International Business

April 1, 2018 Business

International trade is exchange of capital, goods, and services across international borders or territories. [1]. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization.

Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

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Another difference between domestic and international trade is that factors of production such as capital and labour are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor.

An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics. Ricardian model The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best.

Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country. The main merit of Ricardin model is that it assumes technology differences between countries. [citation needed] Technology gap is easily included in the Ricardian and Ricardo-Sraffa model (See the next subsection). The Ricardian model makes the following assumptions: 1.

Labor is the only primary input to production (labor is considered to be the ultimate source of value). 2. Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant returns to scale, and simple technology. ) 3. Limited amount of labor in the economy 4. Labor is perfectly mobile among sectors but not internationally. 5. Perfect competition (price-takers). The Ricardian model measures in the short-run, therefore technology differs internationally. This supports the fact that countries follow their comparative advantage and allows for specialization.

Modern development of the Ricardian model The Ricardian trade model was studied by Graham, Jones, McKenzie and others. All the theories excluded intermediate goods, or traded input goods such as materials and capital goods. McKenzie(1954), Jones(1961) and Samuelson(2001)emphasized that considerable gains from trade would be lost once intermediate goods were excluded from trade. In a famous comment McKenzie (1954, p. 179) pointed that “A moment’s consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England. [2] Recently, the theory was extended to the case that includes traded intermediates. [3] Thus the “labor only” assumption (#1 above) was removed from the theory. Thus the new Ricardian theory, or the Ricardo-Sraffa model, as it is sometimes named, theoretically includes capital goods such as machines and materials, which are traded across countries. In the time of global trade, this assumption is much more realistic than the Heckscher-Ohlin model, which assumes that capital is fixed inside the country and does not move internationally. [4] Heckscher-Ohlin model

In the early 1900s an international trade theory called factor proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the Heckscher-Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. This theory differs from the theories of comparative advantage and absolute advantage since these theory focuses on the productivity of the production process for a particular good.

On the contrary, the Heckscher-Ohlin theory states that a country should specialise production and export using the factors that are most abundant, and thus the cheapest. Not to produce, as earlier theories stated, the goods it produces most efficiently. The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.

The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance. The H-O model makes the following core assumptions: 1.

Labor and capital flow freely between sectors 2. The production of shoes is labor intensive and the production of computers is capital intensive 3. The amount of labor and capital in two countries differ (difference in endowments) 4. Free trade 5. Technology is the same across countries (long-term) 6. Tastes are the same. The problem with the H-O theory is that it excludes the trade of capital goods (including materials and fuels). In the H-O theory, labor and capital are fixed entities endowed to each country. In a modern economy, capital goods are traded internationally.

Gains from trade of intermediate goods are considerable, as it was emphasized by Samuelson (2001). Reality and Applicability of the Heckscher-Ohlin Model The Heckscher-Ohlin theory is preferred to the Ricardo theory by many economists, because it makes fewer simplifying assumptions. [citation needed] In 1953, Wassily Leontief published a study, where he tested the validity of the Heckscher-Ohlin theory[5]. The study showed that the U. S was more abundant in capital compared to other countries, therefore the U. S would export capital- intensive goods and import labour-intensive goods.

Leontief found out that the U. S’s export was less capital intensive than import. After the appearance of Leontief’s paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or either by new interpretations. Leamer[6] emphasized that Leontief did not interpret HO theory properly and claimed that with a right interpretation paradox did not occur. Brecher and Choudri[7] found that, if Leamer was right, the American workers consumption per head should be lower than the workers world average consumption. Many other trials followed but most of them failed. 8][9] Many of famous textbook writers, including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the validity of H-O model. [10][11]. After examining the long history of empirical research, Bowen, Hollander and Viane concluded: “Recent tests of the factor abundance theory [H-O theory and its developed form into many-commodity and many-factor case] that directly examine the H-O-V equations also indicate the rejection of the theory. “[11]:321 Heckscher-Ohlin theory is not well adapted to the analyze South-North trade problems.

The assumptions of HO are less realistic with respect to N-S than N-N (or S-S) trade. Income differences between North and South is the one that third world cares most. The factor price equalization [a consequence of HO theory] has not shown much sign of realization. HO model assumes identical production functions between countries. This is highly unrealistic. Technological gap between developed and developing countries is the main concern of the poor countries In this model, labor mobility between industries is possible while capital is immobile between industries in the short-run.

Thus, this model can be interpreted as a ‘short run’ version of the Heckscher-Ohlin model. The specific factors name refers to the given that in the short-run, specific factors of production such as physical capital are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms. Additionally, owners of opposing specific factors of production (i. e. labor and capital) are likely to have opposing agendas when lobbying for controls over immigration of labor.

Conversely, both owners of capital and labor profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade. New Trade Theory New Trade theory tries to explain several facts about trade, which the two main models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production(i. e. foreign direct investment) which exists.

In one example of this framework, the economy exhibits monopolistic competition and increasing returns to scale. There are three basic theories that global marketer has to comprehend: 1. Comparative Advantage Theory 2. Trade or product trade cycle theory 3. Business orientation theory Gravity model The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries’ economic sizes.

The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model. Regulation of international trade Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in mercantilism most nations had high tariffs and many restrictions on international trade.

In the 19th century, especially in the United Kingdom, a belief in free trade became paramount. [citation needed] This belief became the dominant thinking among western nations since then. In the years since the Second World War, controversial multilateral treaties like the General Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted to promote free trade while creating a globally regulated trade structure. These trade agreements have often resulted in discontent and protest with claims of unfair trade that is not beneficial to developing countries.

Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. [citation needed] The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents.

However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. [citation needed] The latter looks at the transaction cost associated with meeting trade and customs procedures. Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. [citation needed]This has changed somewhat in recent years, however.

In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.

The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely because of opposition from the populations of Latin American nations.

Similar agreements such as the Multilateral Agreement on Investment (MAI) have also failed in recent years. Risk in International business Companies doing business across international borders face many of the same risks as would normally be evident in strictly domestic transactions. For example, • Buyer insolvency (purchaser cannot pay); • Non-acceptance (buyer rejects goods as different from the agreed upon specifications); • Credit risk (allowing the buyer to take possession of goods prior to payment); • Regulatory risk (e. g. a change in rules that prevents the transaction); • Intervention (governmental action to prevent a transaction being completed); • Political risk (change in leadership interfering with transactions or prices); and • War and other uncontrollable events. In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the potential benefit of favorable movements). Cultutral Stereotypes These days it is easy to believe one fully understands a foreign culture even without having directly experienced it.

Images in the popular media and information gleaned from books or from encounters with a few natives can provide the illusion of real knowledge. Living in a culture, having to come to terms with its conventions and customs, is a different matter entirely. Every culture has distinct characteristics that make it different from every other culture. Some differences are quite evident (e. g. , language, religion, political organization, etc. ). Others can be so subtle that learning to deal with them is a complex process. A first-time visitor may remain uncomfortable and off balance for quite some time.

According to L. Robert Kohls, Director of Training and Development for the International Communication Agency and author of Survival Kit for Overseas Living, culture is, “an integrated system of learned behavior patterns that are characteristic of the members of any given society, Culture refers to the total way of life of particular groups of people. It includes everything that a group of people thinks, says, does, and makes–its systems of attitudes and feelings. Culture is learned and transmitted from generation to generation. ” (Kohls, 1984, p. 17.   Living in a foreign environment for an extended period of time will allow you to confront and develop a better understanding of the differences in various cultural systems. Numerous studies have been done to identify specific characteristics that distinguish one culture from another. Unfortunately, attempts to categorize cultural characteristics may often end up in cultural stereotypes that are unfair and misleading. Most Germans, Japanese, Italians, etc. , have stereotyped perceptions of “the American,” just as most Americans have stereotyped images of “Germans,” “Japanese,” “Italians,” etc.

In short, misperceptions exist on all sides. In adjusting to your study abroad environment, you will have to deal not only with real cultural differences, but also with perceived cultural differences. Keep in mind that people of other cultures are just as adept at stereotyping Americans as we are at stereotyping them–and the results are not always complimentary. The following are a few examples of the qualities (some positive, some negative) that others frequently associate with the “typical” American: • outgoing and friendly • informal • loud, rude, boastful • immature • hard working • wealthy • generous extravagant and wasteful • sure they have all the answers • disrespectful of authority • racially prejudiced • ignorant of other countries • always in a hurry • promiscuous While a stereotype might possess a grain of truth, it is obvious, when we consider individual differences, that not every American fits the above description. You should remember this when you pass judgments on your hosts. Remember to maintain a healthy skepticism about all preconceptions. Harmonised system quote EXPORT  DEPARTMENT HS, HS code, harmonized system, harmonized commodity, coding system, export-import quotations, export pricing, economics of scale. oreign exchange risks, quotation, quote, offer sheet, price sheet, measurement units, commissions, INCOTERMS, EXW, FCA, FAS, CFR, CIF, CPT, CIP, DAF, DES, DEQ, DDU, DDP. exchange rates, currency, foreign exchange, BTN, Brussels Tariff Nomenclature, CCCN, Customs Cooperation Council Nomenclature. exporters, importers, exporting, importing, exportation, importation, export, import, service exporters, export trader, export trade portal, export trading, exporters association, export manufacturers, export marketing, exporters guides. xportation, importation, export, import, service exporters, export trader, export trade portal, export trading, exporters association, export manufacturer, export marketing, exporters guides. export directory, manufacturing exporters, Taiwan exporters, Taiwan importers, Hong Kong exporters, Hong Kong importers, trade shows, trade fairs. China exporters, China importers, export manufacturing, export consulting, export trade leads, import trade leads, international business, trade exhibitions. letter of credit, insurance, trader, trading, exportacion, importacion, internet advertising, online advertisement, e-commerce, electronic commerce. ogistics, transportation, transports, cargo insurance, ocean shipping company, courier, airline, customs broker. Export-Import Quotations In exporting, the terms quote, offer sheet and price sheet may be used instead of quotation. The basic information that an export quotation should have includes a description of goods, trade terms (e. g. FOB, CFR or CIF), unit price, packing, means of delivery (e. g. ocean or air), delivery time, and payment terms. No strict form is used in the quotation. Using the company letterhead for a general quotation is quite common. Units of Measurement Most countries have officially adopted the metric units (e. . kilogram, meter, liter, and cubic meter) of measurement. The Imperial units (e. g. pound, foot, gallon, and cubic foot) and some local units are still in use in some countries, besides the metric system. A unit of measurement like the ton may refer to the metric ton (2204. 6 lbs. or 1000 kgs. ), short ton (2000 lbs. or 907 kgs. ), or long ton (2240 lbs. or 1016 kgs. ). The exporter must clearly indicate the proper unit used in the quotation and contract. The Preferred Terms of Import Quotation The preferred terms of import quotation, in the ocean freight, of some of the selected importing countries (areas) of the world are as follows: COUNTRY |TERMS | | |Argentina |CIF, FOB, CFR | | | |Australia |FOB | | | |Austria |CIF, CFR | | | |Belgium |CIF | | | |Brazil |CFR, CIF | | | |Canada |FOB | | | |Chile |FOB, CFR | | | |China |FOB, FAS | | | |     – Hong Kong |CIF | | | |Czech Republic |FOB | | | |Denmark |CIF | | | |Egypt |CFR | | | |Finland |CIF | | | |France |CIF | | | |Germany |CIF | | | |Greece |CIF | | | |Hungary |FOB | | | |India |CIF, FOB | | | |Indonesia |CIF | | | |Ireland |CIF | | | |Israel |CIF, FOB, CFR | | | |Italy |CIF | | | |Japan |CIF, FOB, CFR | | | |Korea, South |CIF | | | |Malaysia |CIF | | | |Mexico |FOB | | | |Netherlands |CIF | | | |New Zealand |FOB | | | |Norway |CIF | | | |Pakistan |CFR | | | |Peru |CIF, FOB, CFR | | | |Philippines |CFR | | | |Poland |FOB | | | |Portugal |CIF | | | |Russian Federation |FOB | | | |Saudi Arabia |CIF, CFR | | | |Singapore |CIF | | | |South Africa |CIF, FOB | | |Spain |CIF | | | |Sweden |CIF | | | |Switzerland |CIF | | | |Taiwan |CFR | | | |Thailand |CIF, CFR | | | |Turkey |CIF | | | |United Arab Emirates   |CIF, CFR | | | |United Kingdom |CIF | | | |USA |FOB | | | |Venezuela |CIF, FOB, CFR | | Importers may request for trade terms not listed above. In practice, importers usually specify the terms of import quotation. The import duty is often based on FOB or CIF value. Some countries may require itemized charges on the CIF term, that is, showing on the invoice the FOB value, insurance and freight, and may further require the cost of packing material and labor.

Some countries may require that the import and/or export shipments be insured with their national insurance companies. Commission Included in the Quotation When selling through an agent, the commission may be included in the quoted price. The commission may be reflected using ” {+ the percentage rate of commission} or ‘C’ {+ the percentage rate of commission} after the trade term. For example, CIF&C5 Bangkok (or CIFC5 Bangkok) means that the quoted price includes a 5% commission. [pic] Export Pricing and Penetrating Strategies, Order Quantity (Economics of Scale), and Foreign Exchange Risks The primary goal of a business is to make money. Trimming the profit margin in order to win a deal is not uncommon in exporting.

However, sacrificing the profit margin at the expense of quality must be avoided. Business practices and standards of living vary from country to country. In some countries a markup of 25% on imported goods is considered excellent, while others may require at least 60% in order to survive. It is very important to know who your competitors are and their selling price and sales strategy. Quite often, the price competitiveness overrides all other considerations in the initial contact with the buyer. How a product is priced is crucial in getting the buyer’s attention, before the buyer becomes familiar with the quality of the product, delivery and service.

When dealing with a large importer like chain store, quoting a high price may cause the buyer to lose interest, unless a business relationship already exists between exporter and buyer, or unless the exporter has a new product where there is no competition. Rarely is an exporter able to offer a product to all customers at the same price. Price bargaining is not uncommon in exporting. However, a few large importers are willing to provide a counter-offer, unless the product is unique or new and there is little or no competition. If the importer has a buying agent in the exporter’s country, it would be better to contact the agent. Pricing, Exchange Rates and Price Validity In some countries, the domestic selling price of imported goods changes a few times a year. However, in Western countries the selling price usually remains constant throughout the year.

The strategy of selling at a low price for the first order and then increasing the price for the next order may backfire. The buyer may insist on paying the same, if not a lower, price for the repeat order. Once a price is lowered, it can be difficult to increase unless competitors are forced out. Most international transactions are conducted in U. S. currency. The exchange rate fluctuates and the costs of export goods change. The exporter will lose money in the event of currency appreciation in the exporting country. For example, three months ago US$1 that was worth 125 Yen is only worth 90 Yen today, which means the exporter will lose 35 Yen for every dollar converted now.

On the contrary, the exporter will receive extra money in the case of currency devaluation in the exporting country. In times of exchange rate instability, the exporter can negotiate with the buyer to deal in the exporter’s currency, instead of U. S. funds. The exporter must indicate in the quotation its price validity, for example, “prices valid for 30 days from date” or “prices subject to our final confirmation (or acceptance). ” [pic] Order Quantity, Production Cost and Freight The economies of scale in the production and shipping must be considered in export pricing. Normally, a minimum production run is required in order to stay competitive. The unit cost of goods generally is lower in a larger order quantity.

In ocean shipments, there is a minimum charge or minimum CBM (cubic meter) requirement in the LCL (less than container load) delivery. Any shipment having a smaller CBM than the minimum requirement would be subject to the full amount. For example, if the minimum requirement is 2 CBM at US$60 per CBM or a minimum charge of US$120, if the consignment is only 1 CBM, that means the freight charge is still US$120. It would be more economical to price the goods based on the FCL (full container load) rather than the LCL, if the order quantity is large enough to fill a container. The exporter can indicate in the quotation the minimum quantity required for the quoted price.

A trick the importer may use in order to get a lower price is to inflate the quantity requirement. For example, the actual quantity of product Z the importer requires is 1,000 dozens at US$2/dozen, the quantity could be inflated to 3,000 dozens, which cost US$1. 80/dozen. The exporter would then bargain hard to buy 1,000 dozens at US$1. 80/dozen. Sometimes, it is necessary to be flexible in the quantity requirement, depending on the customer and circumstance, for example in the first order—initial order or trial order. Allowance for Defective Products Damages incurred to the insured goods in transit may be claimed from the insurance company. At times, goods are damaged due to mishandling at the buyer’s warehouse.

Some buyers may claim such damages in the form of a discount. The exporter should reserve in the pricing 1% or 2%, depending on the customer and product history, as an allowance for defective products. A higher percentage may be required for fragile goods such as glassware Hidden Commission The hidden commission, usually 2% or 3% of the export price, is not uncommon in some exporting countries. It is given by the exporter to the buying agent for each successful deal, as a compensation for supplying inside information on the competitive selling price, and for the opportunity of having the exporter’s product introduced to their overseas principal. Harmonized Commodity Description and Coding System (HS)

The HS—Harmonized System or Harmonized Commodity Description and Coding System—was developed by the Customs Cooperation Council (CCC) in Brussels, Belgium, as the basis for an international system to classify goods for customs purposes. It is a 10-digit system presently being used by most of the world’s trading partners. The HS is an update of the CCCN (Customs Cooperation Council Nomenclature), which was redrafted and renamed in 1965 from the BTN (Brussels Tariff Nomenclature) produced in 1957. The HS information is available at the customs office and government external trade department. The buyer’s customs broker may encounter ambiguity in identifying the tariff number of a new product from the exporter. The ambiguity can be due to a vague product composition, which may mean a different tariff code (number) and import duty.

Under these circumstances, the buyer may request the exporter to provide the proper HS code. Local marketing keys: community involvement This neighborhood-first mantra suggests a heavy dose of community involvement in your local marketing efforts. For example, here are three community-related marketing strategies: 1. Good grades equal good customers: contact local school principals to offer incentives of free products or services to students who achieve high grades. When someone brings in a good report card to your business, give him or her the reward. 2. Surveys equal more customers: regularly check the pulse of your customers with an attitude profile survey.

You’ll collect useful data, learn what they like and dislike, and demonstrate your concern for their opinions, all at the same time. Complaints are your best friend: nine out of ten unhappy customers never complain — at least not to you. Instead, they don’t come back and then they go tell their friends. It needs to invite criticism so you can address the problem and turn it around. Some other uncommon wisdom on marketing locally • Tap the potential of your greatest profit opportunity within your trading area – the customer base that is right in your back yard. Businesses, schools, churches, community events and even fellow retailers become your promotional allies in building cost-effective programs to capture consumer dollars right within your reach. Local marketing is face-time marketing. Look for ways to convey your marketing message to potential customers one-on-one. You can go first to your employees, then from your employees to your guests, and finally from your guests to their families, friends, neighbors and co-workers. This brand of face-time marketing is intimate and personal, as opposed to slick and impersonal mass media advertising. Even big chains are latching onto this concept by encouraging individual stores to think small and locally in their individual marketing plans. • Contrary to some of the old “rules” of advertising, the local marketing approach eschews institutional “exposure” advertising. Every local marketing program should pay its way,” says Feltenstein. “A marketing approach is either profitable or unprofitable based on results. If your current marketing is not measurably profitable on a per-project basis, kill it. ” Move on to the next tactic, go for sales, skip branding. To help generate more sales, treat your customers as authorities and unpaid local marketing consultants. Ask their advice and opinions of your operation, such as how you might improve it to better meet their needs. Don’t be afraid to reveal inside information, such as marketing ideas or recipes. The more they understand your business, the more they will respect what you are trying to do.

Look for ways to show you are aware of them as individuals, not just customers. Offer Curves The offer curve is simply another useful way to describe an individual’s demand behavior. And of course we can also use the offer curve to describe the market’s demand behavior, by summing up the behavior of individuals. While the offer curve can be constructed when there are more than two goods, it is most useful in the two-good case. The idea behind the offer curve is to depict the individual’s demand behavior, or demand function, in the same space (the same diagram) we use to depict his preferences (his indifference map) — namely, the commodity space. Of course, the commodity space is two-dimensional in the two-good case.

If we’re going to depict demand behavior in the commodity space, then the offer curve is going to have to consist of simply a set of bundles (x,y). But which bundles comprise an individual’s offer curve will depend on the individual’s characteristics — i. e. , upon his preference (his indifference map, his utility function) and his endowment of goods. Analytically, the offer curve is exactly the set of bundles (x,y) that the individual might consume, at some price list, given his own particular preference and endowment. Another way to describe it is as follows: if he were to choose the quantity x of the X-good, how much would he choose of the Y-good? The way to answer this question is kind of a clever trick.

In order for him to be led to choose the quantity x, we can determine from the demand function (actually, the inverse of the demand function) what the price-ratio would have to be to actually get him to choose the amount x. And at that price-ratio, we can use his demand function for Y to determine the quantity y he would choose. In other words, for every amount x, we can (by going through the inverse demand function) find the corresponding amount y for which the bundle (x,y) would actually be chosen. So long as the demand function is single-valued, the inverse demand function will be well-defined and we can carry out this operation. Formally, we could make the following definition:

Definition: If there are two goods and a consumer has the utility function u and initial holdings (x*,y*), then the consumer’s offer curve is the set of all bundles (x,y) for which there is some price-ratio ? at which (x,y) is the bundle he chooses — i. e. , for which (x,y) is the solution of his utility maximization problem. IMF Financing: A Review of the Issues Introduction The 1999 budget proposal submitted by President Clinton calls for an $18 billion appropriation for the International Monetary Fund (IMF). This $18 billion appropriation request consists of two parts: $14. 5 billion for a quota increase, and $3. 4 billion for a new IMF credit line called the New Arrangements to Borrow (NAB). The proposed quota increase and NAB commitment represent the U. S. share of a larger package of the proposed IMF expansion. The great majority of IMF lending activities are financed out of the quotas provided by member countries. The quota increase and NAB are not needed to complete the Asian bailouts already underway; current IMF funds are sufficient to complete this assistance. The new funding would be used to finance future loans in addition to those already announced. Even after the completion of the Asian bailouts, the IMF would hold $30 billion in gold, retain some quota resources, and have access to an unused $25 billion IMF credit line known as the General Arrangements to Borrow (GAB).

The key issue before Congress is whether the IMF should be expanded through government-financed contributions and credit lines. The IMF was established in 1945 to finance temporary balance of payments problems under the fixed exchange rate system in place for most of the post-WWII period through 1973. However, under the flexible exchange rate system existing during the past three decades, IMF objectives have become less clear and focused. To an increasing extent, longer term financing is used for purposes other than short-term external adjustment problems. Recent IMF loan packages, for example, have required long-term restructuring of major sectors of national economies and significant adjustments to economic policy.

This alteration in IMF lending underlines an important change in the nature of IMF objectives. According to Columbia University Professor Charles Calomiris, who has served as an IMF economist and World Bank consultant: In the 1990s, the IMF has stretched the notion of liquidity assistance beyond any reasonable definition. IMF programs in Mexico and Asia are now microeconomic bailouts that restore the solvency of clearly insolvent financial institutions. That objective has nothing to do with bank or government liquidity, or with temporary imbalances in the balance of payments. 2       Recently, IMF operations have been the center of growing controversy.

Points of contention include: • Moral hazard: IMF bailouts encourage investors to assume additional risk in pursuit of extra-normal returns in the expectation that losses will be absorbed by the IMF and ultimately the taxpayers of affected countries. • Exposure of taxpayer funds: U. S. government funds are used directly and indirectly in subsidized bailouts that promote perverse incentives leading to a more vulnerable financial system. • Inappropriate conditions: Counterproductive policies that undermine economic performance are sometimes imposed by the IMF as loan conditions. • Transparency: The IMF is a closed and secretive organization that operates in a manner inconsistent with openness, as well as U. S. performance and accountability standards. The lack of transparency makes analysis of the IMF and its performance problematic.

As former World Bank Chief Economist (Latin America) Sebastian Edwards has noted: For any outsider it is extremely difficult–utterly impossible some would even say–to fully evaluate the functioning of the IMF. Many of its decisions are confidential, as are most of the key documents that set the Fund’s policy position. Moreover, the details of specific programs, including… memoranda of understanding, and other documents are also confidential. This makes the evaluation of programs’ performance very difficult. 3 II. IMF Performance and Results Under the Government Performance and Results Act (GPRA), government programs are to be planned and reviewed using objective and measurable criteria whenever possible. Under the Act, the IMF’s appropriation must be evaluated on the basis of its objective contribution to U. S. international economic policy.

As the first quota increase to be considered after the GPRA went into effect, Congress has an important responsibility to review the current IMF appropriation with a focus on the performance and results of IMF activities. The size of the current and future bailouts will reduce available IMF resources and ultimately lead to yet another request for more funding. The IMF has already suggested that an even greater quota increase will be needed relatively soon. 4 The magnitude of the recent bailouts, as well as the pending quota increase, suggest that a fundamental reevaluation of the IMF, its operations, goals, as well as its financing, is needed. In recent months, a threshold has been reached in IMF lending that raises basic questions about IMF decision-making, openness, policy advice, performance, and over-reliance on direct government funding.

One diversion in an IMF performance review is the dubious contention that under existing budget rules the IMF appropriation is not a net outlay and therefore involves no taxpayer cost. Although current accounting rules mask the cost of the IMF quota increases to the U. S. , economic analysis clarifies the true nature of the transaction: real economic resources are transferred at subsidized interest rates from the U. S. economy to other nations. It is doubtful that these resources will ever be fully recovered. The U. S. may hold a paper IOU or an IMF computer entry, but the nature of the IMF quota increase entails a transfer of economic resources from the U. S. economy. If this were not so, there would be no point in an appropriation in the first place.

Additional costs of these IMF bailouts were delineated by Professor Charles Calomiris in recent testimony before the Joint Economic Committee: Three kinds of cost figure prominently: (1) undesirable redistributions of wealth from taxpayers to politically influential oligarchs in developing economies; (2) the promotion of excessive risk taking and inefficient investment; and (3) the undermining of the natural process of deregulation and economic and political reform which global competition would otherwise promote. 5       One additional reason for concern about IMF intervention is IMF’s operations, which are based on below-market funding costs and below-market lending rates.

As Sir Alan Walters has indicated: By its very nature, IMF assistance [has been] given at a subsidized interest rate, in the sense that the rate charged was below that which the country could obtain on the international capital markets. The subsidies have both widened and deepened over time. 6 Economic analysis indicates such taxpayer subsidies to IMF borrowers lead to inefficient results and a misallocation of economic resources. Part of the reason for this inefficiency was identified in the testimony of former Federal Reserve Governor Lawrence Lindsey before the Joint Economic Committee. As Lindsey argued: … there is no real assessment of credit worthiness [in IMF lending].

Quite the contrary, an apparent requirement to get an IMF loan is that the borrower is not creditworthy, in that the borrower could not obtain private sector funding. 7       The IMF’s practice of loan subsidies and the resulting misallocation of resources raises serious policy concerns. The recent orientation of IMF lending towards subsidizing loans to insolvent entities is troubling and qualitatively marks an important departure from past practices. Given this change and the significant increases in IMF loans, its compatibility with the objectives of U. S. international economic policy must be considered by Congress. Specific reforms of the IMF are discussed in a later section of this paper. III. The IMF and Asia

Important questions have been raised by the recent IMF bailouts of South Korea, Indonesia, and Thailand. These IMF loans are tied to a number of conditions in the form of policy changes, some of which involve improved supervision of financial institutions and efforts to eliminate corruption. Additional loan conditions often include tax increases, tight monetary policies, and other guidelines that foster austerity. On November 20, 1997, a high U. S. Treasury Department official was reported to have designed a framework for future Asian bailouts referred to as the “Manila plan,” named for the location of the formative meeting and modeled after the structure of the Indonesian bailout. The Manila plan calls for IMF loans to provide the initial lending support to a distressed economy, supplemented by backup funds contributed by major nations such as the United States. Almost immediately, the Koreans requested IMF assistance that quickly grew into the largest bailout package ever made by the IMF. The Treasury Department had a very public role not only in the general design of the bailout framework but also in the specific components of the Korean bailout. Both the Korean government and the IMF have agreed to the bailout terms. An IMF package of loans amounting to $21 billion will be supplemented by the World Bank, the United States, and others for a total of $57 billion.

Unfortunately, the first Korean bailout failed to restore confidence, and a second bailout based on debt restructuring was implemented. The IMF has enough resources on hand to cover the $21 billion committed in the first bailout, and congressional action will have no bearing on whether these funds are disbursed. However, the Asian crisis does provide a useful point of departure for analysis of the major issues. Brief Background In recent years, a number of Asian economies experienced rapid capital inflows brought about by the region’s fast growth, high returns on investment, and desire for diversification on the part of investors in developed countries. Perceived exchange rate risk was minimized because many of these countries tied their currencies to the U. S. dollar.

This capital, in turn, was often allocated by centralized, bureaucratic, and sometimes corrupt government-controlled banking systems into questionable long-term (e. g. , real estate) projects. 9 In other words, poorly regulated financial institutions in these countries made long-term loans that were financed by short-term foreign liabilities. The result was large amounts of short-term dollar denominated debt together with maturity and currency mismatches. Risk Reassessment For a number of reasons, lenders began to reassess risk. Dollar appreciation against the yen not only forced these economies to tighten monetary policy to defend their currencies but also significantly hurt their export markets.

These developments encouraged speculation against the pegged exchange rate. Rapid disinflation, asset price deflation, and declines in collateral value further weakened poorly regulated financial sectors. Heightened exchange rate risk, capital outflows, and eventually exchange rate depreciation resulted. Possible Contagion As the exchange rate in these countries depreciates, debt denominated in dollars instantly becomes more burdensome (because the debt now must be repaid in dollars that are more valuable) and financial sector weakness is exacerbated. As a result, risk assessment worsens, leading to an increased demand for limited dollar reserves.

At this point, proponents of IMF intervention argue that if no assistance is provided in the form of short-term dollar loans, further capital flight will occur, resulting in accelerated currency depreciation, interest rate increases, and further asset price deflation. If the trend continues, they argue, these problems may spread: contagion can occur and capital flight can accelerate. The result may be competitive devaluations and the possible adoption of protectionist measures in affected countries that are export markets for the United States. Consequently, there may be a severe slowdown in the local economy and a sharp decrease in living standards. Additionally, the U. S. economy’s investors, equity market, export sector, and employment could also be impacted. IV. IMF Assistance

Advocates of IMF intervention maintain that prompt IMF assistance in the form of short-term hard currency loans can temporarily bolster confidence by providing assurance that back-up lending or emergency liquidity provision is readily available. According to proponents of IMF bailouts, this can work to restore investor confidence and prevent worsening capital flight by guaranteeing a reliable source of foreign exchange reserve loans. IMF lending can temporarily stabilize the situation and stem contagion. In short, the case for immediate IMF lending is to keep the problem from getting worse and to reduce the size of the calamity. V. Problems with the IMF Bailouts

Despite potential stabilizing effects in the short run, there are a number of major problems with current IMF bailout practices: • IMF Lending Creates Moral Hazard: IMF bailouts not only fail to change incentives to correct reckless lending behavior, but also embody incentives encouraging this behavior. Existing lending practices persist because both borrowers and lenders recognize that if loan problems should occur, a bailout will readily materialize. 10 To change such incentives, some lenders and borrowers should suffer losses and shoulder some of the risks of their poor decisions. Insolvent institutions should be allowed to fail. Necessary adjustments should be allowed to occur. Lending at market-determined, non-subsidized interest rates would also work to minimize moral hazard. • U. S. Taxpayer Funds Are Overly Exposed: Current IMF (and Treasury) bailout practices often expose U. S. taxpayer funds.

The Exchange Stabilization Fund (ESF) has been used to provide back-up financing for several IMF bailout packages. Since U. S. taxpayers do not participate in emerging market lending/borrowing decisions, the case for using their funds for these purposes is problematic. This use of the ESF circumvents the congressional appropriations process so that taxpayers have no voice regarding the Treasury’s use of their funds. The IMF and Treasury have not seriously considered alternative sources or mechanisms of funding to minimize taxpayer exposure, such as IMF borrowing from the market (like the World Bank and other development banks) or IMF gold sales. 1 At a minimum, Treasury and the IMF should clearly explain why taxpayer-financed lending may be necessary. • The IMF Often Attaches Inappropriate Lending Conditions to Its Loans: The IMF ties several forms of conditions to its loans. Austerity conditions involving tax increases are often part of these lending programs, and these conditions are sometimes applied indiscriminately to countries facing different sets of circumstances. Critics argue that these conditions result from inappropriate use of economic models focusing principally on aggregate demand management and not on supply conditions. Despite rhetoric to the contrary, less emphasis is placed on government restructuring or downsizing as the important element of this conditionality.

Additionally, IMF conditionality often impedes the necessary adjustment process, is frequently reactive rather than pro-active, and often involves an unspecified timetable, allowing loan recipients to backslide on required adjustments. • IMF and Treasury Policies Should Be More Transparent: Both IMF and U. S. Treasury bailout policies remain overly secretive, ambiguous, and ill-defined. Because these policies are seldom explained to the public, unnecessary misunderstanding, resentment, and opposition often result. A good deal more transparency is called for from both of these taxpayer-financed institutions. Explicit specification of the IMF’s objectives, for example, should be accompanied by clarification of the procedures and practices by which it accomplishes these objectives.

At a minimum, full explanations of the conditions, lending terms, subsidies involved, and the rationale as to why such lending is necessary are essential. Additionally, those entities actually receiving taxpayer subsidies should be identified. The notion that IMF policies can be counterproductive is not limited to IMF critics. A recent IMF internal study found that elements of its conditions imposed on Indonesia sparked a bank crisis that deepened the financial crisis in other Asian nations. This IMF analysis underscores the counterproductive potential of IMF policies and highlights its lack of transparency. 12 VI. Overview of Policy Implications The Administration’s IMF appropriation request may result in a number of alternative outcomes.

The entire $18 billion appropriation could be approved without any significant conditions being attached. Alternatively, the entire appropriation could be rejected due to concerns about the effects of IMF expansion, as well as IMF reforms required for continued U. S. funding. Intermediate alternatives could include a range of incremental funding options probably tied to a variety of conditions on the IMF. Regardless of the status of new funding for the IMF, the recent transition of IMF lending from provision of short-term liquidity to subsidization of insolvency is troubling. Lack of transparency has permitted the IMF to make this transition without much public recognition in the United States.

The adoption of more transparent practices by the IMF is necessary if Congress is to be adequately informed about this important element of U. S. economic policy. Minutes of IMF board meetings should be publicly released (after appropriate editing of any proprietary and intelligence information), loan program documents and staff reviews of loan programs should be made public, and an independent advisory board should be established to annually review IMF activities. Furthermore, the subsidization of IMF lending at below-market interest rates exposes the fallacy that there is no cost associated with quota contributions. Base IMF lending rates, currently under 5 percent, are, after all, below the rate at which the U. S. government can borrow.

Although some IMF loans are made at higher rates, artificially low borrowing and lending rates characterize IMF lending operations. These below-market borrowing rates do not adequately reflect the potential risk posed by insolvent borrowers, and thereby exacerbate the moral hazard problem discussed above. The Congress must decide whether this policy of subsidized loans for insolvent entities is a desirable objective of U. S. international economic policy. As Walter Bagehot, eminent former editor of The Economist, explained in his classic formulation more than a century ago, a lender of last resort should lend freely at a penalty interest rate. Subsidized loans are not necessary to assist illiquid borrowers and are counterproductive for insolvent entities.

Economic efficiency would be promoted by IMF lending at market interest rates determined in international financial markets. Accordingly, Congress could stipulate that U. S. funds should not be used to provide subsidized loans. This would help contain the moral hazard problem and encourage the IMF to operate on a more economically efficient basis. Another market-oriented reform would encourage IMF issuance of securities in the financial markets instead of relying so heavily on government funds. VII. Recommendations In view of these many problems, any continued or additional U. S. financial support of the IMF should be accompanied by guarantees that the IMF itself meets certain conditions. In particular, to receive U. S. inancial support, the IMF should: • Work to minimize the moral hazard problem both by ensuring that some costs are borne by those lenders and borrowers initiating the ill-fated loans and lending more in accordance with market-determined interest rates. • Explore alternative funding sources or mechanisms to minimize U. S. taxpayer exposure. • Promote lending conditions that work to attract capital as well as to foster private sector economic growth, free markets, and smaller public sectors. • Become significantly more transparent in a number of specific ways. Clearly identifying policy objectives as well as the procedures and practices used to achieve these objectives is essential. VIII. Conclusion

This paper has reviewed some of the major issues on both sides of the debate over IMF funding. The concerns raised regarding moral hazard, transparency, taxpayer exposure, and conditionality are widely recognized. For example, the Treasury has acknowledged the validity of the moral hazard problem, the IMF has recognized the damage perverse conditionality may cause, and such IMF loan conditions are widely criticized from various points of view. Furthermore, almost all analysts recognize the benefits of a more transparent IMF. Consequently, it appears likely that any congressional action on IMF funding will include conditions intended to mitigate these concerns.

IMF reforms are needed irrespective of what happens to the Administration’s IMF appropriation proposal now before Congress. Two IMF reforms are especially needed at this time: improved transparency and increased use of market interest rates. Improved transparency would require the public disclosure of IMF decision-making meetings as well as program documents and related material. Future IMF loans should employ market interest rates, not subsidized rates that exacerbate the moral hazard problem. The evolution of global marketing Whether an organisation markets its goods and services domestically or internationally, the definition of marketing still applies.

However, the scope of marketing is broadened when the organisation decides to sell across international boundaries, this being primarily due to the numerous other dimensions which the organisation has to account for. For example, the organisation’s language of business may be “English”, but it may have to do business in the “French language”. This not only requires a translation facility, but the French cultural conditions have to be accounted for as well. Doing business “the French way” may be different from doing it “the English way”. This is particularly true when doing business with the Japanese. Let us, firstly define “Marketing” and then see how, by doing marketing across multinational boundaries, differences, where existing, have to be accounted for. S. Carter defines marketing as: The process of building lasting relationships through planning, executing and controlling the conception, pricing, promotion and distribution of ideas, goods and services to create mutual exchange that satisfy individual and organisational needs and objectives”. The long held tenants of marketing are “customer value”, “competitive advantage” and “focus”. This means that organisations have to study the market, develop products or services that satisfy customer needs and wants, develop the “correct” marketing mix and satisfy its own objectives as well as giving customer satisfaction on a continuing basis. However, it became clear in the 1980s that this definition of marketing was too narrow. Preoccupation with the tactical workings of the marketing mix led to neglect of long term product development, so “Strategic Marketing” was born.

The focus was shifted from knowing everything about the customer, to knowing the customer in a context which includes the competition, government policy and regulations, and the broader economic, social and political macro forces that shape the evolution of markets. In global marketing terms this means forging alliances (relationships) or developing networks, working closely with home country government officials and industry competitors to gain access to a target market. Also the marketing objective has changed from one of satisfying organisational objectives to one of “stakeholder” benefits – including employees, society, government and so on. Profit is still essential but not an end in itself.

Strategic marketing according to Wensley (1982) has been defined as: “Initiating, negotiating and managing acceptable exchange relationships with key interest groups or constituencies, in the pursuit of sustainable competitive advantage within specific markets, on the basis of long run consumer, channel and other stakeholder franchise”. Whether one takes the definition of “marketing” or “strategic marketing”, “marketing” must still be regarded as both a philosophy and a set of functional activities. As a philosophy embracing customer value (or satisfaction), planning and organising activities to meet individual and organisational objectives, marketing must be internalised by all members of an organisation, because without satisfied customers the organisation will eventually die. As a set of operational activities, marketing embraces selling, advertising, transporting, market research and product development activities to name but a few.

It is important to note that marketing is not just a philosophy or one or some of the operational activities. It is both. In planning for marketing, the organisation has to basically decide what it is going to sell, to which target market and with what marketing mix (product, place, promotion, price and people). Although these tenents of marketing planning must apply anywhere, when marketing across national boundaries, the difference between domestic and international marketing lies almost entirely in the differences in national environments within which the global programme is conducted and the differences in the organisation and programmes of a firm operating simultaneously in different national markets.

It is recognised that in the “postmodern” era of marketing, even the assumptions and long standing tenents of marketing like the concepts of “consumer needs”, “consumer sovereignty”, “target markets” and “product/market processes” are being challenged. The emphasis is towards the emergence of the “customising consumer”, that is, the customer who takes elements of the market offerings and moulds a customised consumption experience out of these. Even further, post modernisim, posts that the consumer who is the consumed, the ultimate marketable image, is also becoming liberated from the sole role of a consumer and is becoming a producer. This reveals itself in the desire for the consumer to become part of the marketing process and to experience immersion into “thematic settings” rather than merely to encounter products.

So in consuming food products for example, it becomes not just a case of satisfying hunger needs, but also can be rendered as an image – producing act. In the post modern market place the product does not project images, it fills images. This is true in some foodstuffs. The consumption of “designer water” or “slimming foods” is a statement of a self image, not just a product consuming act. Acceptance of postmodern marketing affects discussions of products, pricing, advertising, distribution and planning. However, given the fact that this textbook is primarily written with developing economies in mind, where the environmental conditions, consumer sophistication and systems are not such that allow a quantum leap to postmodernism, it is intended to mention the concept in passing.

Further discussion on the topic is available in the accompanying list of readings. When organisations develop into global marketing organisations, they usually evolve into this from a relatively small export base. Some firms never get any further than the exporting stage. Marketing overseas can, therefore, be anywhere on a continuum of “foreign” to “global”. It is well to note at this stage that the words “international”, “multinational” or “global” are now rather outdated descriptions. In fact “global” has replaced the other terms to all intents and purposes. “Foreign” marketing means marketing in an environment different from the home base, it’s basic form being “exporting”.

Over time, this may evolve into an operating market rather than a foreign market. One such example is the Preferential T


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