ASSIGNMENT 3

Q-1) EXPALIN DIFEERENT FORMS OF REGIONAL ECONOMICE INTEGRATION

Ans. There are four main types of regional economic integration.

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

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

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

Economic union. This type is created when countries enter into an economic agreement to remove
barriers to trade and adopt common economic policies. An example is the European Union (EU).Europa,
the Official Website of the European Union.

Q-2) Explain international financial system

Ans. The global financial system is the worldwide framework of legal agreements, institutions, and both
formal and informal economic actors that together facilitate international flows of financial capital for
purposes of investment and trade financing. Since emerging in the late 19th century during the first
modern wave of economic globalization, its evolution is marked by the establishment of central banks,
multilateral treaties, and intergovernmental organizations aimed at improving the transparency,
regulation, and effectiveness of international markets.[1][2]:74[3]:1 In the late 1800s, world migration
and communication technology facilitated unprecedented growth in international trade and investment.
At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money
market illiquidity. Countries sought to defend against external shocks with protectionist policies and
trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of
reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international
monetary system after World War II improved exchange rate stability, fostering record growth in global
finance.
Q-3) Write short notes on:-

a) Foreign investment :- A foreign direct investment (FDI) is an investment in the form of a controlling
ownership in a business in one country by an entity based in another country.[1] It is thus distinguished
from a foreign portfolio investment by a notion of direct control.

The origin of the investment does not impact the definition, as an FDI: the investment may be made
either "inorganically" by buying a company in the target country or "organically" by expanding the
operations of an existing business in that country.

b) Purchasing power parity :- Purchasing power parity (PPP) is a way of measuring economic variables in
different countries so that irrelevant exchange rate variations do not distort comparisons. Purchasing
power exchange rates are such that it would cost exactly the same number of, for example, US dollars to
buy euros and then buy a basket of goods in the market as it would cost to purchase the same goods
directly with dollars. The purchasing power exchange rate used in this conversion equals the ratio of the
currencies' respective purchasing powers (reciprocals of their price levels).

In neoclassical economic theory, the purchasing power parity theory assumes that the exchange rate
between two currencies actually observed in the foreign exchange market is the one that is used in the
purchasing power parity comparisons, so that the same amount of goods could actually be purchased in
either currency with the same beginning amount of funds. Depending on the particular theory,
purchasing power parity is assumed to hold either in the long run or, more strongly, in the short run.
Theories that invoke purchasing power parity assume that in some circumstances a fall in either
currency's purchasing power (a rise in its price level) would lead to a proportional decrease in that
currency's valuation on the foreign exchange market.

c) International hrm :- International Human Resource Management (IHRM)? IHRM can be defined as set
of activities aimed managing organizational human resources at international level to achieve
organizational objectives and achieve competitive advantage over competitors at national and
international level.

Q-4) Explain country evaluation and selection strategies

Ans. This case explores the location, pattern and reasons for Carrefour’s international operations.
Carrefour opened its first store in 1960 and is now the largest retailer in Europe and Latin America and
the second largest worldwide. Its stores depend on food items for nearly 60 percent of sales and on a
wide variety of non-food items for the remainder. Worldwide Carrefour has five different types of
outlets: hypermarkets, supermarkets, hard discount stores, cash-and-carry stores and convenience
stores. Country selection criteria include a country’s economic evolution, sufficient size to justify
additional store locations and the availability of a viable partner. Aside from financial resources,
Carrefour brings to a partnership expertise on store layout, clout in dealing with global suppliers, highly
efficient direct e-mail links with suppliers and the ability to export unique bargain items from one
country to another. Recently, Carrefour has used acquisition as a way to capture additional scale
economies. Carrefour depends primarily on locally produced goods but also engages in global purchasing
when capable suppliers are found. Whether Carrefour can ultimately succeed as a global competitor
without a significant presence in the U.S. and the U.K. remains to be seen.

Q-5) Define multinational corporation and explain its advantages and disadvantages on host and home
country

Ans. As the word very well suggests, MNC is a company that owns or controls production in more than
one nation.

MNCs set up its offices and factories for production in regions where they can get cheap labor and other
resources.

MNCs go for such multi nation location so as to avail low cost of production thus earning greater profits.

A “multinational corporation” is also referred to as an international, transactional or global corporation.

For enlarging the business firm, multinational is a beginning step, as it helps you become transnational
thus leading you to go global.

Features of MNCs

Following are the main features of MNCs:

Location – MNCs have their headquarters in home countries and have their operational division spread
across foreign countries to minimize the cost.

Capital Assets – Major portion of the capital assets of the parent company is owned by the citizens of the
company’s home country.

Board of Directors – Majority of the members of the Board of Directors are citizens of the home country.
MNCs are large-sized corporation and exercise a great degree of economic dominance.

We all are quite aware of the bottom line of any business. Every business has the ultimate goal of making
profit. Businesses always seek to sell more products and services so as to bring in more revenue and
generate profits for its owners.

Advantages of MNCs

Access to Consumers – Access to consumers is one of the primary advantages that the MNCs enjoy over
companies with operations limited to smaller region. Increasing accessibility to wider geographical
regions allows the MNCs to have a larger pool of potential customers and help them in expanding,
growing at a faster pace as compared to others.

Accesses to Labor – MNCs enjoy access to cheap labor, which is a great advantage over other companies.
A firm having operations spread across different geographical areas can have its production unit set up in
countries with cheap labor. Some of the countries where cheap labor is available is China, India, Pakistan
etc.

Taxes and Other Costs – Taxes are one of the areas where every MNC can take advantage. Many
countries offer reduced taxes on exports and imports in order to increase their foreign exposure and
international trade. Also countries impose lower excise and custom duty which results in high profit
margin for MNCs. Thus taxes are one of the area of making money but it again depends on the country
of operation.

Overall Development – The investment level, employment level, and income level of the country
increases due to the operation of MNC’s. Level of industrial and economic development increases due to
the growth of MNCs.

Technology – The industry gets latest technology from foreign countries through MNCs which help them
improve on their technological parameter.

R&D – MNCs help in improving the R&D for the economy.

Exports & Imports – MNC operations also help in improving the Balance of payment. This can be
achieved by the increase in exports and decrease in the imports.

MNCs help in breaking protectionalism and also helps in curbing local monopolies, if at all it exists in the
country.

Disadvantages of MNCs for the Host Country

Laws – One of the major disadvantage is the strict and stringent laws applicable in the country. MNCs are
subject to more laws and regulations than other companies. It is seen that certain countries do not allow
companies to run its operations as it has been doing in other countries, which result in a conflict within
the country and results in problems in the organization.

Intellectual Property – Multinational companies also face issues pertaining to the intellectual property
that is not always applicable in case of purely domestic firms

Political Risks – As the operations of the MNCs is wide spread across national boundaries of several
countries they may result in a threat to the economic and political sovereignty of host countries.

Loss to Local Businesses – MNCs products sometimes lead to the killing of the domestic company
operations. The MNCs establishes their monopoly in the country where they operate thus killing the
local businesses which exists in the country.

Loss of Natural Resources – MNCs use natural resources of the home country in order to make huge
profit which results in the depletion of the resources thus causing a loss of natural resources for the
economy

Money flows – As MNCs operate in different countries a large sum of money flows to foreign countries as
payment towards profit which results in less efficiency for the host country where the MNCs operations
are based.

Transfer of capital takes place from the home country to the foreign ground which is unfavorable for the
economy.

Q6) Define exchange rate and explain various factors affecting exchange rate determination

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.

Q-7) Writ short notes on:-

a) Export import strategies :-

Develop an action plan. Nominate one member of staff to be responsible for your import strategy. ...

Locate suppliers. Identify potential suppliers of the goods you want. ...

Check legal and tax issues. ...

Negotiate and organise logistics. ...

Organise import finance

b) Marketing globally :- Global marketing is defined as the process of adjusting the marketing strategies
of your company to adapt to the conditions of other countries. Of course, global marketing is more than
selling your product or service globally.

c) Foreign exchange market :- The foreign exchange market is an over-the-counter (OTC) marketplace
that determines the exchange rate for global currencies. Participants are able to buy, sell, exchange and
speculate on currencies