Professional Documents
Culture Documents
WHEN IB
when businesses cross borders: (subsidiaries)
production and operations, and marketing is done internationally, human resources belong to more than one country international investment is involved, the business is international of products, Mcdonalds of markets, Harry Ramsden
DRIVERS
Worldwide trend of the economies of the world becoming borderless and interlinked. National economies merging into an interdependent global economic system. Declining trade and investment barriers Perceived distances are shrinking due to advances in transportation and telecommunications. Material culture is beginning to look similar. Technological change: Microprocessors and Telecommunications The Internet and World Wide Web Changing demographics
1850-1930
1950s
1960s
Jet passenger aircraft 500-700mph.
WHY AN MNC?
brings in additional capital brings in additional revenue via taxation technology transfer to local firms managerial knowhow skill development and training employment creation infrastructure development industry linkage effects export enhancement
Country Competitiveness
IS INDIA COMPETITIVE?
Country Competitiveness: a countrys ability to generate wealth in comparison to other countries Factor Endowments: natural resources climate location demographics
MIXED ECONOMY:
Consumers influence production by exercising their power of choice Legal and institutional frameworks to safeguard economic choice
Fifth largest economy in the world, ranking above France, Italy, the United Kingdom, and Russia Has the third largest GDP in Asia. Massive market Exceptional economic prospects Little external susceptibilities Steady price levels A fair amount of candidness in business dealings A sizeable English-speaking population.
Host-country policies that suit foreign investors, such as promotion of private ownership and financial market regulation. India is the software super power, Houses a large number of IT Parks, Business Centres and SEZs in Bangalore, Gurgaon, Noida, Hyderabad, Chennai, Chandigarh, Kolkata, Mumbai and Pune. India is the world's most preferred manufacturing hub.
Enterprise
IIM students are turning down Rs 1 crore plus salary to start ventures of their own. The fear of failure has vanished. India's roaring entrepreneurial culture has also outbid Chinese in serious business overseas. A recent study by the Duke Universitys School of Engineering and University of California's Berkley School of Information reveals that between 1996 and 2006,Indian immigrants founded more engineering and technology companies in the us than Chinese and Taiwanese and British immigrants put together. In fact, one in every four-technology companies set up by immigrants had an Indian founder.
B. IMPORTS
Imports during August, 2008 were valued at US $ 29946 million representing an increase of 51.2 per cent over the level of imports valued at US $ 19805 million in August, 2007. In Rupee terms, imports increased by 59 per cent. Cumulative value of imports for the period April- August, 2008 was US$ 130364 million (Rs. 550123 crore) as against US$ 94664 million (Rs. 387791 crore) registering a growth of 37.7 per cent in Dollar terms and 41.9 per cent in Rupee terms over the same period last year.
Non-oil imports during August, 2008 were estimated at US $ 18985 million which was 39.6 per cent higher than non-oil imports of US$ 13603 million in August, 2007. Non-oil imports during April- August, 2008 were valued at US$ 84397 million which was 28.2 per cent higher than the level of such imports valued at US$ 65846 million in April- August, 2007.
D. TRADE BALANCE
The trade deficit for April- August, 2008 was estimated at US $ 49139 million which was higher than the deficit at US $ 34543 million during April- August, 2007.
Steel tycoon Lakshmi Niwas Mittal has pledged an investment of about US$ 20 billion for building two 12-million-tonne steel plants in the states of Jharkhand and Orissa. Vodafone, the world's second-biggest mobile firm, plans to spend US$ 2 billion a year on capital expenditure in India. Eyeing the projected 15 per cent growth in the luxury car market segment, DailmerChrysler India Pvt Ltd, makers of MercedesBenz cars, has decided to set up a new plant in Pune. Israeli mall developer Plaza Center NV will invest US$ 1.22 billion over the next five-seven years to set up 50 malls in India. Nokia plans to invest US$ 100 million in India in the next three years to ramp up its capacity in Chennai. US-based aircraft engine manufacturer, Pratt and Whitney, plans to invest about US$ 30 million in the infotech and spare parts manufacturing sector.
INDIA ABROAD-The year 2006 marks the point when, 60 years after independence from colonial rule, Indians are investing more abroad than the country is receiving as foreign direct investment (FDI). The Mukesh Ambani-owned Reliance Industries, Indias second largest private firm, aims to be among the top 10 in the list. With Novelis, Kumar Birla's Hindalco Industries will definitely be entering the list, three years ahead of its target year. Indian firms, like Videocon, Moser Baer and Bharat Forge have emerged as global leaders in their respective sectors. 'The Apollo Group of Hospitals may strike cross border deals through strategic partners with some of the local hospital chains overseas while pursuing mergers and acquisitions in the US and Europe. Nicholas Piramal India Ltd plans to invest $50 million over a three-year period in its plants in the UK and India
In the energy sector, India's Suzlon Energy Limited, the world's fifth largest wind turbine manufacturer, bid $1.3 billion for Germany's RE power. A BCG report said that the axis of corporate power was shifting towards the BRIC (Brazil, Russia, India and China) countries. It identified 100 new global challengers from these nations, including 21 Indian firms, including Bharat Forge, Hindalco, Videocon and Tata Steel. A McKinsey study (2006) found the dynamics in emerging markets like India "actually provide an invaluable springboard" for their companies to go global. A 2006 study by Mape, an investment bank, concluded "the Indian Multinational Company (MNC) has finally come of age" and "Indian buyers have become a force to reckon with in many industries such as pharma, auto components and oil and gas".
Manufacturing and construction, which grew at 12 per cent in 200607, decelerated by about 2.5 percentage points in 2007-08. The slower growth of consumer durables was the most important factor in the slowdown of manufacturing. There was a sharp acceleration in the growth of manufacturing from 3.3 per cent during the Ninth Five Year Plan to 8.6 per cent during the Tenth Five Year Plan. The average growth of manufacturing during the five years ending 2007-08 is expected to be about 9.1 per cent. The contribution of manufacturing to overall growth increased from about 9.6 per cent during the Ninth Five Year Plan to about 17.7 per cent during the Tenth Five Year Plan.
Among the subsectors of services, transport and communication has been the fastest growing with growth averaging 15.3 per cent per annum during the Tenth Five Year Plan period followed by construction. The impressive progress in the telecommunication sector and higher growth in rail, road and port traffic played an important role in the growth of this sector. The two other sectors whose contribution to growth has increased over the two plans are construction and communications. The contribution of the construction sector increased to 10.8 per cent during the Tenth Five Year Plan from 7.5 per cent during the Ninth Five Year Plan, while that of telecom increased to 11.4 per cent from 6 per cent over the two plans.
The growth of financial services comprising banking, insurance and business services, after declining to 5.6 per cent in 2003-04 bounced back to 8.7 per cent in 2004- 05, 11.4 per cent in 2005-06 and 13.9 per cent in 2006-07. Manufacturing, construction and communication were the leading sectors in the acceleration of growth during the Tenth Five Year Plan
Starting a business
It took 35 days to register a company in Mumbai in 2006 as compared to 71 days in 2005 and 89 days in January 2004. The OECD average is 17 days. Within India the shortest time to start a business is 35 days in Mumbai. It takes the longest in New Delhi and Bhubaneshwar (52 days).
The number of procedures to start a business in India is 11 as compared with the OECD average of 7 procedures and the South Asia average of 8.
Registering property
Regarding the ease of registering property, India ranks 110th in the world. The process itself takes 6 procedures and 62 days. When contrasted, it takes only 1 day in Norway, 32 days in China and 47 days in Brazil.
Getting credit
India gets the 65th rank on the simplicity of getting credit for business purposes. India scores 5 out of 10 on the legal rights index, which measures the degree to which collateral and bankruptcy laws facilitate lending.
Paying taxes
India ranks 158th in ranking on the ease of paying taxes. and the time spent on complying with tax requirements is is 264 hours per year. The tax regime requires 59 separate payments annually. Over 81.1 percent of the commercial profits is payable in tax. In China, businesses spend 872 hours per year and in Brazil 2,600 hours per year, the tax rate of 81 percent is higher than that of Brazil at 71.7% and China at 77.1%.
Documents in trading
Indian exporters submit 10 documents, compared with the regional average of 8 documents and the East Asia average of 7 documents. For importing it takes 15 documents in India contrasted with 9 documents in China.
Enforcing contracts
Commercial disputes before courts in India are among the most lengthy, costly and complex in South Asia and globally, resulting in a rank of 173 on the ease of enforcing contracts. It takes 1,420 days to enforce a contract in India, compared with 969 days on an average in South Asia, 351 days on an average in OECD countries, 450 days in Malaysia and only 292 days in China. Court costs and attorneys fees enhance it to 36% of the value of the claim. In China, the cost is 27% of the claim and on an average in South Asia 26.4%.
There are 56 procedures to enforce a contract in India, only 39 procedures are required to be enforced on an average in South Asia, 32 procedures on an average in East Asia, and 31 procedures in China.
In India, claimants can expect to recover less than 13 cents on the dollar, as compared to an average of 20 cents in South Asia, 18 cents in SubSaharan Africa, 32 cents in China and 93 cents in Japan, which is the highest in the world.
Over the coming decade or so, India needs to invest at least 150 billion dollars for improving its infrastructure and a similar amount on retail ventures if the economy is to continue to grow at 8 percent each year.
MODES OF ENTRY
EXPORTING:DIRECT EXPORTS ,INDIRECT EXPORTS, INDIRECT INTRACORPORATE TRANSFERS
DECISION FACTORS OWNERSHIP ADVANTAGES LOCATION ADVANTAGES INTERNALISATION ADVANTAGES OTHER FACTORS: NEED FOR CONTROL RESOURCE AVAILABILITY GLOBAL STRATEGY
INTERNATIONAL LICENSING
INTERNATIONAL FRANCHISING
Telecom
Vodafones 10.5bn announced acquisition of Hutchs 67% stake in Hutchison Essar In 2005, Vodafone also picked up 6% stake in Bharti Airtel for 686m
Mining 24%
Mining
UK based Vedanta Resources recent announced acquisition of 71% stake in Sesa Goa for 972m
Cement
Swiss cement major, Holcim picked up 20% stake in Gujarat Ambuja Cement for 466m
Source: Merger Market, Rothschild analysis Note:1) Includes all announced deals from 2004 till 2007 YTD 2) Excludes Vodafone Hutchison Essar deal
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Michael Huber Muenchen Germany Hewlett-Packard Leiden Holcim Ltd SABMiller PLC* Ciments Francais DHL Worldwide SA
Netherlands Digital Globalsoft (49%) Germany UK France Belgium Ambuja Cement (67%) Shaw Wallace Zuari Cement (50%) Blue Dart (68%)
Source: SDC, Merger Market, Rothschild analysis Note *- Through its Indian Subsidiary, Mysore Breweries
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Foreign Direct Investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate, which together form a Transnational Corporation (TNC).
Country Hourly Cost $27.37 Germany $21.38 Japan $17.10 France/U.S. $9.06 Israel $5.47 Taiwan $2.57 Mexico
El Salvador 1.25 Finland 14 France 9.4 Germany 17.06 Greece 5.92 Guatemala 1.27 India 0.23 Ireland 14.66 Israel 10.56 Japan 13.34 Jordan 1.41 , Republic of Korea 9.07 Malaysia 2.16 Mauritius 1.25 Mexico 2.49 Netherlands 19.71 New Zealand 10.96 Nicaragua 0.94 Norway 19.73
Intangible Assets
Coca-Cola has a very valuable asset in its closely guarded secret formula. To protect that proprietary information, Coca-Cola has chosen FDI over licensing. Since intangible assets are difficult to package and sell to foreigners, MNCs often enjoy a comparative advantage with FDI.
Vertical Integration
MNCs may undertake FDI in countries where inputs are available in order to secure the supply of inputs at a stable accounting price. Vertical integration may be backward or forward: Backward: e.g. a furniture maker buying a logging company. Forward: e.g. a U.S. auto maker buying a Japanese auto dealership.
Quantity
New product
Maturing product
FDI equity flows were US$ 5.5 billion in 2005-06, it increased almost three times to US$ 15.7 billion in 2006-07, representing a growth rate of 184 per cent. In fact, calculating the total FDI inflows into India by international best practices places the total inflow at US$ 19,531 million. This huge inflow of FDI has in turn reversed the past trend, with FDI inflows overtaking the portfolio investment inflows by almost US$ 5.6 billion in 2006-07, according to the RBIs report on International Investment Position. During April-July 2007-08, FDI inflows amounted to US$ 5,614 million as against US$ 2,848 million during the corresponding period last year, recording a growth rate of 97 per cent.
The principal sources of FDI during August 1991 to June 2007 have been Mauritius (US$ 20,808 million), US (US$ 6,215 million), UK (US$ 3,979 million), Netherlands (US$ 2,789 million), Japan (US$ 2,585 million), Singapore (US$ 2,033 million) and Germany (US$ 1,917 million), accounting for 41.89 per cent, 12.03 per cent, 7.98 per cent, 5.59 per cent, 5.07 per cent, 4.05 per cent and 3.69 per cent, respectively. The principal sectors attracting FDI during August 1991 to June 2007 have been services (US$ 9,443 million), electrical equipment (US$ 8,964 million), telecommunication (US$ 4,880 million), transportation (US$ 3,856 million), fuels (US$ 2,892 million), chemicals (US$ 2,465 million) and construction (US$ 1,912 million).
Cisco
Networking major Cisco's CEO John Chambers announced a $1.1 billion investment package for India. Chambers said that the company is also considering India as a manufacturing base. Intel: Intel Corporation said the company would invest more than $1 billion in the next five years to expand its operations in India and in local technology companies.
Automobile sector
According to Commerce Minister Kamal Nath, India is an attractive destination for global auto giants like BMW, General Motors, Ford and Hyundai who were setting base in India, despite the absence of specific trade agreements. The government is also likely to grant special economic zone status and take a re-look at the tax structure for setting up testing centres and manufacturing plants in a bid to make India the automotive hub of the world.
BMW
German automobile major BMW signed a memorandum of understanding with the Tamil Nadu government to establish its car assembly plant at an investment of $38 million in five years. The German group has selected a site in Mahindra World City in Maraimalainagar, near Chennai, to set up its assembly plant. BMW has selected Chennai as the "best location" for establishing its car assembly plant with an investment of about Rs 180 crore (Rs 1.8 billion) in five years.
Toyota
Global auto giant Toyota is setting up a gearbox manufacturing plant in India to serve the Asian market. Toyota is planning to invest around Rs 387 crore (Rs 3.87 billion) in collaboration with its mini-vehicle making arm Daihatsu. The aim is to develop a compact car for the Indian market. Besides, Toyota, Honda Motorcycle, Suzuki Motor (Maruti Suzuki) and Kansai Paints are firming up plans to pump in foreign direct investment (FDI) of at least $1.5 billion in the next three years.
Telecom sector
LG Electronics has invested Rs 900 cr (Rs 9 billion) at Ranjangaon, Samsung has planned to set up a mobile manufacturing base in India. Finnish mobile handset giant Nokia set up a manufacturing plant in Chennai with an investment of up to $150 million to meet the booming demand for its handsets in India. The Chennai unit will be Nokia's tenth mobile device production facility globally and will roll out India-specific entry level and mid and upper end GSM and CDMA handsets.
Proposed SEZs will create economic hardship because they would be built on prime agricultural land, without adequate compensation for farmers, "islands of affluence in a sea of deprivation", aggravating India's already wide regional imbalances. BBC : there is currently no law to deal with foreign investment by companies that could have links with terrorism. There are also no bars against firms involved in money and drug laundering.
The Indian economy has grown by an average of 8 percent a year four years in a row, making it one of the fastest in the world. Manufacturing industry and the services sector have been annually expanding at 10 percent or faster, agriculture has grown by a meager 1.5-2 percent a year. The secular decline in the share of agriculture sector in GDP continued, with a decline from 24 per cent in 2001-02 to 17.5 per cent in 2007-08.
Strategic Alliances
A strategic alliance is an arrangement between two or more companies to pursue a common business objective. 'if you can't beat 'em, join 'em', 'join 'em, and you can beat anybody.
Wal-Marts experience
Moved into other countries Growth opportunities at home were becoming constrained Create value by transferring core skills to markets where indigenous competitors lacked those skills Preempt other retailers who were expanding globally Discovered had to change US model Differences in local taste, preferences and local infrastructure Change store location, layout and stocking practices Keep companys core strategies and operations emphasize everyday low prices & realize operating efficiencies from world class logistics management and information systems Benefits becoming transnational corporation Enhanced bargaining power with suppliers Ability to transfer valuable ideas from one country to another Balance global standardization with local customization
Boeing enlists the support of its Japanese partners to help offset the high development costs of the next generation of Jumbos
British Airways possesses an extensive network of routes throughout Europe and North America due to its partnership with its alliance partner, US Air
With Quantas, British Airways can provide coverage of Australia, Asia and the Pacific
Visa and Master Card, traditionally arch rivals, entered into an alliance with Microsoft. They together created specifications for secure online transactions oner open networks, the internet, to prevent payment fraud. TNT, an Australian air express firm, and the post offices of Canada, France, Germany, the Netherlands and Sweden established a joint venture to get quick entry into these markets and to counter competition from federal express, DHL worldwide and United Parcel Service
A complementor
'if customers value your product more when they have the other player's product than when they have your product alone. - Barry J.Nalebuff and Adam M.Brandenburger, who coined the word 'coopetition' to describe the new world of companies working in alliance. Co-opetitors abound in information and communications technology, because no company, however mighty, can supply from its own resources all the hardware, software, connections and distribution that customers require - and it's customer needs that drive co-opetition. Intel and Microsoft are inseparable complementors in the Wintel
Supplier-Customer Alliances
In supplier-customer alliances, the traditional adversaries stop battling over price, and play together to streamline the relationship, thus lowering costs and improving performance. The benefits flow to both. Such partnering between customers and suppliers enables integrating the whole supply chain to achieve great economies and increase speed IBM- business alliances- 1990s with over 20,000 relationships worldwide. Pilkington jointly owns float glass manufacture in Latin America with its deadly European rival, St.Gobain. When IBM and Toshiba agreed to invest $1.2 billion in a plant, sited in Virginia, to make advanced 64-megabit memory chips, the two were already partners - with each other in a Japanese plant making liquid crystal display panels, and also with Siemens in a project making the great leap forward into 256-megabit memory chips.
Success factors
FOCUS AND DIRECTION: Pharmaceutical giants like SmithKline Beecham have linked arms with relative minnows to enter unfamiliar fields like biotechnology. SmithKline Beecham's necessities included tapping into drug-related research fields, like biotechnology, where it had no position itself. Pilkington jointly owns float glass manufacture in Latin America with its deadly European rival, St.Gobain. Since alliance with a Japanese competitor was the key to expanding in automotive glass in the US and other markets
Acquisitions
Acquisition of Command Cellular Services in Kolkata by Hutchison from Usha Martin in 2000. Acquisition of 79.24% stakes of Aircel, Chennai by Sterling group from RPG group for Rs. 210 Crores in 2003. Acquisition of 48% stakes in Idea cellular by Aditya Birla group from the Tata group in 2005. Acquisition of Hutch services in India by Vodafone in 2006. ICICI acquired Bank of Madura : at a time when its own revenues stood at Rs 2,500 crore (Rs 25 billion) and that of the bank at Rs 100 crore (Rs 1 billion.
Heidelberg Cement , a leading German cement manufacturing company. entered into an agreement for a 50% joint venture with the Indorama Cement Ltd., situated in Mumbai, originally possessed by the Indorama S P Lohia Group. Being one of the best in the world the Heidelberg Cement Company has its bases in different countries. The Heidelberg Cement Company has two manufacturing units in India. A grinding plant in Mumbai and a cement terminal near Mumbai harbor. A clinker plant is coming up in the state on Gujarat
Holcim Cement signed an agreement of 14.8% take over with the Gujarat Ambuja Cements (GACL). With new products, skilled personnel, superb management, and a outstanding market strategy gives this tie up good edge over the other competitors. Holcim Cement Company, the leading cement manufacturing and supplying companies has a work force of 90,000.The Holcim Cement Company has units in excess of 70 countries all over the world. Italcementi cement - Zuari Cement Limited Italcementi Cement Company with the help of the Ciments Franais, a subsidiary for its global activities, has acquired shares of the famous Indian cement manufacturer - Zuari Cement Limited. The acquisition was of 50% shareholding and the deal was of about 100 million Euros. Italcementi Cement is the 5th largest cement manufacturing company in the world. The production capacity of the Italcementi cement company is about 70 million tons in a year. With the construction boom in India the company looks for a stable future. In 2001 the Italcementi cement entered the Indian market scenario. It took over the plant of the Zuari Cement Limited in Andhra Pradesh in southern India. The joint venture earned revenues of around 100 million Euros and an operating profit of 4 million Euros.
Lafarge India is the subsidiary of the Lafarge Cement Company of France. It was established in 1999 in India with the acquisition of the Tisco and the Raymond cement plants. Lafarge Cement presently has three cement manufacturing units in India.
Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973Present
During this period in most major countries: Gold alone was assured of unrestricted coinage There was two-way convertibility between gold and national currencies at a stable ratio. Gold could be freely exported or imported. The exchange rate between two countrys currencies would be determined by their relative gold contents.
For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at 6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: $30 = 6 $5 = 1 Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment.
The supply of newly minted gold is so restricted that the growth of world trade and investment can be hampered for the lack of sufficient monetary reserves. Even if the world returned to a gold standard, any national government could abandon the standard.
History
After World War II Create institutions that would eliminate the causes of war. Through UN and eliminating the economic causes of war Bretton Woods Conference of 1944 Three institutions formed: The International Monetary Fund (IMF) The World Bank The International Trade Organization (ITO)
Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. The purpose was to design a postwar international monetary system. The goal was exchange rate stability without the gold standard. The result was the creation of the IMF and the World Bank.
Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar. Each country was responsible for maintaining its exchange rate within 1% of the adopted par value by buying or selling foreign reserves as necessary. The Bretton Woods system was a dollar-based gold exchange standard.
Established in 1945, the World Banks initial goal was to help finance reconstruction of the war torn european economies. with the assistance of the Marshall Plan, the World Bank accomplished this task by the mid 1950s.
Then the bank adopted the new mission of building the economies of the world developing countries. As its mission has expanded over time, the world bank created four affiliated organizations: 1.INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) 2.THE INTERNATIONAL FINANCE CORPORATION (IFC) 3.THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) 4.THE INTERNATIONAL CENTER FOR SETTLEMENT OF INVESTMENT DISPUTES (ICSID).
To ensure that the post-second world war monetary system would promote international commerce, the bretton woods agreement called for the creation of the IMF to oversee the functioning of the international monetary system.
WTO
Mission
Increase international trade by promoting lower trade barriers providing a platform for the negotiation of trade ...In brief, the World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
Structure
Highest level: Ministerial Conference Meets at least every two years Comprised of countries or customs unions Makes decisions on all matters under any of the multilateral trade agreements
Structure (cont.)
Second level: General Council Handles the daily work of the ministerial conference along with the Dispute Settlement Body and the Trade Policy Review Body Consists of representatives of all WTO member states
Structure (cont.)
Third level: Councils for Trade Work under the General Council Three parts Council for Trade in Goods Council for Trade-Related Aspects of Intellectual Property Rights Council for Trade in Services Six other bodies report to the General Council trade and development the environment regional trading arrangements administrative issues.
Structure
Fourth level: Subsidiary Bodies
Three bodies The Goods Council11 committees agriculture, market access, subsidies, anti-dumping measures, etc. The Services Council financial services, domestic regulations and other specific commitments Dispute Settlement panels and Appellate Body resolve disputes Appellate Body deals with appeals
Principles of Trading
1. Free of discrimination Cannot privilege a particular trading partner above others within the system Cannot discriminate against foreign products and services. 2. Tend toward more freedom fewer trade barriers (tariffs and non-tariff barriers) 3. Predictable trade barriers will not be raised arbitrarily markets will remain open. 4. Tend toward greater competition 5. More accommodating for less developed countries Give them more time to adjust, greater flexibility, and more privileges.
Agreements
Approximately 30 agreements exist Agreements are (officially) made by consensus of all member countries Finds the most widely acceptable decision Time consuming In reality, agreements are often made in informal Green Room or Mini-ministerial meetings with some nations not being present
Doha Round
Began November 2001
WTO @ Cancun
Hong Kong
Billed as a Development Round Agreement to phase out all agricultural export subsidies by 2014 Terminate cotton subsidies by 2007 Developing nations again see this round as a loss.
WTO Advantages
Helps trade to flow smoothly. Deals with disputes over trade. Decisions in the WTO are made by consensus and the agreements apply to everyone. All countries can appeal against decisions which they feel are unfair. This system has the potential to protect developing countries from harsh measures and unfair rules.
WTO Criticisms
1. The WTO only serves the interests of multinational corporations and wealthy nations. 2. Fundamental principals and aims of the WTO are not beneficial for all parties involved. 3. The WTO tramples over labor and human rights 4. The WTO is destroying the environment. 5. Fundamental principals and aims of the WTO are not beneficial for all parties involved. 6. The US adoption of the WTO undemocratic. 7. The WTO undermines local development and penalizes poor countries. 8. The WTO is increasing inequality.
Some examples of this bias are: (1) rich countries are able to maintain high import duties and quotas in certain products, blocking imports from developing countries (2) the increase in non-tariff barriers such as antidumping measures allowed against developing countries; (3) many developing countries do not have the capacity to follow the negotiations and participate actively in the Uruguay Round; and (4) the TRIPS agreement which limits developing countries from utilizing some technology that originates from abroad in their local systems. - Martin Khor
Economic Integration
A group of countries come together and agree to cooperate in international trade by various means. Mainly economic advantages. Trade creation and trade diversion, reduced Import Prices, Increased competition and economies of scale, Higher factor Productivity. Political Factors and power in international markets.
For Example - A.S.E.A.N. Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam
The South Asian Association for Regional Cooperation (SAARC) Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and SriLanka.
Common Market.
No Internal Tariffs. Common External Tariffs. Free flow of labor and capital. Southern Cone Common Market (Mercosur) - Argentina, Brazil, Paraguay, Uraguay, Bolivia, and Chile. Caribbean Community and Common Market.
Economic Union.
No Internal Tariffs. Common External Tariffs. Free flow of labor and capital. Integration of economic policies. Harmonize monetary policies, taxation, and government spending. Common currency or fixed exchange rates. E.U. - Full monetary union by 1999 and single European currency by 2002.
Political union
Political union Involves complete political and economic integration, either voluntary or enforced. Commonwealth a voluntary organization providing for the loosest possible relationship that can be classified as economic integration. Two new political unions came into existence in the 1990s: The Commonwealth of Independent States (CIS) The European Union (EU)
EU Institutions.
The European Commission - Executive branch, commissioners oversee 23 directorates such as agriculture, transportation, etc. Council of Ministers- votes based on country size, final power to decide EU actions. European Parliament - 626 members elected by popular votes in member countries, advisory body with very little power. European Court of Justice - Judicial branch, mainly matters related to trade and business disputes.
Latin America.
Economic and trade liberalization. Deregulation, Privatization and control of inflation. Almost every country in Latin America has either signed some type of trade agreement or is involved in negotiations. Latin American Integration Association Caribbean Community and Common Market (CARICOM) NAFTA to FTAA or SAFTA?
03/09/98
Africa
The Economic Community of West African States (ECOWAS) and the Southern African Development Community (SADC) are the two most active regional cooperative groups. ECOWAS continues to be plagued with financial problems, conflict within the group, and inactivity on the part of some members. The Southern African Development Community is the most advanced and viable of Africas regional organizations.
Middle East
Economic Cooperation Organization (ECO) Creation of the Organization of the Islamic Conference (OIC) Represents 60 countries and over 650 million Muslims worldwide The member countries vast natural resources, substantial capital, and cheap labor force are seen as the strengths of the OIC.
OPEC
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 1014, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962); Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (19731992); Gabon (19751994) and Angola (2007).
OPEC
OPEC was to rival the supposedly seven sister multinational oil companies because developing country oil exporters sensed that they were being exploited by Western governments and their multinational corporations, who drilled their oil and marketed it as well. OPECs objective was to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.
In 1973 the U.S. and the Western world were caught in the whorl of inflation and this made them vulnerable to commodity cartels. The preceding twenty years had seen prosperity and increase in the growth of population, which created heavy demand for raw materials. In the U.S., consumer prices were rising at an average rate of 8.5 per cent, with even higher inflation rates in other countries. The oil sold by the Gulf nations had therefore much more demand than before and had grown beyond the capacity of supply and oil production.
When President Nixon put controls on oil, the U.S., which had been self sufficient in energy till the year 1950, was importing 35 per cent of its energy needs in March 1973. The so far discovered petroleum reserves of the US were almost depleted. On October 6, 1973, on the Jewish holy day of Yom Kippur, Egyptian forces attacked Israel from across the Suez Canal. Simultaneously, Syrian troops attacked the Golan Heights in a surprise manouvre. Israel, was supported by the US in their effort, which was disliked by the countries of the OPEC. On October 17, OPEC imposed an oil embargo on the U.S. and increased prices by 70 per cent to America's Western European allies. This raised the price of a barrel of oil to these nations from USD 3 to USD 5.11 and it was further raised to USD 11.65.
Brent is used to price two thirds of the world's internationally traded crude oil supplies as per IPE reports. Dubai crude is used as a benchmark to price sales of other regional crudes into Asia in the Gulf region In the United States, the benchmark is West Texas Intermediate (WTI) meaning, crude oil sales into the US are usually priced in comparison to WTI. Crude oil prices on the New York Mercantile Exchange normally refer to light, sweet crude, which may be any US domestic or foreign crudes but will have a specific gravity and sulphur content within a certain range.
The basket price index is currently composed of the following 11 OPEC crude oils: Algeria's Saharan Blend, Indonesia's Minas, Iran's Iran Heavy, Iraq's Basra Light, Kuwait's Kuwait Export, Libya's Es Sider, Nigeria's Bonny Light, Qatar's Qatar Marine, Saudi Arabia's Arab Light, United Arab Emirates' Murban and Venezuela's BCF 17.
SUB-PRIME LENDERS
The root of much of the current difficulties lies in the sub-prime loans market, predominantly in the US. The sub-prime category refers to the category of borrowers at the highest risk of defaulting on their loan perhaps those with a poor credit history or unreliable income. "The poorest people pay the highest interest rates," he says. In the low interest rate years after 2001, sub-prime borrowers might pay two or three times the interest of a prime borrower.
And if some defaulted, it wasn't the end of the world. Property prices were rising so fast in the US that the odd repossession wasn't a major problem. In an atmosphere of speculation, many people saw there was money to be made in property and so the spiral continued. But when the housing market took a turn for the worse, the problems started. Many borrowers were on deals that for the first two years had low rates and then switched to a much higher rate. Once house prices fell, borrowers who were struggling started defaulting on loans. Repossessed houses flooding onto the market caused a vicious circle. By April this year, the FBI was already investigating 19 allegations of corporate fraud relating to sub-prime loans.
WHAT IS SHORT-SELLING?
Short seller borrows share Sells share on market Share price falls Short seller repurchases share Share returned to original owner The price difference is mostly profit
A short seller effectively bets on the price of an asset, often a share, falling. Typically this is done by borrowing the share from the owner. The share is then sold and when the price drops it is repurchased and returned to the original owner. The short seller pockets the difference.
A key issue is the opacity of the banking system. If no-one can truly assess the liabilities of a given financial institution, how can they confidently lend it money? But this has helped people make money.
Agriculture Railroads Textiles Steel Mining Lumber Automobiles Housing Consumer goods
FARMERS STRUGGLE
No industry suffered as much as agriculture During World War I European demand for American crops soared After the war demand plummeted Farmers increased production sending prices further downward
Photo by Dorothea Lange
By the late 1920s, American consumers were buying less Rising prices, stagnant wages and overbuying on credit were to blame Most people did not have the money to buy the flood of goods factories produced
The gap between rich and poor widened The wealthiest 1% saw their income rise 75% The rest of the population saw an increase of only 9% More than 70% of American families earned less than $2500 per year
SEEDS OF TROUBLE
By the late 1920s, problems with the economay emerged Speculation: Too many Americans were engaged in speculation buying stocks & bonds hoping for a quick profit Margin: Americans were buying on margin paying a small percentage of a stocks price as a down payment and borrowing the rest
In September the Stock Market had some unusual up & down movements On October 24, the market took a plunge . . .the worst was yet to come On October 29, now known as Black Tuesday, the bottom fell out 16.4 million shares were sold that day prices plummeted People who had bought on margin (credit) were stuck with huge debts
FINANCIAL COLLAPSE
After the crash, many Americans panicked and withdrew their money from banks Banks had invested in the Stock Market and lost money In 1929- 600 banks fail By 1933 11,000 of the 25,000 banks nationwide had collapsed
The Mexican Peso crisis is unique in that it represents the first serious international financial crisis touched off by cross-border flight of portfolio capital. Two lessons emerge: It is essential to have a multinational safety net in place to safeguard the world financial system from such crises. An influx of foreign capital can lead to an overvaluation in the first place.
JOINT ACTION
The International Monetary Fund said it was ready to lend to countries hit by the credit crunch, using an emergency funding mechanism first used in the 1990s Asian financial crisis. The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden and Switzerland took the unprecedented step on 8 October of co-ordinating a halfpoint cut in interest rates in an effort to ease the credit crunch. On 13 October, the 15 countries in the eurozone agreed a joint plan to guarantee loans between banks, and provide government capital to protect ailing financial institutions.
The US is pinning its hopes on a $700bn (395bn) bail-out of the banking sector.
The plan's supporters argue that it is important to bail out banks - as opposed to other failing industries - because of the knock-on effects a bust bank can have on the economy. Banks can also fail for irrational reasons, which non-financial companies are less likely to do. A perfectly sound bank could fail just because its customers panic and all ask for their money on the same day.
The airline industry faced collapse after the terrorist attacks of 11 September. United was one of the airlines worst affected by 9/11. Carriers faced immediate problems when a flying ban was imposed and people were afraid to fly. The US government provided compensation. But once flights resumed, the airlines faced a problem that is now familiar to banks: they could not get credit. The government set up the Air Transport Stabilization Board to provide up to $10bn (5.66bn) in loan guarantees. The government received shares in the airlines in return for guaranteeing loans to them and also charged fees for participating in the scheme. "The bottom line is that the programme did its job," says Professor Leighton Vaughan Williams from Nottingham Business School. "Taxpayers eventually made a profit of $300m," he adds. It was not an easy time for airlines and several such as United Airlines were forced to seek bankruptcy protection, but most of them survived.
Bailing out or nationalising big manufacturers is not as popular as it once was. Advocates of bail-outs arged that if "a company had a strong future but was experiencing temporary difficulties, that would be solved by an injection of taxpayers' money," says Professor Naresh Pandit from Norwich Business School. "The idea was that the government could later withdraw, but it never did as planned." British Leyland was effectively nationalised with a cash injection in 1975 and, despite owning marquees that still exist today, the company itself and the British carmaking industry never really recovered.
Rolls-Royce was nationalised in 1971, a bail-out which worked better in the long run than the British Leyland deal. The company had run into difficulties due to cost-overruns in the development of its RB211 engine. It spun off its carmaking division in 1973, but the rest of the company remained in government control until 1987, when it was privatised. Rolls-Royce is now a successful company, but many people argue that it spent too long in government hands. "There is strong evidence that nationalisation leads to lower efficiency," says Professor Pandit.
America's savings and Loans companies were similar to building societies in Britain and were often owned by their customers. The US Savings and Loan (S&L) crisis of the 1980s and 1990s was partly caused by institutions lending more money in home loans than was prudent and then getting hit by rising interest rates, which will sound familiar to observers of the current crisis. Fraud was also a big factor.
The government set up the Resolution Trust Corporation (RTC) to take over the hundreds of failed S&Ls and try to sell their assets. "The bail-out cost about $300bn in today's money and when the RTC sold the assets, it made back about 80% of what it paid," says Professor Vaughan Williams. "To get back 80% on what were bankrupt assets could be called a success."
In marked contrast, President Andrew Jackson in the 1830s was widely blamed for bringing about the demise of the Second Bank of the United States when he refused to deposit tax revenues in it. The collapse of the bank was one of the causes of the Panic of 1837 in which the next president, Martin van Buren, refused to involve the government. Milton Friedman described the depression that followed as the only one comparable with the Great Depression of the 1930s.
Traders are not the only ones worried about the falls. The fluctuations of share prices affect all of us - often in a more direct way than consumers realise. At the start of trading on Friday the FTSE 100 share index plunged about 10%, falling below 4,000 points for the first time in five years. There were also falls across the world - in France, Germany, Australia, Hong Kong, Singapore and Russia, as well as in Tokyo and on Wall Street.
The "ripple effect" of a downturn in the market has an effect on house prices, says Mr Halling. As well as traders becoming less wealthy and so less likely to buy homes, the shrinking possibility of borrowing and less job security also slows down the housing market. In recent years, employees might have been paid bonuses in shares. People might have held onto shares handed out to customers when building societies demutualised in the late 1990s.
Any share-based investments such as shares ISAs or endowment policies will have been cut in value. There are worries for people who use endowment policies to pay off their mortgage. But trying to cash them in early will cost you money. It is always worth remembering that investments are very different from savings in a bank account - they can go down in value as well as up, especially in the short-term. Perhaps most affected by this latest slump are those who are set to retire soon.
This could lead people to delay their retirement. The latest you can leave it to buy an annuity is the age of 75. The government says it may consider a temporary suspension of this deadline so people of that age can wait for their funds to recover. Others have pensions in a final salary scheme. They are safe because their employer covers the risk. But over the long-term, if the markets continue to struggle, employers may be quicker to close down these schemes to new members.