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Commerce Question Bank – 34 Short Questions With Answers on “International Business”

1. Define international marketing.

International marketing can be defined as ‘marketing carried on across national boundaries’. It is different from domestic marketing in as much as the exchange takes place beyond the frontiers, thereby involving different markets and consumers who might have different needs, wants and behavioural attributes.

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2. What are controllable and uncontrollable factors in international marketing?

Control will have to be defined with reference to a company’s management The Company is in a position to control and design marketing mix element, namely, product, price, place and promotion.

But the total environment in which the marketing mix elements will operate is beyond the control of the company. Median has identified 13 uncontrollable factors which can be classified under the following heads: anthropological, economic, competitive, risk and distance factors

3. What is the scope of international marketing?

Through international marketing is in essence export marketing, it has a broader connotation in marketing literature It also means entry into international markets by:

(a) Opening a branch/subsidiary abroad for processing, packaging, assembly or even complete manufacturing through direct investment;

(b) Negotiating licensing/franchising arrangements whereby foreign enterprises are granted the right to use the exporting company’s know-how, viz patents processes or trademarks, with or without financial investment;

(c) Establishing joint ventures in foreign countries for manufacturing and/or marketing; and

(d) Offering consultancy services and undertaking turnkey projects abroad.

Depending upon the degree of a firm s involvement, there may be several variations of these arrangements.

4. Point out the similarities between domestic marketing and international marketing.

There are three basic points of similarities between domestic marketing and international marketing:

1. Both in domestic marketing as well as in international marketing, success depends upon satisfying the basic requirements of the consumers. This necessarily involves finding out what the buyers want and meeting their needs accordingly.

2. It is necessary to build goodwill both in the domestic market as well as in the international market.

3. Research and development for product improvement and adaptation is necessary both for international marketing and domestic marketing.

5. Which characteristics of a non-exporting firm influence its decision to go in for export business?

These characteristics include (a) product characteristics, (b) size and growth of the domestic market, (c) optimal scale of production, and (d) potential export markets. If the firm is manufacturing a product which is internationally marketable and the present and future market prospects in the domestic market are riot encouraging, the motivation of the firm to get involved in export business will be considerable

6. What factors fall under perceived external export stimuli which influences firm’s decision to go in for export business?

Under this fall’s the management’s recognition of the external market conditions. This will include (a) fortuitous order, (b) market opportunity and (c) government’s stimulation/assistance.

7. What is meant by perceived internal export stimuli?

These refer to the management’s expectations about the effects of exports on the firm’s business. This covers (a) the level of capacity utilization, (b) higher level of profits and (c) the growth objectives of the firm.

8. What is comparative advantage theory of international business?

A country tends to specialise in the production of commodities for which it has got a comparative cost advantage, or in other words, where its costs are lower than in other countries. It is the comparative advantage and not the absolute advantage which determines whether international trade will take place or not

9. On what factor is the Ricardian model of comparative costs based?

The Ricardian model of comparative costs is based on only one factor of production namely labour, and the basic hypothesis that each country will export that product which it can produce at lower average labour cost. In other words, differential labour productivity is the cause of price differences.

10. Describe the limitations of the Ricardian theory.

There are certain limitations of the Ricardian theory: It is a one-factor model. In reality, even though labour cost constitutes an important segment of total cost, there are other elements also which, in some cases, can outweigh the labour cost differences. Even though cost difference is attributed to [1]differential labour productivity, the Ricardian theory does not explain the reasons why labour productivity may differ from country to country.

11. What is factor proportions theory of international business?

The factor proportions theory, also known as factor endowment theory was developed by Heckscher and Ohlin. This theory was further developed by Samuelson The Heckscher-Ohlin theorem is basically a two-country two-commodity and two-factor model. The conclusion of the theorem is that a country will specialise and export that product whose factors of production are more abundant. It will import those goods which, on the other hand, are more intensive in that factor of production which is scarce in that country.

12. Write a short note on human capital approach to international business

This theory, which is also sometimes known as ‘skills theory of international trade, ‘has been advocated by a number of economists, especially Becker, Kennen and Kessing Whereas the Factor Proportions theory considers labour as a homogeneous factor, it is not so in the real world.

In fact, for export of manufactures the skill level of labour is a very important determinant. Labour can be basically divided into skilled and unskilled labour. On the basis of empirical testing, Kessing concluded that patterns of international trade and location were predetermined for a broad group of manufactures by the relative abundance of skilled and unskilled labour.

For example, a developing country which has more abundant supply of unskilled labour will specialise and export those goods which are relatively more intensive in unskilled labour. Imports, on the other hand, will consist of those goods which are skill-intensive

13. Write down the basic hypothesis of the natural resources theory of international business.

This theory was first proposed by Vanek. This theory includes resources of a country also in the explanation of its trade structure. The basic hypothesis of this theory is that the country will export those products which are more intensive in that natural resource with which it is relatively more endowed and will import those items which use relatively more of those natural resources which are scarce.

14. Write a short note on R & D and product life cycle theories of international business.

According to these theories the commodity compositions of trade can be explained in terms of relative research efforts and the consequent technological gaps between the trading partners. It is argued that the industrialised countries commit more resources to research and development efforts and as a result develop new products.

In the initial stage of manufacture, these countries will be monopolists and will enjoy easy access to foreign markets. Subsequently, a process of imitation will start and other countries will start manufacturing the same product.

The initial comparative advantage will start disappear and the manufacturing centres in fact can move from the developed to the developing countries which have low labour cost. This has already happened in the case of mature manufactured products with low labour skills intensity, like textiles.

15. What is meant by scale economies theory of international business?

According to this theory, there is a relationship between the size of the internal market, average unit cost of production and export competitiveness. A firm operating in a country where the domestic market is large will be able to reach a high output level, thereby reaping the advantages of large-scale production.

The lower cost of production will increase its competitiveness enabling the firm to make an easy entry into export markets. While prima facie this logic appears to be valid, this hypothesis cannot be generalised because it is possible that the pull of the domestic market will be so strong that export would not promoted, as in the case in India for certain products.

16. Briefly describe identical preferences theory of international business.

A domestic industry can flourish and reach technologically and commercially optimal level of production, if and only if the domestic demand is large enough. Also it is found that countries at similar levels of economic development have similar demand characteristics.

It is, therefore, postulated that trade opportunities are more among countries at similar stage of development with similar demand structure In general, this theory provides an explanation for the rapid growth in trade among the industrialised countries themselves.

17. What is synthesis theory of international business?

According to this theory, whether a country would export certain types of products would depend upon a number of factors—natural resources, availability of labour and its productivity, technical skill and equipment, adequacy of capital, enterprise and industrial traditions. Comparative advantage is the combined result of all these factors.

18. What does the balance of trade denote?

The balance of trade denotes the difference between merchandise exports and merchandise imports of a country. The excess of exports over imports denotes favourable balance of trade while an excess of imports of imports over exports denotes adverse balance of trade.

19. Define balance of payments. For what period is the balance of payments prepared?

Balance of payments of a country has been defined as a “systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries”. Thus balance of payments includes both visible and invisible transactions.

Ordinarily balance of payments is prepared for a period of one year, but quarterly balance of payments is also common.

20. Briefly explain the use of balance of payments.

A country’s balance of payments reveals its financial position vis-a-vis foreign countries. In fact, it is so important that balance of payments is considered to be an economic barometer of a country’s health. It can furnish the key to an understanding of a country’s economic problems. It is of great value in forecasting its business and economic conditions. Balance of payments can also be used to evaluate a country’s international solvency and to determine the appropriateness of the external value of its currency.

21. What are current and capital accounts of balance of payments?

Balance of payments is divided into two parts, viz., current account and capital account. The current account shows the income and expenditure for/or purchase of current output, goods and services. The capital account shows as to how the deficit on the current account is financed In other words, capital transactions reflect the changes in the international indebtedness of the country

22. In how many categories can the transactions appearing in a balance of payments can be divided? What is meant by autonomous transactions?

The transactions appearing in a balance of payments can be divided in two categories, viz., autonomous transactions and induced or compensatory transactions.

Autonomous transactions are transactions which take place because traders find it profitable to trade, the travellers find ,it necessary to travel for business or pleasure, banks provide their services for profit, insurance companies operate for profit and so on. In other words, no inducement is needed for such transactions and they are self-motivated.

23. When does a deficit in balance of payments exist?

A deficit in balance of payments exists when payments for autonomous or self-motivated transactions exceed receipts therefore. In case there is a deficit or surplus, there have to be some compensatory transaction to balance the deficit or surplus.

These transactions are called compensatory or induced because they are undertaken by the State or foreign exchange authorities to balance the country’s balance of payments. The examples of compensatory transactions are official borrowings grants received from abroad, and changes in the country’s foreign exchange reserves.

24. What will the balance of payments show in the case of undeveloped countries and developed countries respectively?

In the case of a young and relatively undeveloped country, the balance of payments will show how its development is being financed from external sources.

In the case of a developed country which has widely distributed foreign investments, the balance of payments can show the extent to which its citizens are living on their past profits or it may be used to reveal how some countries live on tourism, shipping services and so on.

25. Write a short note on balance of payments equilibrium

A nation’s balance of payments is said to be in equilibrium when it is neither drawing upon its international reserves to make excess payments nor accumulating such reserves as a result of its receipts. The disturbance in balance of payments may be either short-term or long-term.

Long-term disturbances result from changes in the forces which govern the kinds or amounts of a country’s exports and its imports, its position as a long-term debtor or creditor or the character of the international services it renders. Each such disturbance upsets the pre-existing stability in the balance of payments and sets in motion a number of consequences which bring it to a stable position again.

26. Describe the origin of IMF and IBRD.

Even before the Second World War ended, monetary experts in the U S A. and the U.K. began planning to solve the monetary problems likely to be faced after the war. Known after their authors as the Keynes Plan and the White Plan, both sets of proposals were subjected to intensive discussions and furnished the basis for the Bretton Woods Conference which decided to set up the two organisations, the IMF and the IBRD. The creation of the Fund represents a major effort at international monetary co­operation.

27. What are the main objectives of IMF?

The main objectives of IMF are as follows:

1. To promote exchange stability and orderly exchange arrangements and to avoid competitive devaluation.

2. To help re-establish a multilateral system of trade and payments and to eliminate foreign exchange restrictions.

3. To provide means for international adjustment, superior to deflection, by making available increased international reserves.

4. To facilitate the expansion and balanced growth of international trade.

28. What are the basic functions of IMF?

The basic functions of IMF are as follows:

1. To lay down ground rules for the conduct of international finance.

2 To provide short and medium term assistance for overcoming short-term balance of payments deficits.

3. Creation and distribution of reserves in the form of SDRs.

29. Write a short note on member’s quotas in the IMF

The Fund has 155 member-countries, accounting for about 80 per cent of the total world production and 90 per cent of the world trade. Members’ quotas in the fund amount to approximately SDR 90 billion (September 1990). Quotas are used to determine (i) the voting power of members, (ii) their contribution to the fund’s resources, (iii) their access to these resources and (iv) their share in the allocation of SDRs.

30. What is meant by reserve tranche facility provided by IMF?

If a member draws upto 25 per cent of its quota, it is said to have utilized the gold tranche now called the reserve tranche. Drawings from the Reserve tranche are automatic and the Fund does not raise any objection. A reserve tranche purchase does not constitute use of fund credit and is not subject to charges or obligation to repurchase.

31. What is credit tranches facility provided by IMF?

If a member draws more than 25 per cent of its quota, it is said to have utilized credit tranches. Each credit tranche is equal to 25 per cent of the member’s quota A member may borrow up to four credit tranches Thus a member may borrow up to 125 per cent of its quota at any one time.

All drawings beyond 25 per cent of the quota are subject to examination by the Fund, the criteria being more liberal when the request is for the first credit tranche than it is for higher credit tranches.

32. Write a short note on compensatory financing facility provided by IMF.

Compensatory financing facility is designed to extend the Fund’s balance of payments support to member countries, particularly primary producing countries, suffering from fluctuations in receipts from exports.

The conditions for drawings under this facility are that: (i) export shortfall is a short-term one; (ii) it is largely attributable to the circumstances beyond the control of the member, (iii) the member will co-operate with the Fund in an effort to find appropriate solutions to any balance of payments difficulties.

33. When was contingency financing introduced by IMF? Describe its functions.

Contingency financing was introduced in 1983. This helps members that are engaged in economic policy adjustments supported by the Fund, by providing advance assurance of financial support in the event of a disruptive external shock. Contingency financing covers deviations in certain key variables from ‘baseline’ forecasts. These variables include export earnings, import prices, international interest rates, workers remittances, etc.

34. What is the purpose of buffer stock financing facility of IMF?

The purpose of this facility is to finance a member’s contributions to buffer stock arrangements in commodity agreements approved by the United Nations. Drawings for buffer stock financing may be made up to the equivalent of 45 per cent of the quota without any limit on the amount drawn in any 12- month period.

Drawings under buffer stock financing are in addition to those permitted normally. The member is expected to co-operate with the Fund in an effort to solve its balance of payments difficulties. Repurchases have to be effected in 3-1/4-5 years Repurchases must, of course be made if buffer stock contributions are returned to members.

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