth and trade in South-
East Asian countries they did not play much role in the Indian economy where import-substitution
development strategy was followed. Since 1991 with the adoption of industrial policy of liberalisation
and privatisation rote of private foreign capital has been recognised as important for rapid growth of the
Indian economy.

1. Promotion of Foreign Investment:

In the recent years, external assistance to developing countries has been declining. This is because the donor
developed countries have not been willing to part with a larger proportion of their GDP as assistance to developing
countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment
in India.
For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is not confined to income
and employment for the workers and employees of Maruti Udyog but goes beyond that. Many workers are
employed in dealer firms who sell Maruti cars.

2. Non-Debt Creating Capital inflows:

In pre-reform period in India when foreign direct investment by MNCs was discouraged, we relied heavily on
external commercial borrowing (ECB) which was of debt-creating capital inflows. This raised the burden of
external debt and debt service payments reached the alarming figure of 35 per cent of our current account receipts.

3. Technology Transfer:
Another important role of multinational corporations is that they transfer high sophisticated technology to
developing countries which are essential for raising productivity of working class and enable us to start new
productive ventures requiring high technology.
Whenever, multinational firms set up their subsidiary production units or joint- venture units, they not only import
new equipment and machinery embodying new technology but also skills and technical know-how to use the new
equipment and machinery.

4. Promotion of Exports:
With extensive links all over the world and producing products efficiently and therefore with lower costs
multinationals can play a significant role in promoting exports of a country in which they invest. For example, the
rapid expansion in China’s exports in recent years is due to the large investment made by multinationals in various
fields of Chinese industry.
Historically in India, multinationals made large investment in planlations whose products they exported. In recent
years, Japanese automobile company Suzuki made a large investment in Maruti Udyog with a joint collaboration
with Government of India. Maruti cars are not only being sold in the Indian domestic market but are exported in a
large number to the foreign countries.

5. Investment in Infrastructure:
With a large command over financial resources and their superior ability to raise resources both globally and inside
India it is said that multinational corporations could invest in infrastructure such as power projects, modernisation
of airports and posts, telecommunication.
6.Good international relation:
A multinational company recognizes the country in the international market. It creates harmonious relation between
parent company and subsidiary countries. It recognizes exporting country to all over the world.

7.Increase in employment opportunity:

A multinational company requires a large number of skilled as well as unskilled employees to operate its activities.
Thus it provides employment opportunity to the people of host country as a result economic standard of society is
improved.

15. Write short note on Export marketing and Write in Detail about export marketing procedure
for exporting mangos to Russia.

Export marketing means exporting goods to other countries of the world. It involves lengthy procedure
and formalities. In export marketing, goods are sent abroad as per the procedures framed by the exporting
country as well as by the importing country. Export marketing is more complicated to domestic marketing
due to international restrictions, global competition, lengthy procedures and formalities and so on.
Moreover, when a business crossed the borders of a nation, it becomes infinitely more complex. Along
with this, export marketing offers ample opportunities for earning huge profits and valuable foreign
exchange.

Export marketing means marketing of goods and services beyond the national boundaries”.

FEATURES OF EXPORT MARKETING

1) Systematic Process – Export marketing is a systematic process of developing and distributing goods
and services in overseas markets. The export marketing manager needs to undertake various marketing
activities, such as marketing research, product design, branding, packaging, pricing, promotion etc. To
undertake the various marketing activities, the export marketing manager should collect the right
information from the right source; analyze it properly and then take systematic export marketing
decisions.

2) Large Scale Operations – Normally, export marketing is undertaken on a large scale. Emphasis is
placed on large orders in order to obtain economies in large sole production and distribution of goods.
The economies of large scale help the exporter to quote competitive prices in the overseas markets.
Exporting goods in small quantities is costly due to heavy transport cost and other formalities.

3) Dominance of Multinational Corporations – Export marketing is dominated by MNCs, from USA,

Europe and Japan. They are in a position to develop world wide contacts through their network and
conduct business operations efficiently and economically. They produce quality goods at low cost and
also on massive scale.

4) Customer Focus – The focus of export marketing is on the customer. The exporter needs to identify
customers‟ needs and wants and accordingly design and develop products to generate and enhance
customer satisfaction. The focus on customer will not only bring in higher sales in the overseas markets,
but it will also improve and enhance goodwill of the firm.

5) Trade barriers – Export marketing is not free like internal marketing. There are various trade barriers
because of the protective policies of different countries. Tariff and non-tariff barriers are used by
countries for restricting import. The export marketing manager must have a good knowledge of trade
barriers imposed by importing countries.
6) Trading Blocs – Export trade is also affected by trading blocs, certain nations form trading bloc for
their mutual benefit and economic development. The non-members face problems in trading with the
members of a trading bloc due to common external barriers. Indian exporters should have a good
knowledge of important trading blocs such as NAFTA, European Union and ASEAN

7) Marketing – mix Export marketing requires the right marketing mix for the target markets, i.e.
exporting the right product, at the right price, at the right place and with the right promotion. The exporter
can adopt different marketing – mixes for different export markets, so as to maximize exports and earn
higher returns.

8) Reputation – Export marketing brings name and goodwill to the export firm. Also, the country of its
origin the gets reputation. The reputation enables the export firm to command good sales in the domestic
market as well as export market.

STARTING EXPORTS

Export in itself is a very wide concept and lot of preparations is required by an exporter before starting an
export business. To start export business, the following steps may be followed:

1) Establishing an Organisation

To start the export business, first a sole Proprietary concern/ Partnership firm/Company has to be
set up as per procedure with an attractive name and logo.

2) Opening a Bank Account

A current account with a Bank authorized to deal in Foreign Exchange should be opened.

3) Obtaining Permanent Account Number (PAN)

It is necessary for every exporter and importer to obtain a PAN from the Income Tax Department.
(To apply PAN Card Click Here)

4) Obtaining Importer-Exporter Code (IEC) Number

An IEC is a 10 digit number which is mandatory for undertaking export/ import. Application for
obtaining IEC Number can be submitted to Regional authority of DGFT in form ANF 2A along
with the documents listed therein.

Applicants can also apply for e-IEC on the DGFT website (http://dgft.gov.in/). Only one IEC can
be obtained against a single PAN.

5) Registration cum membership certificate (RCMC)

For availing authorization to import/ export or any other benefit or concession under FTP 2015-
20, as also to avail the services/ guidance, exporters are required to obtain RCMC granted by the
concerned Export Promotion Councils/ FIEO/Commodity Boards/ Authorities.

6) Selection of product

All items are freely exportable except few items appearing in prohibited/ restricted list.

After studying the trends of export of different products from India proper selection of the
product(s) to be exported may be made.
7) Selection of Markets

An overseas market should be selected after research covering market size, competition, quality
requirements, payment terms etc. Exporters can also evaluate the markets based on the export
benefits available for few countries under the FTP. Export promotion agencies, Indian Missions
abroad, colleagues, friends, and relatives might be helpful in gathering information.

8) Finding Buyers

Participation in trade fairs, buyer seller meets, exhibitions, B2B portals, web browsing are an
effective tool to find buyers. EPC’s, Indian Missions abroad, overseas chambers of commerce can
also be helpful. Creating multilingual Website with product catalogue, price, payment terms and
other related information would also help.

9) Sampling

Providing customized samples as per the demands of Foreign buyers help in getting export orders.
As per FTP 2015-2020, exports of bonafide trade and technical samples of freely exportable items
shall be allowed without any limit.

10) Pricing/Costing

Product pricing is crucial in getting buyers’ attention and promoting sales in view of international
competition. The price should be worked out taking into consideration all expenses from sampling
to realization of export proceeds on the basis of terms of sale i.e. Free on Board (FOB), Cost,
Insurance & Freight (CIF), Cost & Freight(C&F), etc. Goal of establishing export costing should
be to sell maximum quantity at competitive price with maximum profit margin. Preparing an
export costing sheet for every export product is advisable.

11) Negotiation with Buyers

After determining the buyer’s interest in the product, future prospects and continuity in business,
demand for giving reasonable allowance/discount in price may be considered.

12) Covering Risks through ECGC

International trade involves payment risks due to buyer/ Country insolvency. These risks can be
covered by an appropriate Policy from Export Credit Guarantee Corporation Ltd (ECGC). Where
the buyer is placing order without making advance payment or opening letter of Credit, it is
advisable to procure credit limit on the foreign buyer from ECGC to protect against risk of non-
payment.(To know more about ECGC Click Here)

Processing an Export Order

i. Confirmation of order

On receiving an export order, it should be examined carefully in respect of items, specification,

payment conditions, packaging, delivery schedule, etc. and then the order should be confirmed.
Accordingly, the exporter may enter into a formal contract with the overseas buyer.

ii. Procurement of Goods

After confirmation of the export order, immediate steps may be taken for
procurement/manufacture of the goods meant for export. It should be remembered that the order
has been obtained with much efforts and competition so the procurement should also be strictly as
per buyer’s requirement.

iii. Quality Control

In today’s competitive era, it is important to be strict quality conscious about the export
goods. Some products like food and agriculture, fishery, certain chemicals, etc. are subject to
compulsory pre-shipment inspection. Foreign buyers may also lay down their own
standards/specifications and insist upon inspection by their own nominated agencies.
Maintaining high quality is necessary to sustain in export business.

iv. Finance

Exporters are eligible to obtain pre-shipment and post-shipment finance from Commercial Banks
at concessional interest rates to complete the export transaction. Packing Credit advance in pre-
shipment stage is granted to new exporters against lodgment of L/C or confirmed order for 180
days to meet working capital requirements for purchase of raw material/finished goods, labour
expenses, packing, transporting, etc. Normally Banks give 75% to 90% advances of the value of
the order keeping the balance as margin. Banks adjust the packing credit advance from the
proceeds of export bills negotiated, purchased or discounted.

Post Shipment finance is given to exporters normally upto 90% of the Invoice value for normal
transit period and in cases of usance export bills upto notional due date. The maximum period for
post-shipment advances is 180 days from the date of shipment. Advances granted by Banks are
adjusted by realization of the sale proceeds of the export bills. In case export bill becomes overdue
Banks will charge commercial lending rate of interest.

v. Labeling, Packaging, Packing and Marking

The export goods should be labeled, packaged and packed strictly as per the buyer’s specific
instructions. Good packaging delivers and presents the goods in top condition and in attractive
way. Similarly, good packing helps easy handling, maximum loading, reducing shipping costs and
to ensuring safety and standard of the cargo. Marking such as address, package number, port and
place of destination, weight, handling instructions, etc. provides identification and information of
cargo packed.

vi. Insurance

Marine insurance policy covers risks of loss or damage to the goods during the while the goods
are in transit. Generally in CIF contract the exporters arrange the insurance whereas for C&F and
FOB contract the buyers obtain insurance policy.

vii. Delivery

It is important feature of export and the exporter must adhere the delivery schedule. Planning
should be there to let nothing stand in the way of fast and efficient delivery.

viii. Customs Procedures

 It is necessary to obtain PAN based Business Identification Number (BIN) from the Customs prior
to filing of shipping bill for clearance of export good and open a current account in the designated
bank for crediting of any drawback amount and the same has to be registered on the system.

In case of Non-EDI, the shipping bills or bills of export are required to be filled in the format as
prescribed in the Shipping Bill and Bill of Export (Form) regulations, 1991. An exporter need to
apply different forms of shipping bill/ bill of export for export of duty free goods, export of
dutiable goods and export under drawback etc.

Under EDI System, declarations in prescribed format are to be filed through the Service Centers
of Customs. A checklist is generated for verification of data by the exporter/CHA. After
verification, the data is submitted to the System by the Service Center operator and the System
generates a Shipping Bill Number, which is endorsed on the printed checklist and returned to the
exporter/CHA. In most of the cases, a Shipping Bill is processed by the system on the basis of
declarations made by the exporters without any human intervention. Where the Appraiser Dock
(export) orders for samples to be drawn and tested, the Customs Officer may proceed to draw two
samples from the consignment

ix. Customs House Agents

Exporters may avail services of Customs House Agents licensed by the Commissioner of
Customs. They are professionals and facilitate work connected with clearance of cargo from
Customs.

x. Documentation

FTP 2015-2020 describe the following mandatory documents for import and export.

· Bill of Lading/ Airway bill

· Commercial invoice cum packing list

· shipping bill/ bill of export/ bill of entry (for imports)

(Other documents like certificate of origin, inspection certificate etc may be required as per the
case.)

xi. Submission of documents to Bank

After shipment, it is obligatory to present the documents to the Bank within 21 days for onward
dispatch to the foreign Bank for arranging payment. Documents should be drawn under
Collection/Purchase/Negotiation under L/C as the case may be, along with the following
documents

- Bill of Exchange
- Letter of Credit (if shipment is under L/C)
- Invoice
- Packing List
- Airway Bill/Bill of Lading
- Declaration under Foreign Exchange
- Certificate of Origin/GSP
- Inspection Certificate, wherever necessary
- Any other document as required in the L/C or by the buyer or statutorily.
 xii. Realization of Export Proceeds

As per FTP 2015-2020, all export contracts and invoices shall be denominated either in freely
convertible currency of Indian rupees, but export proceeds should be realized in freely convertible
currency except for export to Iran.

Export proceeds should be realized in 9 months.

16. Which Factors you would consider as an exporter of food products from country risk point of
view for following countries:

a. Nepal

b. South Korea

c. Denmark

d. Iran

(REFER PAGE NUMBER 207)

18. Short Note:

1. Euro market:

The euromarket is the market that includes all of the European Union member countries - many of which
use the same currency, the euro. All tariffs between Euromarket member countries have been abolished,
and import duties from all non-member countries have been fixed for all of the member countries. The
Euromarket also has one central bank for all of the member countries, the European Central Bank (ECB).

The Euromarket is a large single market comprised of all member countries, allowing for more efficient
trade and the centralization of monetary policy through the ECB. The Euromarket is considered a major
finance source for international trade, through the money
market or eurocurrency, eurocredit and eurobonds.

Types of Instruments in Euro Market

1. Global Depository Receipts:

GDR or Global Depository Receipt is used to offer Indian shares in any other country other than the US.
A company when issues ordinary shares keeps them with custodian / depository banks against which
bank issue Drs to the foreign investors. GDRs are listed on the Luxemburg stock exchange

For example, Infosys wants to list its shares in Australia. Hence, Infosys deposits a large number of its
shares with a bank located in Australia where it wants to list indirectly. The Australian bank issues
receipts(GDRs) against these shares,to the investors, each receipt representing a fixed number of shares.
2. American Depository Receipts:-

a receipt representing foreign shares of stock held on deposit in an American bank: receipts
are denominated in U.S. dollars and traded on American exchanges. ADRs are depository receipts are
issued by a company in USA. In this case, a non US company deposits its securities with a custodian
bank which in turn informs the depository in US that ADRs can be issued . The holder of such receipts
enjoys same ownership rights of underlying securities.

3. Eurobonds:-

Eurobonds are bonds which are denominated in currencies other than that of the country in which the
bonds are sold. In the Eurobond market risk of lending is borne directly by the lender whereas in case of
Euro currency market such risk is borne by financial institutions.

4. Euro convertible bonds:-

Euro convertible bond is a debt instrument with an option to convert it into a pre determined number of
equity shares of the company. It carries a fixed rate of interest. Euro convertible bonds can be issued with
call option and put option. In case of call option, issuer company can any time call bonds for conversion
into equity shares prior to the date of maturity . Generally company exercises this option when share
prices reach up to 130% to 150% of conversion price /redemption price. In case of put option, holder of
bond has a right to sell back bonds to the company. In this case usually, issuer company makes payment
in US dollars . Euro convertible bonds are also known as a deferred equity issue.

2. Trade Deficit:

A trade deficit is when a country imports more than it exports. It is also called a negative balance of
trade. It is one way of measuring international trade. To calculate the trade deficit, subtract the total value
of exports from the total value of imports.

What Causes a Trade Deficit?

A trade deficit occurs when a country does not produce all it needs. Most nations must borrow from
foreign states to pay for the imports.

Therefore, a country with a trade deficit will also have a current account deficit.

A trade deficit also results when domestic companies manufacture in foreign countries. When raw
materials are shipped overseas to factories, they count as exports. When the finished goods are shipped
back home, they count as imports. That's true even though they're made by domestic companies. The
imports are subtracted from the country's gross domestic product. That's despite the fact the earnings
benefit the company's stock price and the taxes increase the country's revenue stream.
IBRD: The International Bank for Reconstruction and Development (IBRD), commonly referred to as the
World Bank, is an international financial institution whose purposes include assisting the development of
its member nation’s territories, promoting and supplementing private foreign investment and promoting
long-range balance growth in international trade. The World Bank was established in December 1945 at
the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. It opened for
business in June 1946 and helped in the reconstruction of nations devastated by World War II. Since
1960s the World Bank has shifted its focus from the advanced industrialized nations to developing third-
world countries.

Organization and Structure:

The organization of the bank consists of the Board of Governors, the Board of Executive Directors and

the Advisory Committee, the Loan Committee and the president and other staff members. All the powers
of the bank are vested in the Board of Governors which is the supreme policy making body of the bank.

The board consists of one Governor and one Alternative Governor appointed for five years by each

member country. Each Governor has the voting power which is related to the financial contribution of the
Government which he represents.

Objectives:

The following objectives are assigned by the World Bank:

1. To provide long-run capital to member countries for economic reconstruction and development.
2. To induce long-run capital investment for assuring Balance of Payments (BoP) equilibrium and
balanced development of international trade.
3. To provide guarantee for loans granted to small and large units and other projects of member countries.
4. To ensure the implementation of development projects so as to bring about a smooth transference from
a war-time to peace economy.
5. To promote capital investment in member countries by the following ways;
(a) To provide guarantee on private loans or capital investment.
(b) If private capital is not available even after providing guarantee, then IBRD provides loans for
productive activities on considerate conditions.

Functions:
World Bank is playing main role of providing loans for development works to member countries,
especially to underdeveloped countries. The World Bank provides long-term loans for various
development projects of 5 to 20 years duration.

The main functions can be explained with the help of the following points:

1. World Bank provides various technical services to the member countries. For this purpose, the Bank
has established “The Economic Development Institute” and a Staff College in Washington.
2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.
3. The quantities of loans, interest rate and terms and conditions are determined by the Bank itself.
4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member
country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was
sanctioned.
6. Bank also provides loan to private investors belonging to member countries on its own guarantee, but
for this loan private investors have to seek prior permission from those counties where this amount will
be collected.

3. Offshore Financial Centres:

Offshore financial centres play a critical role in the international financial system. They provide finance,
insurance, broking, holding-company and head-office services, and exist because the economic benefits
outweigh their costs.

In a global economy, there will be bona fide business reasons for setting up a business in any country,
including a low tax one. These dealings can be genuine and profits allocated to them commensurate with
the economic value they add. Their role may include a wide range of business objectives.

Types of Offshore Financial Centres:

a. Base Havens:

Base havens are offshore financial centres with nil or very low corporate taxes, no withholding taxes, and
no or, at best, a few tax treaties. Often, they charge a “fee in lieu of taxes” or a flat rate tax, irrespective of
the actual turnover or profits.

There are generally no exchange controls or currency restrictions, and a high level of banking and
commercial secrecy is provided. The lack of tax treaties reduces the possibilities of exchange of
information under the treaty provisions. Their primary use is to collect and accumulate income in a tax-
free or low-tax environment.

b. Treaty Havens:

Treaty havens are offshore financial centres that permit nonresidents to use their tax treaties for resident
intermediary entities, e.g. treaty shopping. The tax treaties with source countries provide for reduced or
nil withholding tax on inbound income.

For example:

i. It helps to minimize the total tax through the use of third-country treaties. For example, the treaty with
an intermediary jurisdiction may provide more favourable treaty benefits, or grant them if there is no
treaty between the host and home States.

c. Special Concession Havens:

Many high-tax “onshore” countries act as tax havens and provide special tax regimes with exemptions or
reliefs to attract businesses with certain types of international business activities. They also allow the use
of their treaty network for treaty shopping. As mentioned earlier, some commentators call them non-
traditional offshore jurisdictions.

For example:

i. Several countries have special provisions for holding, finance or licensing companies, usually with the
benefits of their tax treaties. They also give preferential treatment for financial services, such as
insurance, offshore banking, mutual funds management and leasing activities to nonresidents.

Some of the major special concession havens today include:

United States:

The United States is probably among the world’s largest beneficiaries of global competition for offshore
activities. Each US state has its own corporate laws. Most of them act as a secrecy haven and keep little
or no information on companies registered under their corporate laws. The US federal government cannot
impose its law on the states because of the division of powers under the US Constitution.

United Kingdom:

London is the largest and one of the oldest offshore financial centres in the world. Although it is not
considered as an offshore centre in a narrow sense, financial services constitute a sizeable percentage of
the UK’s invisible exports.

Switzerland:

Switzerland has widely promoted itself as a tax-efficient offshore financial centre with a pro-business
fiscal policy. It is a low-taxed jurisdiction due to its split taxation at varying rates among the federal,
cantonal and municipal governments and the generous tax incentives for offshore business activities.
Switzerland provides several structures for offshore tax planning using tax-beneficial holding and
domiciliary companies.

Switzerland is also a tax haven for foreigners, particularly high net worth individuals. They can live in
Switzerland and pay a low negotiated lump sum tax. The bank secrecy law makes it an attractive “secrecy
haven”. It is estimated that Swiss banks hold significant amounts of foreign private wealth.

4. WTO (refer pg no 191 of bms eco)