How does Porters 5 Forces Model affect the entry of new firms?

Once an industry becomes profitable, the high returns will begin to draw new firms. New entrants in an industry carry with them a new capacity and drive to increase market share. They also come up with new approaches to serving customers. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition). The following are the barriers to entry: -Economies of Scale: This refers to the decline in the per unit production costs as the absolute volume of production per period goes up. When established firms in an industry achieve high economies of scale, new firms find it difficult to gain a foothold. -Brand equity: Established firms carry with them a certain equity that a completely new firm will take a long time to build up. As a result, their entry becomes difficult. -Switching costs: The costs incurred while switching suppliers or products are called switching costs. If a customer perceives a very high switching cost, be it related to evaluation, retraining, new equipment etc., the new firms existence will face an obstacle. -Capital requirements: The huge capital (both fixed and working) requirements in some industries, like pharma, chemicals and the like, prevent a number of potential firms from plunging into the industry. -Access to distribution: If some channels are full, expensive to enter, or unavailable, the cost of entry of a new entrant rises, since it then has to try and create new channels. -Government policies: Sometimes, the Govt. restricts new entrants, especially in those industries that it has nationalized, as a protectionist measure. As a result, some firms cannot enter such a market. -Absolute Cost Advantages: Govt. subsidies, raw materials, favourable locations are some of the non-learning curve related advantages that established firms already own. It is difficult for new firms to deal with such benefits. -Expected Competitor Response: If the competitors response is expected to be strong, new entrants might rethink their expectations regarding rewards. -Freight: From a global marketing perspective, carriage of raw materials/component parts/finished products will be a challenging task as well. If new firms perceive difficulty in the same, they might rethink their decision of entering a new country. -Import/Export: High costs and legalities associated with importing and exporting may present a daunting challenge to new firms.

1) Short Notes on: a) Formation of GATT and its development into the WTO The General Agreement on Tariffs and Trade was created during the UN Conference on Trade and Employment and was a result of the failure of negotiating governments to create the International Trade Organization (ITO). GATT was formed in 1947 and lasted until 1994, when it was replaced by the World Trade Organization in 1995. GATTs functioning can be split up into three phases. 1947 to 1959: What commodities would be covered by the agreement, existing tariff levels. 1959-1979: Reduction of tariffs 1986-1994(Uruguay Round): Extension of the agreement to new areas like IP, services, capital and agriculture.

In each of these rounds, the agreements reached upon bound members to reduce some tariffs. As per GATTs estimates, these negotiations created 123 agreements which covered 45000 tariff items. In 1993 the GATT was revised to include new obligations upon its signatories. One of the most significant changes was the creation of the WTO, under the Marrakesh Agreement. The WTO HQ is at Geneva, Switzerland. The 75 existing GATT members and the European Communities became the founding members of the WTO on 1 January 1995. The other 52 GATT members rejoined the WTO in the following two years (the last being Congo in 1997). Since the founding of the WTO, 21 new non-GATT members have joined and 29 are currently negotiating membership. There are a total of 153 member countries in the WTO, representing almost 95% of the total world trade. It is presided over by a ministerial conference that meets every two years a council that implements policy decisions and looks after daily admin, and a director general. The WTO helps regulate trade between member countries. It also provides a framework for negotiating and formalizing trade agreements, and aims at resolving disputes between participants. GATT put down rules agreed upon by nations. The WTO is an institutional body broadened its horizon from traded goods to trade within the service sector and IPR. Although it was designed to serve multilateral agreements, during several rounds of GATT negotiations (particularly the Tokyo Round) plurilateral agreements created selective trading and caused fragmentation among members.

b) Main objectives of the WTO:

The main motto of WTO is to promote and ensure the international trade in the member countries with the mantra Liberalisation, Privatisation and Globalisation. Beside this, WTOs other has some other objectives. They are:

Trade without discrimination To set and enforce rules for international trade, To provide forum for negotiating and monitoring the international trade To resolve trade disputes, To increase the transparency of decision-making processes To cooperate with other major international economic institutions involved in global economic management To help developing countries benefit fully from the global trading system. It oversees the implementation, administration and operation of the covered agreements. It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making.Another priority of the WTO is the assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training. The WTO is also a center of economic research and analysis: regular assessments of the global trade picture in its annual publications and research reports on specific topics are produced by the organization. Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank. c) Tariff and Non-Tariff Barriers

Tariff barriers are duties imposed on goods which effectively create an obstacle to trade, although this is not necessarily the purpose of putting tariffs in place. They are also called import restraints since they limit the amount of goods imported. They protect domestic manufacturers from foreign competition. High Customs Duty High import duties have been reduced under GATT and later the WTO.

Countervailing Duty Imposed along with the regular import duty, to counteract subsidies and bounty paid to foreign export manufacturers by their govt. as an incentive to export. Anti-Dumping Duty This is a duty imposed to offset the advantage gained by foreign exporters when they sell their goods to an importing country at a price lower than their domestic selling price or below cost. Ad Valorem Duty - Here, duty is assigned according to value, that is, as a percentage of the import value of goods. Specific Duty Assessed on the basis of certain units of measurement, such as quantity or net/gross weight. Compound Duty Assessed as a combination of the specific and ad valorem duty. Non-tariff barriers to trade (NTB's) are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures and countervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs once they are enacted. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, or sanitation, or to protect depletable natural resources. In other forms, they are criticized as a means to evade free trade rules such as those of the World Trade Organization (WTO), the European Union (EU), or North American Free Trade Agreement (NAFTA) that restrict the use of tariffs. Six Types of Non-Tariff Barriers to Trade

1) Specific Limitations on Trade: Quotas Import Licensing requirements Proportion restrictions of foreign to domestic goods (local content requirements) Minimum import price limits Embargoes

1. 2. 3. 4. 5.

2) Customs and Administrative Entry Procedures: Valuation systems Antidumping practices Tariff classifications Documentation requirements Fees

1. 2. 3. 4. 5.

3) Standards: Standard disparities Intergovernmental acceptances of testing methods and standards Packaging, labeling, and marking

1. 2. 3.

4) Government Participation in Trade: Government procurement policies Export subsidies Countervailing duties Domestic assistance programs

1. 2. 3. 4.

5) Charges on imports: Prior import deposit subsidies Administrative fees Special supplementary duties Import credit discriminations Variable levies Border taxes

1. 2. 3. 4. 5. 6.

6) Others: Voluntary export restraints Orderly marketing agreements

1. 2.

d) IMF and World Bank The International Monetary Fund (IMF) is an international organization that looks after the global financial system by following the macroeconomic policies of its member nations, especially those that have an impact on exchange rates and the balance of payments. It has the aims at stabilizing international exchange rates and aiding development. It also offers highly leveraged loans, mainly to poorer countries. Its headquarters are in Washington, D.C., United States. The IMF describes itself as "an organization of 186 countries (as of June 29, 2009),[6][7] working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". Its influence in the global economy went up as it accumulated more members. The number of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the collapse of the Soviet bloc. The expansion of the IMF's membership, together with the changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively.

World Bank The World Bank is one of two institutions created at the Bretton Woods Conference in 1944. The International Monetary Fund, a related institution is the second. Delegates from many countries attended the Bretton Woods Conference. The most powerful countries in attendance were the United States and United Kingdom which dominated negotiations. The World Bank's current focus is on the achievement of the Millennium Development Goals (MDGs), lending primarily to "middle-income countries" at interest rates which reflect a small mark-up over its own (AAA-rated) borrowings from capital markets; while the IDA provides low or no interest loans and grants to low income countries with little or no access to international credit markets. The IBRD is a market-based nonprofit organization, using its high credit rating to make up for the relatively low interest rate on its loans, while the IDA is funded primarily by periodic "replenishments" (grants) voted to the institution by its more affluent member countries. The Banks mission is to aid developing countries and their inhabitants to achieve development and the reduction of poverty, including achievement of the MDGs, by helping countries develop an environment for investment, jobs and sustainable growth, thus promoting economic growth through investment and enabling the poor to share the fruits of economic growth. The World Bank sees the five key factors necessary for economic growth and the creation of an enabling business environment as: 1. Build capacity: Strengthening governments and educating government officials. 2. Infrastructure creation: implementation of legal and judicial systems for the encouragement of business, the protection of individual and property rights and the honoring of contracts. 3. Development of Financial Systems: the establishment of strong systems capable of supporting endeavors from micro credit to the financing of larger corporate ventures. 4. Combating corruption: Support for countries' efforts at eradicating corruption. 5. Research, Consultancy and Training: the World Bank provides platform for research on development issues, consultancy and conduct training programs (web based, on line, tele-/ video conferencing and class room based) open for those who are interested from academia, students, government and non-governmental organization (NGO) officers etc. The Bank obtains funding for its operations primarily through the IBRDs sale of AAA-rated bonds in the worlds financial markets. The IBRDs income is generated from its lending activities, with its borrowings leveraging its own paid-in capital, plus the investment of its "float". The IDA obtains the majority of its funds from forty donor countries who replenish the banks funds every three years, and from loan repayments, which then become available for re-lending. e) Transfer Pricing

This refers to the pricing of goods and services bought and sold by operating units or divisions of a single company., or intra-corporate exchanges. For examples, Tata Motors can buy steel from Tata Steel. As companies expand and create decentralized operations, profit centres become increasingly important to complete the overall corporate financial picture. There are three approaches to transfer pricing, depending on the nature of the firm, the products, markets and history. a) Cost-based transfer pricing: Since some companies define costs differently, they arrive at transfer prices that reflect variable and fixed manufacturing costs only. TP may also be based on full costs including OH and other charges. Cost Plus pricing is another variant where profits are shown for every stage that the product moves through in the corporate system. Many exporters can use this approach to their benefit. b) Market-based transfer price: This is derived from the price required to be competitive in the international market. Here, the constraint is cost. One needs to decide whether to price on the basis of current or planned volume levels. If the market is too small to support local manufacturing, third country sourcing may be required. c) Negotiated transfer prices: The firms affiliates can negotiate prices among themselves.