QUESTION NO 1. BUS
419 2005/2006 SESSION
Introducing a new product to a
host country requires a strategic approach.
a) Explain
the rationale for new product introduction.
b) Itemize the developmental processes required
for a new product introduction especially at international markets.
SOLUTION TO QUESTION 1. BUS 419
2005/2006 SESSSION
a)
Introducing a new product to a host country
A new product
may be described as a different one from an existing product and is seen as new
to the host country. Decisions required about the introduction of a new product
include; decision about which product to introduce in which country. Decision
about timing and sequence of introduction which product to whether to introduce
it us it is marketed in the country (in the standardize form or to adapt it to
the peculiar requirement of the hole country)
A country can
produce a new product for a foreign market either internationally or by
acquisition from another company a defensive or as an offensive measure. The
rationale for a new product introduction can therefore take three shapes;
To serve a
segment hitherto ignored
To satisfy an
unfulfilled need and
To adapt a
domestic product for better product/market catch.
b)
New product development process involves the six
steps required for a new product at the international level. These are:
-
Idea generation
-
Idea screening
-
Evaluation
-
Proper production market testing and
-
Market entry (commercialization)
QUESTION NO 2. BUS 419 2005/2006 SESSION
Clearly explain the concept of
world-class organizations. Enumerate five pillars that form their basis.
SOLUTION TO QUESTION 2. BUS 419 2005/2006 SESION
WORLD-CLASS ORGANIZATION
Today, the very best MNCs are
going beyond even the learning organization and have become what can be called
“World-class organization” (WCOs)
World-class organizations (WCOs)
are enterprises that are able to complete with anybody, anywhere, anytime. In
most cases. WCOs have operation throughout the globe. WCOs may focus heavily on
only one geographic locale and have only limited worldwide operations; examples
here include the Kitz-Carllon Hotel chain. Wainwright industries and Wal-Mark.
In either case, WCOs are able to compete effectively against all comers,
whether foreign or domestic. To become a WCOs an organization must excel in a
number of dimensions that in both an additive and synergistic way create a new
level of competitive excellence that goes beyond the total quality and learning
organizations.
SOME MAJOR PILLARS FORMING THE BASIS OF WCOs includes:
1. A customer based-focus
2. Continuous
3.Fuide, flexible or “virtual
organizations”
4. Creative human resources
5. Egalitarian climate and
6. Technological support
The details of each of these
characteristics of the world-class organization will be discussed as follows:
1.
CUSTOMER-BASESD
FOCUS
WCOs are
customer-driven. They have identified their internal and external custo0mers
and have determined how to serve them effectively. In doing so, WCOs tends to
have flat structures. So everyone can be closer to the customer. A good example
is Sony’s Walkman. The buyers were impressed not only with the innovativeness
of the product but also with the CD version, and how much value they were
receiving.
2.
CONTINUOUS
IMPROVEMENT
A second
distinctive characteristic of WCOs is their commitment to continuous
improvement (Cl). In contrast to their competitors, WCOs can improve faster,
more effectively, and efficiently. A good example is ford motor, which found
that it took weeks to process vendor receipts because so many people had to
approve the payment. By carefully studying the process, Ford was able to reduce
sharply the of individuals who needed to sign off on payments and cut the
processing time by 90 percent.
3.
USE
OF FLEXIBLE OR VITAL ORGANIZATIONS
Another
characteristic of WCOs is the flexible or virtual organizations. A virtual
organizations is one that is able to conduct business as it were a very large
enterprise with major facilities while in fact it is much smaller, made of core
business competencies with rest outsourced or partnered . How is this possible?
One major way taken into international arena is global sourcing.
Global sourcing
is the worldwide suppliers, regardless of where they are located
geographically, who are best able to provide the needed output. For example,
Japanese automakers today rely increasingly on U.S. suppliers for their cars.
Similarly, U.S. laptop computer firm rely on Japanese source to provide screen
technology. Wherever possible, However, MNCs prefers home based suppliers
because of the benefit this provides them in maintaining their worldwide
competitive advantage.
4.
CREATIVE
HUMAN RESOURCES MANAGEMENT
Human resources
generally are given lip service to be the most important asset for any
organization. Yet there growing research evidence that human resources and how
they are managed do make the difference.
World-class
organizations such as southwest Airlines. Rubbermaid, ABB and Gallup, Inc. Do
recognize the importance of their people. The relative value of human resources
is becoming increasingly important as knowledge-based organizations are
replacing traditional asset-based MNCs. WCOs know they must compete based on
what their resources are cable of doing rather than on more physical assets,
such as buildings, machinery, and equipment. WCOs have state of the art,
creative approaches to managing their human resources, and they effectively, stimulate
and have a supportive climate for employee creativity. More specifically, their
human resource management (HRM) programmes are design to help their people
share ownership of problems and solutions, achieve a strong commitment and
involvement by top management, communicate consistent goals and objectives to
all levels and function in the organization, and help develop an effective use
of recognition and reward programmes.
5.
EGALITARIAN
CLIMATE
WCOs create an
egalitarian climate in which all stakeholders-employees, customers, owners,
suppliers and the community are treated with dignity and respect.
Another sign of
an egalitarian approach is the way which WCOs treat their suppliers. In most
the past companies would negotiate with vendors and put one against the other
to get the lowest possible price.
6.
TECHNOLOGICAL
SUPPORT
Most of the
creative, innovative and effective approaches of WCOs are supported by
advanced, cutting-edge technology support. Examples of such technology include
computer aided design and computer aided manufacturing (CAD/CAM).
Telecommunications networks, experts or “smart” systems, distributed
information systems, multimedia systems and executive or management information
systems. One good example is found in the retailing industry, where competition
is fierce and profit margins are typically low. Thanks to IT, retailers can
tell instantly what they are selling in each of their hundreds of stores, how
much money they are making on each sale and increasingly, who their customers are.
Additionally, an effective IT system can help a company to minimize its
inventory but still reduce the likelihood of stock outs.
QUESTION NO 3. BUS 419 2005/2006 SESSION
International business is guided
by laws. Identify four foundations on which such laws are based and explain
four principals that guide the conduct of the laws
SOLUTION TO QUESTION 3.419 2005/2006 SESSION
One reason that today’s
international environment is so confusing and challenging for MNCs is because
there many rules and regulations. There four foundations on which such laws are
based around the world.
1. Islamic law: This is a law derived from
interpretation of the Qur’an and the teachings of the prophet Mohammed, it is
found in most Islamic countries in the Middle East and central Asia.
2. Socialist law: This law comes from the Marxist socialist
system and continuous to influence former soviet union, as well as present day
china, Vietnam, north Korea and Cuba.
3. Common law: This comes from English
law, and it is the foundation of the legal system in the United States, Canada,
England, Australia, New Zealand, and others.
4. Civil or Coded law: This law is derived
from Roman law and is found in the non Islamic and non socialist countries such
as France, some countries in Latin America, and even Louisiana in the United
States.
BASIC PRINCIPLES THAT GUIDES
INTERNATIONAL LAW
1. Sovereignty and Sovereign immunity: The
principle of sovereignty holds that governments have the right to rule
themselves as they see fit. In turn, this implies that one county’s court
system cannot be used to rectify injustices or impose penalties on another
unless that country’s agrees. While U.S laws requires equality in the work
place for all employees, U.S. citizens who take a job in Japan cannot sue their
Japanese employer under the provision of U.S. for failure to provide equal
opportunity for them.
2. International Jurisdiction: The first
is the nationality principle, which holds that every country has jurisdiction
(authority or power) over its citizens no matter where they are located.
THEREFORE A U.S. manager who violates American foreign corrupt practices Act
while travelling abroad can be found guilty in the United States. The second is
the territoriality principle which holds that every nation has the right of
jurisdiction within its legal territory. Therefore a German firm that sells a
defective product in England can be sued under English law even though the
company is headquartered outside of England. The third is the protective
principle, which holds that every country holds jurisdiction.
3. Doctrine of comity: The doctrine of
comity holds that there must be mutual respect for the laws, institutions and
government of other countries in the matter of jurisdiction over their own
citizens.
4. Act of state doctrine: Under the act of
the state doctrine, all acts of other governments are considered to be valid by
U.S courts, even if such acts are inappropriate in the United States.
5. Treatment and Rights of Aliens:
Countries have the legal right to refuse admission of foreign citizens and to
impose special restrictions on their conduct, right of travel, where they can
stay, and what business they may conduct. For example the united states have
the right to limit the travel of Iranian or Chinese scientists coming into the
U.S. to attend a scientific convention and can insist they remain 5 miles of
the hotel.
6. Forum for Hearing and Setting Disputes:
This is a principle of U.S. justice as it applies to international law. At
their discretion, U.S. courts can dismiss cases brought before them by
foreigners however; they are bound to examine issues such as where the
plaintiffs are located, where the evidence must be gathered, and where property
to be used in restitution is located.
QUESTION NO 4.BUS 419 2005/2006 SESSION
Product design
is a strategy that requires sensitive management decisions. Identify the design
strategies and explain five criteria for the choice of each particular
strategy.
SOLUTION TO QUESTION 4.BUS 419 2005/2006 SESSION
PRODUCT DESIGN STRATEGY
An important,
question that multinational markets need to answer is whether the product
approach will be adequate in foreign markets. In other world; a decision must
be made about which is more appropriate, of two product design strategies.
Standardization or customization means adaptation that is making appropriate
changes in a product to march local perspective on the one hand; environmental
differences between nations abroad are great. On the other hand, there are
potential gains to consider in product standardization. The criteria for the
choice of a particular strategy are discussed below:
1.
Nature
of Product
More
standardization is feasible in the case of industrial goods than consumer
goods. Among customer goods. Non durables require greater customization than
durable, because non durable consumer goods appeal to tastes. Habits and
customs. These traits are unique to each country, therefore adaptation becomes
significant.
2.
Market
Development
If a product ‘s
foreign market is in a different stage of market development than its local
market, appropriate changes in the product design become desirable in order to
make an adequate product/market match.
3.
Cost/Benefit
Relationship
Product
adaptation to match local conditions involves costs, these costs may relate to
research development (R & D). Physical alteration of the product’s design,
style, features, changes in packaging brand name, performance guarantee and the
like. The cost/benefit analysis is in terms of what it would cost to customize
or standardized and what benefits may be expected in the form of market growth
and profitability that would result.
4.
Legal
Requirements
Different
countries have different laws about product standards, patent laws, tariffs and
taxes. These laws may require product adaptation.
5.
Competition
Customization to
gain an advantage over the rivals by providing a product that ultimately
matches local conditions
6.
Support
System
The support
system refers to institutions and functions that are necessary to create
develop and demand service. These include retailers, wholesalers, sales agent,
warehousing, transportation, creditors and media. For example it will be
difficult to market frozen foods in a country where retailers do not have
facilities for freezing.
7.
Physical
Environment
This refers to
the physical condition of a country such as climate, topography and resources.
For example such products as air conditioners in hot country require additional
features for satisfactory performance.
8.
Market
Conditions
Factors such as
cultural differences, economic prosperity and customer perceptions in the
foreign country would influence the decision to adapt a product.
QUESTION NO 5.BUS 419 2005/2006 SESSION
Clearly explain
the various regional developments around the world that had help to fuel the
buying and selling activities in the global market.
SOLUTION TO QUESTION 5.BUS 419 2005/2006
SESSION
INCREASING INTERNATIONALIZATION
International
business is a new phenomenon: however, the volume of international trade has
increased dramatically over the last decade. A number of developments in
regions around the world have helped to fuel this activity. Amongst them are:
REGIONAL DEVELOPMENTS IMPACTS INTERNATIONALIZATION
Several important developments
have had a direct impact on internationalization and should be noted. Some of
the most important have been:
1.
THE
United States, Canada and Mexico make up the North American free Trade
Agreement (NAFTA), which in
essence has removed all barriers to trade between these countries and created a
huge North American market.
2.
The
European Union (EU) is now well on its way to create a unified market that
many have been described as the united states of Europe. This group consists of
15 nations including Austria, Belgium, Denmark, Finland, France, Germany, Great
Britain, Greece, Holland, Ireland, Italy, Luxembourg, Portugal, Spain and
Sweden. Not only have most trade barriers between the members been removed, but
the group has adopted a unified currency called the “euro”.
3.
The most
recent changes of the General Agreement on Tariffs and Trade (GATS) are
stimulating increased world trade. Under the new agreement, lands will be
reduced world wide by 38 percent, and in some cases eliminated completely. The
percentage of products entering United States duty free will rise from the
current 10 percent to 40 percent and for industrialized countries worldwide the
percentage will rise from 20 to 44.
Under the new agreement, GATT itself has
been replaced by the world trade organization (WTO), which came into existence
on January 1. 1995. The WTO has more power to enforce rulings on trade disputes
and create a more efficient system for monitoring trade policies.
4.
There also is recent economic progress among
less developed nations. A good example is India, which for years has had a
love-hate relationship in attracting foreign capital.
5.
In Africa a new economic order has emerged the
African union with objectives similar to the ones discussed above plans are
underway to eliminate all trading barriers and evolve a unified currency.
6.
Central and Eastern Europe, Russia and other
republics of the former Soviet Union currently are still trying to make the
other transition to market economics. For example, after the fall of the Berlin
wall in 1989, coca-cola quickly began to severe its relations with most of the
state-run bottling companies in the former communist bloc countries.
QUESTION
NO 6. BUS 419 2005/2006 SESSION
Multinational Corporations are blessings in
disguise particularly to the underdeveloped countries. Evaluate their negative
and positive contributions and take a position.
SOLUTION
TO QUESTION 6. BUS 419 2005/2006 SESSION
MULTINATIONAL
CORPORATIONS AND THEIR IMPACT
It can be said that no existing nation can
survive in a total isolation, be it a developed or underdeveloped nation. No
country can as such be totally self sufficient without having to relate and
trade with other countries or nations. A country cannot produce all the goods
and services that she require and as such has to trade with other countries to
be able to obtain those goods that cannot be produce in the country but are
required by the country.
In the light of the above it should be
argued that there is need for a certain degree of involvement of foreign or
multinational organization which brings in fresh capital to boost the size and
shape of the prevailing economy through their various economic activities. The
multinational corporation are seen as blessings by their host countries but in
the actual sense they hardly catalyst the economic growth of the host
countries.
BENEFITS
OF MULTINATIONAL CORPORATIONS
Multinational corporations usually brings
about benefits and cost to her country or countries. Multinational corporation
invest usually provide desirable risk capital for host country development
sectors. Multinational also serves as instruments of beneficial technology
transfer through the infrastructural and social overhead items. Multinational
corporation organizations and marketing expertise, knowledge transfer and job
training.
Multinational Corporation also tends to spur a
greater quest for efficiency in many of their indigenous counterparts.
CRITICISM
OF MULTINATIONAL CORPORATIONS
However, over the years there exist an
increasing cry by both government and its citizenry against the actions and
practices of many of these multinational corporations, there exist many which
led to very eases of antagonization, expropriation and outright
nationalization.
One good example was, antagonization decree
of 1972 (Nigeria) which transferred ownership of multinational corporations to
the Nigeria citizens.
a.
They constraint national development by using
inappropriate technology and expatriate managers.
b.
They reduce the efficiency of domestics or local
enterprises and stifle their growth and development.
c.
They worsen the balance of payment by
importation of capital equipment intermediate good, foreign personnel and by
the heavy repatriation of profit.
d.
They have exerted influence on political
decision making at all levels of government in the host nation
e.
They do not make substantial contributions to
tax revenue as most multinational corporation enjoys tax holidays as well as
liberal tax concessions
f.
They also use their enormous power to influence
government policy. They extract undue concessions in the form of extended
protection tax holidays, depreciation allowances and so on.
In
general the multinational corporations have been described as insensitive
instruments of imperialism, exploitation and also agents of the foreign
policies of advanced nations.
QUESTION NO 7. BUS
419 2005/2006 SESSION
(a)
State and explain the type of risk exposure
which international companies face in doing business overseas.
(b)
Suggest any five ways of minimizing these risks.
SOLUTION TO
QUESTION 7. BUS 419 2005/2006 SESSION
Risk in International Business
Introduction
From a U.S. or west European perspective investment in the
second and third worlds looks very much riskier than investment at home. There
is a lot to worry about: The increased internationalization of investment in
the past decade has enormously raised the exposure of investors to risks
associated with events in many different countries.
Joint ventures with local firms
When manufacturing firms take local partners with an eye to
reducing risk, the risk they generally have in mind is political risk.
Why Study
International Business Risk?
There are at least two broad
reasons why the country in which an investment is made may be of interest to an
investor.
First, classifying investment by
country is useful in identifying a group of investments that are likely to have
similar characteristic because they are subject to common sources of
uncertainly.
A Second reason for classifying
investments by the recipient country derives from the existence of the nation
state. All investments within a single country share the characteristic of
falling within the same government’s jurisdiction.
Type of International Business Risk
1.
Economic
Risk
In focusing on
the economic aspects of country risk we treat political and cultural factors as
given. In particular, we assume that recipient countries have government pursue
a consistent set of objectives and that the populace of these countries has an
observable and stable attitude to foreigners, private property and contract.
2.
The
Resources at Stake
At the most
elementary key resources at stake are the very lives of the corporations and
their personnel.
3.
Social
and Cultural Risk
The first
problem of explaining the incidence of revolution. (This is unsurprising since,
on the analysis offered here, the completed trajectory of a revolution is the
quintessence of actualized social and cultural risks). The second is the less
well-defined problem of identifying just what in social, cultural and political
terms makes capitalist production and the patterns of exchange it generates
viable at all.
4.
Political
Risk
‘’Bet only on
winners, and try to get your bets in after the horse is past the post.’’ this
is sound advice for those who like to win. The only problem is how to follow
the advice.
Large firms and
even private individuals face political risk in their own country by the mere
fact that they exist in a political environment.
Individuals and
corporations who ignore economic planning and prediction may end up poorer if
luck fails to smile. But those who choose to ignore the portents of change in
the political environment may not survive at all, or may find them fortunate to
be in exile.
Internal political
risks are those run by an installation or individual to the unforeseen actions
or influence of the local political powers. They may be associated with changes
in the policy or parties caused by elections, public pressure, coup d’état,
revolution or civil war.
Measures to Reduced international Business Risk
1.
Joint
ventures as Risk Reduces
Once a firm has
determined that an international investment may be desirable as a means of
reducing risk, it is still faced at times with possibility of going it alone or
investing in partnership with others. The choice among the various alternatives
is commonly affected by questions of risk. But once again, the risks to be avoided
are of various kinds.
2.
Consortia
of foreigners
Firms in the raw
material industries typically place a high premium on reducing the risks of the
unforeseen, such as wars, strikes and earthquakes. But in operational scale
economies are large; such diversification can especially on the part of the
smaller firms in the oligopoly. The solution for such firm to multiply their
joining others in a number of consortia. That response has had the effect of
producing various consortia of firms engage in the common exploitation of a raw
material in a country that is foreign to all of them.
3.
The
Exchange of Threats
Researchers also
claim to see risk reducing objectives in other seemingly imitative investments
of the multinational enterprises. It has repeatedly been observed, for
instance, that U.S. based industries that were generating the highest rate of
foreign direct investments in Europe were much the same as the European
industries that more or less simultaneously were investing in the United
States. One explanation for this behaviour is provided by so called exchange of
threat hypothesis. Threatened by the establishment of a foreign owned
subsidiary, in their home market, the response of the leading firms in that
market is to set up subsidiaries, in the invader’s home market. This cross
investment conveys a warning to the invading firm that any excessively
energetic efforts to compete in the foreign market may, be countered by similar
efforts in the market of the invader.
4.
Direct
Investment as a Response to Risk
The drive for
internalization, it is generally agreed, stems from the firm’s view that there is some marked imperfection in the
market for the product or service concerned a view that stimulates the firm to
create its own internal market and to accept the narrowing of choice that is
commonly involved in that decision. Two types of industry in which such
internationalization is particularly common are the exploitation and processing
of oil and minerals and the development and application of advanced
technologies. Not surprisingly, therefore this industry proves to be heavily
over represented among foreign direct investors.
QUESTION
NO 8. BUS 419 2005/2006 SESSION
The
international marketing environment has undergone significant changes since
1945, creating both new opportunities and problems.
i.
States
these changes
ii.
Briefly
discuss the following international market environments:
(a)
Economic
environment
(b)
Political
Legal environment
SOLUTION
TO QUESTION 8i BUS 419 2007/2008 SESSION
CHANGES IN
POLITICAL, LEGAL AND ECONOMIC FORCES
In recent years two large and related shifts in political and
economic forces have occurred globally. One the shift away from totalitarian
dictatorships and toward more democratic regimes has been most dramatic in
Eastern Europe and the former Soviet Union, where totalitarian communist
regimes collapse during the late 1980s and early 1990s. The other shift toward
representation democracy has occurred from Latin America to Africa. For the
most part, the movement toward democracy has been be precipitated by the
failure of totalitarian regimes with command or mixed economics to improve the
well being of their citizens.
SOLUTION
TO QUESTION 8ii. BUS 419 2007/2008 SESSION
ECONOMIC
ENVIRONMENT
Economic forces are caused by changing nature of countries
economic systems. Around the globe, economic systems range from free market
economics to command economics and managers must learn how different economic
systems work in order to understand the opportunity and threats associated with
them.
In a free market economy, the production of goods and services is
left in the hands of private (as opposed to government) enterprise. The goods
and services that are produced and quantities that are produced are not
specified by a central authority. Rallied production is determined by the
interaction of the forces of supply and demand. If demand or a product exceeds
supply, the price of the product will rise, prompting managers and organization
to produce more. If supply exceeds demand, prices will fall causing managers
and organizations to produce less.
In a command economy, the goods and services that a country
produces, the quantity in which they are produced, and the prices in which they
are sold are all planned by the government. In a pure command economy, all
business is government owned and private enterprises are forbidden. As recently
as 1989-1991, the communist of Eastern Europe and the Soviet Union had command
economics as did other communist countries such as china and Vietnam.
Between free markets economics, on the one hand command economies,
on the other are mixed economies. In a mixed economy, certain sectors are
characterized by significant government ownership and government planning.
Mixed economics are most commonly found in the democratic countries of Western
Europe, but they are disappearing as these countries shift toward the free
market model. For example in Britain in the early 1980s the government owned a
majority stake in many important industries including airlines, healthcare,
steel and telecommunications.
The manager of a global organization generally prefers a free
market system, for two reasons; first because much of the economy is in private
hands, there tend to be a few restrictions on organizations that decide to
invest in countries with free market economies. Second free market economic
growth than command or mixed economics, so their citizens tends to have higher
per capital incomes and more spending power.
SOLUTION
TO QUESTION iib. BUS 419 2007/2008 SESSION
POLITICAL
AND LEGAL ENVIRONMENT
Global political and legal forces result from the diverse and
changing nature of various countries political and legal systems. The global
range of political systems includes everything from representative democracies
to totalitarian regimes, and in order to manage global organizations
effectively, managers must understand how these different political systems
work. These includes
1.
An individual right to freedom of expression,
opinion and organization
2.
Free media
3.
Regular elections in which all the eligible
citizens are allowed to vote.
QUESTION
NO 10 BUS 419 2007/2008 SESSION
Explain
the following with illustrations where appropriate
a.
Terms of
trade
b.
Balance of
payment
c.
Theory of
comparative cost
SOLUTION
TO QUESTION 10A. BUS 419 2007/2008 SESSION
The terms
of trade
By terms of trade, we mean the rate at which one country’s product
exchange for product of another country. This can be expressed mathematically
as follows:
Terms of Trade= Index of export prices
Index of import prices
Example, by the term of trade we mean the rate at which one unit
of Sierra Leone’s rice will exchange for one unit of Nigeria’s cocoa. These
depend on the price of commodities entering international trade. The terms of
trade are said to be favourable to a country, when the price of its exports are
higher relatively to the price of its imports.
SOLUTION
TO QUESTION 10B. BUS 419 2001/2002 SESSION
The
Balance of payments
International trade provides obligations to make payments to other
countries and to receive payments from them. The balances of payments show the
relationship between a country’s payments to other countries and its receipts
from them. Balance of payment is, therefore, a statement of income and
expenditure of a country on international account.
The balance of payment can be divided into three groups
i.
The visible balance of trade
ii.
The invisible items
iii.
Capital movement
i.
The
visible balance of trade
The chief
payments and receipts are for goods imports and exports. Items in the balance
of payment which relate to goods are known as visible items and the relation
between imports and exports of these goods is known as the ‘’balance of trade’’
Invisible Items
Apart from imports and exports of goods many other payments and
receipts enter into a country’s balance of payments. These are called invisible
items because they are largely in the forms of services provided by one country
to another. Broadly, these services include:
i.
Shipping by Sea and by Air: Payments
have to be made to shipping and air craft companies for the carriage of goods
and passengers from the country to another. The most important merchant fleets
in the world are those of the Americans, Germans, British and Japanese.
ii.
Insurance:
Shipping
and air lifting involve a considerable amount of risk, hence the need for
insurance. This service, when provided by foreign banks has to be paid for.
iii.
Interest, Profits and Dividends: Foreign investment is of considerable
importance. However the existence of foreign investment in a country means that
some money, in the form of interest on loans, profits and dividends will have
to flow out. These are all invisible items. Although government may reduce the
amount of out-flow in the form of profits and dividends, there will still be
need to pay for the companies whose shares have been taken up.
iv.
Tourism: Some countries attract tourist from
other countries. When a foreigner visits a country, they bring along foreign
currency. Tourism has become an important source of foreign exchange earnings
for some countries such as Kenya. Israel is a world tourist centre for the
Christians, while Saudi Arabia is a tourist centre for the Muslims.
v.
Government Expenditure Abroad: Most
governments spend money abroad through their embassies or high commissions.
They remit money to their students on scholarships. Most governments also make
contributions to international organizations such as AU, ECOWAS, ILO. Also
these transactions are made in foreign exchange and the form parts of the
invisible items. Other invisible items include: These include a large variety
of remittance such as home remittance of 25 percent of the salaries of
expatriates, remittance to relatives and children studying abroad, renting or
hiring of foreign films, aircrafts, ships, etc. All these have to be paid for
in foreign currencies. Also include in the invisible items are consultancy
services and official transfers.
Capital
Movement
The visible and invisible items of
balance of payments show the current income and expenditure of one country with
the rest of the world. The balance of payment is also affected by the capital
movement. The capital account will include, among other things, investments
undertaken in other countries. Since the current account will show a credit
balance or a debit balance, the capital account will show the balance was
financed. As a matter of book keeping, therefore, the capital account must show
a balance equal to that of the current account and the capital account
together, must always equal to one another. This is so because transaction must
be paid for by somebody.
SOLUTION
TO QUESTION 10C. BUS 419 2007/2008 SESSION
The
Theory of comparative costs
The Classical Theory of the
International Trade is known as the Theory of Comparative Costs, was first
formulated by Ricardo and later improved by J. Stuart Mill, Cairnes, and
Bastable. Its best exposition is to be found in the works of taussing and
haberler.
COPARATIVE
COSTS THEORY
The principle of comparative costs is
based on the differences in production costs of similar commodities in
different countries. Production costs differ in countries because of
geographical division of labour and specialization in production. Due to
differences in climate, natural resources, geographical situation and
efficiency of labour a country can produce one commodity at lower cost than the
other. In this way country specialises in production of that commodity in which
it comparative cost of production is the least. Therefore when a country enter
into trade3 with some other country it will export those commodities which it
comparative production costs are least and will import those commodities which
its comparative production are high.
Assumption
of the theory
The Ricardian doctrine of comparative
advantage is based on the following assumptions:
1.
They are only two countries say A and B
2.
They produce the same to commodities X and Y
3.
Tastes are similar in both countries
4.
Labour is the only factor of production
5.
All labour units are homogeneous
6.
The supply of labour is unchanged
7.
Prices of the two commodities are determined
by labour cost i.e the number of labour units employed to produce each.
8.
Commodities are produced under the law of
constant costs or returns
9.
Trade between the two countries takes place on
the basis on the basis of barter system.
10.
Technological knowledge is unchanged
11.
Factors of production are perfectly mobile
within each country but are perfectly immobile between the two countries
12.
There is free trade between the two countries,
there being no trade barriers or restrictions in the movement of commodities
13.
No transport costs are involved in carrying
trade between the two countries
14.
All factors of production are fully employed
in both the countries
15.
The international market is perfect so that
the exchange ratio for the two commodities is the same.
Cost
Differences
Given these assumptions, the theory of comparative costs is
explained by taking three types of differences in costs: absolute equal and
comparative.
1.
Absolute differences in costs. There
may be absolute differences in costs when one country produces a commodity at
an absolute lower cost of production than the other.
The absolute differences in costs are illustrated in the Table
below
|
Country
|
Commodity-X
|
Commodity-Y
|
|
A
|
10
|
5
|
|
B
|
5
|
10
|
The table reveals that country A can produce 10X or 5Y with one
unit of labour and country B can produce 5X or 10Y with one unit of labour.
In this case country A has an absolute advantage in the production
of X (for 10X is greater than 5X), and country B has an absolute advantage in
the production of Y (for 10Y is greater than 5Y).
2.
Equal Differences in costs. Equal differences
in cost arise when two commodities are produced in both countries at the same
cost difference. Suppose country A can produce 10X or 5Y and country B can
produce 8X or 4Y.
In this case, with one unit of labour country
A can produce either 10X or 5Y and the cost ratio between X and Y is 2:1. In
country B, one unit of labour can produce either 8X or 4 and the cost ratio
between the two commodities are 2:1.
When the cost differences are equal, no
country stands to gain from trade. Hence international trade is not possible.
3.
Comparative
Differences in Costs. Comparative differences in cost occur when one
country has an absolute advantage in the production of both commodities, but a
comparative advantage in the production of one commodity than in the other.
QUESTION11.
BUS 419 2007/2008 SESSION
A)
Briefly
explain the history of international banking.
B)
Briefly
trace the origin of Eurocurrency market, highlighting its major
characteristics, and main reasons for its expansion.
SOLUTION
TO QUESTION11A. BUS 419 2007/20008 SESSION
Banking is generally known to have been started by the Italian
goldsmiths who settled down into business in London in about the seventeenth
century. They initially began by accepting deposit of gold coins and other
valuable from their customers for safe keeping. As the volume of this business
grew they had to build large strong rooms where these customers valuable items
were kept until demands were made on them by the depositors. They later found
that not all that were deposited were need at a particular time and so they
began giving out part of the money deposited to interested borrowers by way of
loans. They equally charge some amount of interest. The acceptance of deposits
and granting of loans are basic banking functions all over the world today.
It is interesting to note that the forerunner of the modern
banking started and performed virtually all the same functions of banking.
SOLUTION
TO QUESTION11B. BUS 419 2007/2008 SESSION
The
Euro-Dollar Market (Eurocurrency)
1.
MEANING
The Euro-dollar market otherwise called
Eurocurrency is the largest market in the international monetary system. It has
been playing a central role in international finance.
Euro-dollar is not a different currency from
the US dollar. But it is the American dollar which stands deposited with banks,
known as euro banks (European banks), outside the United States. Quite often,
they are deposited with a bank in London, or in Paris, Frankfurt, Amsterdam or
Zurich.
2.
ORIGIN AND
GROWTH
The origin of the Euro-dollar market can be
traced back to the 1920s when the US dollars were deposited in the European
banks which converted them into their local currencies for lending purposes.
But the real growth of the euro-dollar market began after the Second World War.
The following factors led to its growth
1.
Flow of US
Aid: The United States emerged as the most powerful nation in the
post-war period which spent huge sums of money on the rehabilitation of Europe
both in terms of economic and military aid. This lead to the transfer of a
large number of dollars in euro banks
2.
Cold War. The cold
war which started in the 1950s led the Soviet Union and the east European
government to transfer their dollar deposits from America to euro banks for
fear that might be blocked by the American government.
3.
Decline in
the Importance of sterling. In the post war period Britain emerged as a
debtor country. Consequently the British sterling which had dominated the
international financial market in the pre-war era gave place to the dollar in
the post-war period. The importance of sterling further fell when the British
government placed severe restrictions on the grant of sterling to, central
banks outside the sterling area under the British exchange control act in the
early post-war period.
4.
Other US
Measures. There were some other measures which hampered the capacity of US
banks to complete for international business including curbs on the release of
taxes on profits earned by foreigners in the United States, the introduction of
the interest Equalization Tax in 1964, controls over the US direct investment
abroad and tight monetary policy to control inflationary pressures. These led
to heavy borrowing by US banks from the Euro-dollar market to meet the demand
for dollars in the US.
5.
Innovative
Banking. Because of special circumstances that were present in the
1950sthere came into being a banking system distinct fro0m but supplementary to
the banking system of Europe. Like any other banking system, its element
consisted of reserves, deposits and loans, all in US dollars and recorded in
euro banks. Consequently, the euro-dollar market has grown rapidly in which the
market is situated.
FEATURES
OF EURO-DOLLAR MARKET
The euro-dollar market has the following features
1.
International Market. The euro-dollar market is
an international market which accepts deposits in dollars from throughout the
world and gives credits in dollars
2.
Independent Market. It is a free and
independent market which does not function under the control of any monetary
authority
3.
Wholesale Market. It is a wholesale market in
which US dollars are bought and sold usually above $ 1 million.
4.
Competitive Market. It is a highly competitive
market in which the supply and demand for dollars depends on interest rate
changes of Euro banks.
5.
Short-Term Market. It is a short term money
market in which dollar deposits are usually accepted for a period ranging from
a few days to a year and interest is paid on them.
6.
Inter-Bank Market. It is an inter-bank market
in which the euro banks borrow and lend dollars and other euro-currencies from
each other.
QUESTION
12. BUS 419 2007/2008 SESSION
State
the main theories of international business and assess the relevance of one of
these theories for application in Nigeria.
SOLUTION
TO QUESTION 12 BUS 419 2007/2008 SESSION
Contemporary
theories of foreign direct investment
1.
Monopolistic Advantage Theory
The monopolistic advantage theory
maintains firms make foreign direct investment in oligopolistic industries
possessing technical and other advantages over indigenous firms.
The modern monopolistic advantage
theory stems from Stephen Hymer’s dissertation in the 1960s in which he
demonstrated THAT FOREIGN DIRECT INVESTMENT (FDI) occurred largely in
oligopolistic industries rather than in industries under near perfect
competition. This means that the firms in these industries must possess
advantage not available to local firms. Hymer reasoned that the advantages must
be economies of scale, superior technology, or superior knowledge in marketing
management or finance, foreign direct investment took place because of these
product and factor market imperfections.
2.
Portfolio
Theory. One other financial based theory (portfolio theory) suggests
that international operations allow for a diversification of risk and therefore
tend to maximize the return on investment.
3.
Follow the
leader theory: Another theory was developed by knicker Bocker, who noted that
when one firm especially the leader in an oligopolistic industry entered a
market other firms in the industry followed. The follow the leader theory is
considered defensive because competitors are investing to avoid losing the
markets served by exports when the initial investor begins local production.
4.
The International Theory: Is an
extension of the market imperfection theory. The firm has superior knowledge,
but it may obtain a higher price for that knowledge by using it than by selling
it in the open market. By investing in a foreign subsidiary rather than
licensing, the company is also able to send the knowledge across borders while
maintaining it within the firm, where it presumably yields a better return on
the investment made to produce it.
5.
International
Product Life Cycle (IPLC): We have already examined this theory to help
explain international trade flows, but as we said there is close relationship
between international trade and international investment. As you saw, the IPLC
concept also explains that foreign direct investment is a natural stage in the
life of a product. To avoid losing a market that it services by exporting, a
company is forced to invest in overseas production facilities when other
companies begin to offer similar products.
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