ASSIGNMENT- 02

404- International Business Environment

Submitted By-

Miss Bhavna Talreja

Q 1. write short note on

1).GSP

The Generalized System of Preferences, or GSP, is a formal system of exemption

from the more general rules of the World Trade Organization (WTO), (formerly, the
General Agreement on Tariffs and Trade or GATT). Specifically, it's a system of
exemption from the most favored nation principle (MFN) that obligates WTO
member countries to treat the imports of all other WTO member countries no worse
than they treat the imports of their "most favored" trading partner. In essence, MFN
requires WTO member countries to treat imports coming from all other WTO member
countries equally, that is, by imposing equal tariffs on them, etc.

GSP exempts WTO member countries from MFN for the purpose of lowering tariffs
for the least developed countries (without also doing so for rich countries). The idea
of tariff preferences for developing countries was the subject of considerable
discussion within UNCTAD in the 1960s. Among other concerns, developing
countries claimed that MFN was creating a disincentive for richer countries to reduce
and eliminate tariffs and other trade restrictions with enough speed to benefit
developing countries.

But more significant is that most GSP programs are not completely generalized with
respect to products. That is, they don't cover most products, at least most products of
export interest to developing countries. And this is by design. In the United States and
many other rich countries, domestic producers of "simple" manfuctures, such as
textiles, leather goods, ceramics, glass and steel, have long claimed that they could
not compete with large quantities of imports. Thus, such products have been
categorically excluded from GSP coverage under the U.S. and many other GSP
programs. Unfortunately, these excluded products are precisely the kinds of
manufactures that most developing countries are able to export.

2). GSTP

THE GLOBAL SYSTEM OF TRADE PREFERENCES

The Agreement on the Global System of Trade Preferences among Developing
Countries (GSTP) was established in 1988 as a framework for the exchange of trade
preferences among developing countries in order to promote intra-developing-country
trade. It lays down rules, principles and procedures for conduct of negotiations and for
implementation of the results of the negotiations. The coverage of the GSTP extends
to arrangements in the area of tariffs, para-tariff, non-tariff measures, direct trade
measures including medium and long-term contracts and sectoral agreements

BENEFITS OF GSTP
• The agreement on GSTP, which was signed by 48 members of G-77 in 1988,
was the first instrument available to developing countries for promoting trade
and economic cooperation among themselves.
• GSTP is a useful instrument for promoting South-South cooperation on a
broad front.
• GSTP Participants could increase their participation in the global economy
and identify complementarities among their economies so as to open the
tremendous potential for trade cooperation envisaged when they adopted the
Agreement in 1988.
• GSTP's importance lies in the fact that as developing countries become more
comfortable with tariff reductions, much wider range of products and more
substantial preferences can be offered under this instrument.
• It could also be used to draw in countries that have so far benefited little from
trade preferences.

3). SDR
Special Drawings Rights

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed
exchange rate system. A country participating in this system needed official reserves
—government or central bank holdings of gold and widely accepted foreign
currencies—that could be used to purchase the domestic currency in foreign exchange
markets, as required to maintain its exchange rate. But the international supply of two
key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the
expansion of world trade and financial development that was taking place. Therefore,
the international community decided to create a new international reserve asset under
the auspices of the IMF.

However, only a few years later, the Bretton Woods system collapsed and the major
currencies shifted to a floating exchange rate regime. In addition, the growth in
international capital markets facilitated borrowing by creditworthy governments. Both
of these developments lessened the need for SDRs.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim
on the freely usable currencies of IMF members. Holders of SDRs can obtain these
currencies in exchange for their SDRs in two ways: first, through the arrangement of
voluntary exchanges between members; and second, by the IMF designating members
with strong external positions to purchase SDRs from members with weak external
positions. In addition to its role as a supplementary reserve asset, the SDR, serves as
the unit of account of the IMF and some other international organizations.
4).FPI

Foreign portfolio investment:-

The purchase of stocks, bonds, and money market instruments by foreigners for the
purpose of realizing a financial return, which does not result in foreign management,
ownership, or legal control.

Some examples of portfolio investment are:

• purchase of shares in a foreign company.

• purchase of bonds issued by a foreign government.
• acquisition of assets in a foreign country.
• purchase of stocks in a foreign company.

Factors affecting international portfolio investment:

• tax rates on interest or dividends (investors will normally prefer countries

where the tax rates are relatively low)
• interest rates (money tends to flow to countries with high interest rates)
• exchange rates (foreign investors may be attracted if the local currency is
expected to strengthen)

Portfolio investment is part of the capital account on the balance of payments

statistics.

5).FDI

Consistent economic growth, de-regulation, liberal investment rulse, and operational

flexibility are all the factors that help increase the inflow of Foreign Direct Investment
or FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor.

FDIs require a business relationship between a parent company and its foreign
subsidiary. Foreign direct business relationships give rise to multinational
corporations. For an investment to be regarded as an FDI, the parent firm needs to
have at least 10% of the ordinary shares of its foreign affiliates. The investing firm
may also qualify for an FDI if it owns voting power in a business enterprise operating
in a foreign country.

Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector of the economy and could be
any one of the following:-

• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
 • a group of related enterprises;
• a government body;
• an estate (law), trust or other societal organisation; or
• any combination of the above.

6).IMF

The International Monetary Fund (IMF) is an international organization that

oversees the global financial system by following the macroeconomic policies of its
member countries, in particular those with an impact on exchange rates and the
balance of payments. It is an organization formed with a stated objective of stabilizing
international exchange rates and facilitating development.[3] It also offers highly
leveraged loans, mainly to poorer countries. Its headquarters are in Washington, D.C.,
United States.
The International Monetary Fund was created in July 1944, originally with 45
members,[4] with a goal to stabilize exchange rates and assist the reconstruction of the
world's international payment system. Countries contributed to a pool which could be
borrowed from, on a temporary basis, by countries with payment imbalances
(Condon, 2007). The IMF was important when it was first created because it helped
the world stabilize the economic system. The IMF is still important because it works
to improve the economies of its member countries.]
The IMF describes itself as "an organization of 186 countries (as of June 29, 2009),
working to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth, and
reduce poverty". With the exception of Taiwan (expelled in 1980),] North Korea,
Cuba (left in 1964),] Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN
member states participate directly in the IMF. Member states are represented on a 24-
member Executive Board (five Executive Directors are appointed by the five
members with the largest quotas, nineteen Executive Directors are elected by the
remaining members), and all members appoint a Governor to the IMF's Board of
Governors.]

Q 2. Explain the term Balance Of Payment with respect to Indian Economy ?

 The balance of payments accounts are those that record all transactions
between the residents of a country and residents of all foreign nations.
 The BOP is determined by the country's exports and imports of goods,
services, and financial capital, as well as financial transfers.
 It reflects all payments and liabilities to foreigners (debits) and all payments
and obligations received from foreigners (credits).
 Balance of payments is one of the major indicators of a country's status in
international trade.
BOP consists of

1. The Current Account

2. The Capital Account
3. Official Reserves Account
4. Errors and Ommisions

1). Current Account

 Includes all imports and exports of goods and services.

 Includes unilateral transfers of foreign aid.
 If the debits exceed the credits, then a country is running a trade deficit.
 If the credits exceed the debits, then a country is running a trade surplus.

2). Capital Account

1. Foreign Investment(FDI, FII)

2. Banking Capital (NRI Deposits)
3. Short term credit
4. External Commercial Borrowings(ECB)

 If foreign ownership of domestic financial assets has increased more quickly

than domestic ownership of foreign assets in a given year, then the domestic
country has a capital account surplus.
 On the other hand, if domestic ownership of foreign financial assets has
increased more quickly than foreign ownership of domestic assets, then the
domestic country has a capital account deficit.

3). Official international reserves

 The official international reserve account records the change in stock of

official international reserve assets (also known as foreign exchange
reserves) at the country's monetary authority .

 Official reserves assets include gold reserves, foreign currencies, SDRs,

reserve positions in the IMF.
 {Special Drawing Rights (SDRs) are potential claims on the freely usable
currencies of IMF members.}

4). Net errors and omissions

 This is the last component of the balance of payments and principally exists to
correct any possible errors made in accounting for the three other accounts

 They are often referred to as "balancing items".

Q.3. Write down in detail role of World Bank towards India ?

Role of World Bank in India GDP is one of the most important parameters to mark
the growth in Indian economy. The World Bank has been aiding the country with
every possible incentive. The activities of the World Bank are like:

The World Bank works in collaboration with a number of development associates

such as the government of India, the bilateral and multilateral donor organizations,
nongovernmental organizations (NGOs), and the private sectors to bring about an
overall welfare of the Indian economy

• The World Bank operates with the help of eminent academics, scientists,
economists, journalists, and teachers, all of those who are sincerely involved
in the execution of various development projects designed to bring about
improvement in the Gross Domestic Product of India
• The World Bank not only implements its own developmental schemes but also
finances various other programs
• One of the most effective and well-organized development plans formulated
by the World Bank in collaboration with the Indian government and civil
society is the Country Assistance Strategy (CAS), introduced in the year 2005
• CAS was incorporated in order to explicit the nature of the assistance provided
by the World Bank to the developmental programmes in India
• Role of World Bank in India GDP includes offering finance in terms of
various loans or credits, which are usually interest-free.

Country Assistance Strategy:

This plan has been successfully carried out for the past four years and is still in the
process. The CAS plan of the World Bank focus upon certain facts like-

• Ensuring a notable infrastructural development

• Proper environment for the betterment of the industrial units
• Providing special benefits to the poor and disadvantaged class of people
• Ensuring a sustainable growth in India's economy

Q 4. Explain following terms in brief:

1).Protectionism

Protectionism is the economic policy of restraining trade between states, through

methods such as tariffs on imported goods, restrictive quotas, and a variety of other
government regulations designed to discourage imports, and prevent foreign take-over
of native markets and companies. This policy is closely aligned with anti-
globalization, and contrasts with free trade, where government barriers to trade and
movement of capital are kept to a minimum. The term is mostly used in the context of
economics, where protectionism refers to policies or doctrines which protect
businesses and workers within a country by restricting or regulating trade with foreign
nations
 2). Tariffs Barriers

Tariffs, which are taxes on imports of commodities into a country or region, are
among the oldest forms of government intervention in economic activity. They are
implemented for two clear economic purposes. First, they provide revenue for the
government. Second, they improve economic returns to firms and suppliers of
resources to domestic industry that face competition from foreign imports.
Tariffs are widely used to protect domestic producers’ incomes from foreign
competition. This protection comes at an economic cost to domestic consumers who
pay higher prices for importcompeting goods, and to the economy as a whole through
the inefficient allocation of resources to the import competing domestic industry.
Therefore, since 1948, when average tariffs on manufactured goods exceeded 30
percent in most developed economies, those economies have sought to reduce tariffs
on manufactured goods through several rounds of negotiations under the General
Agreement on Tariffs Trade (GATT).

3).Non tariff barriers

Non tariff barriers to trade (NTB's) are trade barriers that restrict imports but are
not in the usual form of a tariff. Some common examples of NTB's are anti-dumping
measures oand countervailing duties, which, although they are called "non-tariff"
barriers, have the effect of tariffs once they are enacted.

Their use has risen sharply after the WTO rules led to a very significant reduction in
tariff use. Some non-tariff trade barriers are expressly permitted in very limited
circumstances, when they are deemed necessary to protect health, safety, or
sanitation, or to protect depletable natural resources. In other forms, they are criticized
as a means to evade free trade rules such as those of the World Trade Organization
(WTO), the European Union (EU), or North American Free Trade Agreement
(NAFTA) that restrict the use of tariffs.

Q 5. Role of innovation as a competitive advantage ?

 Role of innovation

Creativity can be defined as problem identification and idea generation whilst

innovation can be defined as idea selection, development and commercialisation.

There are other useful definitions in this field, for example, creativity can be defined
as consisting of a number of ideas, a number of diverse ideas and a number of novel
ideas.

There are distinct processes that enhance problem identification and idea generation
and, similarly, distinct processes that enhance idea selection, development and
commercialisation. Whilst there is no sure fire route to commercial success, these
processes improve the probability that good ideas will be generated and selected and
that investment in developing and commercialising those ideas will not be wasted.
  Innovation and Competitive Advantage

Creativity and Innovation are intricately linked to competitive advantage:

a) There is a positive correlation between new products and market share. This is best
explained by examining what would happen if firms didn’t introduce new products –
Microsoft would almost certainly have lost its dominance if it hadn’t improved on
Windows 95.

b) Firms have to introduce new products as life cycles decrease – the average life span
of a mobile phone is less than a year.

c) Competitors force the introduction of new products – if Nokia didn’t introduce new
mobile phones every year then Motorola or Siemens would.

d) Macro changes push innovation – China’s entry into the WTO meant that Western
firms would face competitions of scale and scope