Part –A

A. Multiple Choice questions –

1. The balance of payments of a country on current account is equal to –

B. Balance of trade plus net invisible exports

2. NAFTA is an example of –
D. Free Trade Area

3. Which one is not an international organization-

D. CBDT

4. The main objective of International Monetary Fund (IMF) was to-

B. Help economically backward countries

5. Which of the following is not an International Financial Institution –

A. ICICI

6. The gains from two nations depend on –

C. Terms of trade

7. Interest payments on loans borrowed abroad are recorded in –

B. Current Accounts

8. Which is not an Indian Multinational Company?

C. Unilever

9. Out of the following, one is not related with WTO

D. TRAI

10. Foreign Exchange and Foreign currencies in India are governed by

C. FEMA Act

11. Which one is called Bretton-wood Twin's

C. IMF and IBRD

12. The world bank is known as

C. IBRD

13. Which one is not the form of FDI

A. Purchase of existing assets in foreign currency.

14. Which one is not on objective of IMF?

C. To finance productive efforts according to peace time requirements

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15. BRICS includes
C. Brazil, Russia, India, China and South Africa

16. IBRD also known as -

A. World Bank

17. In balance of payment accounts, all goods exported and imported are recorded
in
B. Visible Accounts

18. Ultimately ……………. Was replaced by the …………. On 1st January 1995
D. GAAT, WTO

19. Which one is not the form of FDI-

A Purchase of existing assets in foreign currency.
.

20. The theory of Absolute Cost Advantage is given by –

B. Adam Smith

Part-B

Unit-1

1. Write the Answer of the following question –

a. Write modes of Entry into International Business.

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Ans - Some of the modes of entry into international business you can opt for include direct
export, licensing, international agents and distributors, joint ventures, strategic alliance, and
foreign direct investment. 
Each of these entry strategies for international markets are different in terms of the costs
involved, level of risk, level of ease of execution, and the level of reward. I have arranged
these 5 modes of entry into international business on a graph which suggests what are the
trade-offs in each of these entry strategies for international markets.

1. Direct Exporting
Direct exporting involves you directly exporting your goods and products to another
overseas market. For some businesses, it is the fastest mode of entry into the international
business. 
Direct exporting, in this case, could also be understood as Direct Sales. This means you as a
product owner in India go out, to say, the Middle East with your own sales force to reach out
to the customers.

2. Licensing and Franchising 

Companies which want to establish a retail presence in an overseas market with minimal risk,
the licensing and franchising strategy allows another person or business assume the risk
on behalf of the company.
In Licensing agreement and franchise, an overseas-based business will pay you a royalty or
commission to use your brand name, manufacturing process, products, trademarks and other
intellectual properties.
While the licensee or the franchisee assumes the risks and bears all losses, it shares a
proportion of their revenues and profits you.

3. Joint Ventures
A joint venture is one of the preferred modes of entry into international business for
businesses who do not mind sharing their brand, knowledge, and expertise.
Companies wishing to expand into overseas markets can form joint ventures with local
businesses in the overseas location, wherein both joint venture partners share the rewards and
risks associated with the business.

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Both business entities share the investment, costs, profits and losses at the
predetermined proportion.
This mode of entry into international business is suitable in countries wherein the
governments do not allow one hundred per cent foreign ownership in certain industries.

4. Strategic Acquisitions 
Strategic acquisition implies that your company acquires a controlling interest in an
existing company in the overseas market. 
This acquired company can be directly or indirectly involved in offering similar products or
services in the overseas market.
You can retain the existing management of the newly acquired company to benefit from
their expertise, knowledge and experience while having your team members positioned in the
board of the company as well.

5. Foreign Direct Investment 

Foreign Direct Investment involves a company entering an overseas market by making a
substantial investment in the country. Some of the modes of entry into international business
using the foreign direct investment strategy includes mergers and acquisitions, joint ventures
and greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of
the market in the substantially large to justify the investment.
Some of the reasons because of which companies opt for foreign direct investment
strategy as the mode of entry into international business can include:
 Restriction or import limits on certain goods and products.
 Manufacturing locally can avoid import duties.
 Companies can take advantage of low-cost labour, cheaper material.

b. Write Important and scope of International business.

Ans. International business refers to the trade of goods, services, technology, capital and/or
knowledge across national borders and at a global or transnational scale.
It involves cross-border transactions of goods and services between two or more countries.
Transactions of economic resources include capital, skills, and people for the purpose of the
international production of physical goods and services such as finance, banking, insurance,
and construction. International business is also known as globalization.

Impotance of International Business are

 Most companies are either international or domestic are competing with international
companies.
 Modes of operations may differ from those used domestically.
 The best way of conducting business may differ by country.
 An understanding helps you make better career decisions.
 An understanding helps you decide what govt. policies to support.

Scope of International Business are:

 Merchandise exports and imports

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Merchandise means goods that are tangible, i.e., those that can be seen and touched. When
viewed from this perceptive, it is clear that while merchandise exports mean sending tangible
goods abroad, merchandise imports means bringing tangible goods from a foreign country to
one’s own country.
 Service exports and imports

Service exports and imports involve trade in intangibles. It is because of the intangible aspect
of services that trade in services is also known as invisible trade.
 Licensing and franchising

Permitting another party in a foreign country to produce and sell goods under your
trademarks, patents or copyrights in lieu of some fee is another way of entering into
international business. It is under the licensing system that Pepsi and CocaCola are produced
and sold all over the world by local bottlers in foreign countries.
 Foreign investments

Foreign investment is another important form of international business. Foreign investment

involves investments of funds abroad in exchange for financial return. Foreign investment
can be of two types: direct and portfolio investments.
 Monopoly Power

It might arrive from patent rights, technological advantages, product segregation etc. Another
reason for internationalization is limited market information.

c. Why the studying International Business is Important?

Ans. There are many benefits of studying International Business Administration: 

1. Gain an international perspective

You will study global challenges companies face, looking at international boundaries, trade,
global economics and how to negotiate with diverse cultures. This approach to problem
solving will broaden your world view and help you understand different perspectives. IBA is
a popular degree among international students so even during your studies you will gain
valuable experience of working with people from all over the world.  

2. Develop key management skills

Studying an international business administration degree involves working on individual and
group projects, writing reports and presenting your ideas. You will develop essential
management skills, such as:

 Leadership
 strategic thinking
 communication 
 delegation
 problem solving
 decision making 
 organisation 
 presenting 

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  reporting.

3. Boost your employability

International Business Administration is a broad degree and introduces you to a range of
skills that employers are looking for. As you progress through your degree programme you
will begin to shape your course and specialise in the business functions you are most
interested in. IBA graduates can look forward to a wide range of job opportunities in
management, marketing, accounting, corporate finance, consultancy or even human
resources.

4. Solve commercial challenges

Study business administration and you will analyse global and local business challenges and
find strategic solutions. Through researching international markets and negotiating with other
cultures and countries, you will develop the skills needed to follow a career in consultancy or
management for a multinational company.

5. Build your business knowledge

How to manage diverse teams, improve financial performance, research international
competitors and redesign business processes are just some examples of what you’ll learn
during an IBA. This core knowledge is essential to the running of any business, and you will
further develop your skills through elective modules in key areas.

d. Why Companies Engage in International Business?

Ans. Companies are engage in International Business for following reasons:

 To Expand Sales
The first and foremost reason is that western multinationals would like to expand their sales
and acquire newer markets so that they can record impressive growth rates. Considering the
fact that the developing countries are peopled with consumers who have aspirations to
western lifestyles, it is, but natural that the western companies would like to target this need
and hence, expand into these markets. Moreover, with declining sales in one region, the
western companies hope to recoup the losses by expanding into other markets. Further, the
attractive rates of return in the emerging markets are another reason as well.

 Acquire Resources
This is one of the most important reasons for companies to expand internationally. Because
the developing and emerging countries have large deposits of minerals, metals and land for
agricultural production, the western multinationals eye these markets in order to get access to
the resources. This is the reason why many international businesses operate in Africa and
South Asia where the humungous deposits of minerals and metals are attractive for the profits
that these multinationals can make. Many emerging markets and developing countries do not
have the expertise or the resources needed to tap their reserves of these minerals and metals.
Hence, they welcome the multinationals with open arms as it gives them royalties and other
payments to grow their economies. As can be seen from the expansion of Vedanta and the
South Korean steel company (POSCO) into India, the eagerness to tap the resources is one of
the most important reasons for expansion.

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  Minimize Risk
Often, businesses expand internationally to offset the risk of stagnating growth in their home
country as well as in other countries where they are operating. For instance, ever since the
Western countries saw their growth rates slip to below 3% (in cases recording negative
growth i.e. depression), the Western multinationals have made a beeline to the emerging
markets that are growing in excess of 5%. Since firms exist to make profits and grow their
bottom lines, it is but natural for them to expand internationally into countries that have better
growth rates than their home country. Further, by operating in a basket of countries as
opposed to a few, they are able to manage political, economic, and societal risks better. We
had discussed the characteristics of these risks in earlier articles. Because they vary from
country to country, it makes sense to spread risk across countries and diversify the portfolio
rather than placing all eggs in one basket.

 Closing Thoughts
Though this article has concentrated on western companies alone, it is the fact that many
Chinese companies are aggressively expanding into African and Asian markets. In the same
way in which Japanese companies conquered Western markets with superior quality, low
cost, and exemplary customer service, the Chinese companies hope to target the emerging
and developed markets with the same vigor and passion that has made China the factory of
the world. These themes would be explored in detail in subsequent articles and this article has
given the bare bones reasons why businesses expand internationally.

e. What is Globalization? Explain it.

Ans: Globalization is the word used to describe the growing interdependence of the world’s
economies, cultures, and populations, brought about by cross-border trade in goods and
services, technology, and flows of investment, people, and information. Countries have built
economic partnerships to facilitate these movements over many centuries. But the term
gained popularity after the Cold War in the early 1990s, as these cooperative arrangements
shaped modern everyday life. This guide uses the term more narrowly to refer to
international trade and some of the investment flows among advanced economies,
mostly focusing on the United States.
The wide-ranging effects of globalization are complex and politically charged. As with major
technological advances, globalization benefits society as a whole, while harming certain
groups. Understanding the relative costs and benefits can pave the way for alleviating
problems while sustaining the wider payoffs.

Unit-2

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a. Write a short note on tariff and non tariff barriers.

Ans: Tariff barriers means a tax on imported goods to restrict imports in the country. A tariff
barriers is a price based policy to restrict trade because it changes the price of import paid by the
importer. Tariff or customs duty may be called a tax imposed by a government on physical goods as
they move into or out of the country. Tariff barriers are levied either purely to collect revenue to meet
the government expenditure or to protect domestic industries against foreign competition.

Non-tariff measures (NTMs) are policy measures — other than ordinary customs tariffs — that can potentially have
an economic effect on international trade in goods, changing quantities traded, or prices or both.
Nontariff barriers include quotas, embargoes, sanctions, and levies. As part of their political
or economic strategy, large developed countries frequently use nontariff barriers to control the amount
of trade they conduct with other countries.

b. What is counter tread?

Ans: Countertrade is a system of international trading that helps governments reduce imbalances
in trade between them and other countries. It involves the direct or indirect exchange of goods
for other goods instead of currency.
Countertrade is a reciprocal form of international trade in which goods or
services are exchanged for other goods or services rather than for hard currency. This type of
international trade is more common in developing countries with limited foreign exchange or
credit facilities.

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Countertrade is often used when a foreign currency is in short supply or when a country
applies foreign exchange controls, which are limits imposed on the availability of foreign
currencies to importers for the purchase of foreign products. Countertrade is often used by
developing countries to control trade and as a development technique.

Unit-3

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1. Write the Answer of the following question –
a. What is Foreign Direct Investment?

Ans- Foreign direct investment (FDI) is when a company owns another company in a
different country. FDI is different from when companies simply put their money into assets in
another country—what Foreign direct investment (FDI) is when a company owns another
company in a different country. FDI is different from when companies simply put their
money into assets in another country—what economists call portfolio investment.
With FDI, foreign companies are directly involved with day-to-day operations in the other
country. This means they aren’t just bringing money with them, but also knowledge, skills
and technology. call portfolio investment. With FDI, foreign companies are directly involved
with day-to-day operations in the other country. This means they aren’t just bringing money
with them, but also knowledge, skills and technology.

b. What is foreign Exchange?

Ans- Foreign exchange is the exchange of one currency for another or the conversion of one
currency into another currency. Foreign exchange also refers to the global market
where currencies are traded virtually around the clock. ... The term foreign exchange is
usually abbreviated as "forex" and occasionally as "FX."

c. What is Cross Rate Mechanism?

Ans-A cross rate is the currency exchange rate between two currencies when neither are the
official currencies of the country in which the exchange rate quote is given. Foreign exchange
traders often use the term to refer to currency quotes that do not involve the U.S. dollar,
regardless of what country the quote is provided in.

d. What is Spot Rate?

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Ans- A spot rate is a contracted price for a transaction that is taking place immediately (it is
the price on the spot).The spot rate is the price quoted for immediate settlement on a
commodity, a security or a currency. The spot rate, also referred to as the "spot price," is the
current market value of an asset at the moment of the quote.

Depending on the item being traded, spot prices can indicate market expectations of future
price movements in different ways. For a security or non-perishable commodity (e.g. silver),
the spot price reflects market expectations of future price movements. In contrast,
a perishable or soft commodity does not allow this arbitrage – the cost of storage is
effectively higher than the expected future price of the commodity. As a result, spot prices
will reflect current supply and demand, not future price movements.

e. Write about factors Affecting Exchange Rates.

Ans-
1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a
lower inflation rate than another's will see an appreciation in the value of its currency. The
prices of goods and services increase at a slower rate where the inflation is low. A country
with a consistently lower inflation rate exhibits a rising currency value while a country with
higher inflation typically sees depreciation in its currency and is usually accompanied by
higher interest rates.

 
2. Interest Rates
Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest
rates, and inflation are all correlated. Increases in interest rates cause a country's currency to
appreciate because higher interest rates provide higher rates to lenders, thereby attracting
more foreign capital, which causes a rise in exchange rates.

3. Country’s Current Account / Balance of Payments

A country’s current account reflects balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc. A deficit in
current account due to spending more of its currency on importing products than it is earning

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through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of
its domestic currency.

 4. Government Debt

Government debt is public debt or national debt owned by the central government. A country
with government debt is less likely to acquire foreign capital, leading to inflation. Foreign
investors will sell their bonds in the open market if the market predicts government debt
within a certain country. As a result, a decrease in the value of its exchange rate will follow.
 

5. Terms of Trade
Related to current accounts and balance of payments, the terms of trade is the ratio of export
prices to import prices. A country's terms of trade improves if its exports prices rise at a
greater rate than its imports prices. This results in higher revenue, which causes a higher
demand for the country's currency and an increase in its currency's value. This results in an
appreciation of exchange rate.

6. Political Stability & Performance

A country's political state and economic performance can affect its currency strength. A
country with less risk for political turmoil is more attractive to foreign investors, as a result,
drawing investment away from other countries with more political and economic stability.
Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic
currency. A country with sound financial and trade policy does not give any room for
uncertainty in value of its currency. But, a country prone to political confusions may see a
depreciation in exchange rates.

 
7. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing its
chances to acquire foreign capital. As a result, its currency weakens in comparison to that of
other countries, therefore lowering the exchange rate.

 
8. Speculation
If a country's currency value is expected to rise, investors will demand more of that currency
in order to make a profit in the near future. As a result, the value of the currency will rise due
to the increase in demand. With this increase in currency value comes a rise in the exchange
rate as well.

 
Conclusion:
All of these factors determine the foreign exchange rate fluctuations. If you send or receive
money frequently, being up-to-date on these factors will help you better evaluate the optimal
time for international money transfer. To avoid any potential falls in currency exchange rates,
opt for a locked-in exchange rate service, which will guarantee that your currency is
exchanged at the same rate despite any factors that influence an unfavorable fluctuation
UNIT-4

Question a -: Write advantages and objectives of WTO.

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Answer -:The WTO is a body designed to promote free trade through organizing trade
negotiations and act as an independent arbiter in settling trade disputes. To some extent the
WTO has been successful in promoting greater free trade.
Advantages of having WTO and promoting free trade are -:

1. Lower prices for consumers. Removing tariffs enables us to buy cheaper imports

2. Free trade encourages greater competitiveness. Through free trade, firms face a
higher incentive to cut costs. For example, a domestic monopoly may now face competition
from foreign firms.

3. The law of comparative advantage states that free trade will enable an increase in
economic welfare. This is because countries can specialize in producing goods where they
have a lower opportunity cost.

4. Economies of scale. By encouraging free trade, firms can specialize and produce a
higher quantity. This enables more economies of scale, this is important for industries with
high fixed costs, such as car and aero plane manufacture. 

The major objectives of WTO are –:

1. To improve the standard of living of people in the member countries.

2. To ensure full employment and broad increase in effective demand.
3. To enlarge production and trade of goods.
4. To increase trade of services
5. to insure utilization of world resources
6. to protect the enviorment
7. to accept the concept of sustainable development

Question b -: discuss the function and role of world bank.

Answer -:
The International Bank for Reconstruction and Development (IBRD), commonly referred to
as the World Bank, is an international financial institution whose purposes include assisting
the development of its member nation’s territories, promoting and supplementing private
foreign investment and promoting long-range balance growth in international trade.

The following roles are assigned by the World Bank:

1. To provide long-run capital to member countries for economic reconstruction and

development.
2. To induce long-run capital investment for assuring Balance of Payments (BoP)
equilibrium and balanced development of international trade.
3. To provide guarantee for loans granted to small and large units and other projects of
member countries.
4. To ensure the implementation of development projects so as to bring about a smooth
transference from a war-time to peace economy.
5. To promote capital investment in member countries by the following ways;
6. (a) To provide guarantee on private loans or capital investment.

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(b) If private capital is not available even after providing guarantee, then IBRD provides
loans for productive activities on considerate conditions.

World Bank is playing main role of providing loans for development works to member
countries, especially to underdeveloped countries. The World Bank provides long-term loans
for various development projects of 5 to 20 years duration.

The main functions can be explained with the help of the following points:

1. World Bank provides various technical services to the member countries. For this purpose,
the Bank has established “The Economic Development Institute” and a Staff College in
Washington.
2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.
3. The quantities of loans, interest rate and terms and conditions are determined by the Bank
itself.
4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the
member country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the
loan was sanctioned.
6. Bank also provides loan to private investors belonging to member countries on its own
guarantee, but for this loan private investors have to seek prior permission from those
counties where this amount will be collected.

Question c -: introduces to BIMSTC and write its objectives.

Answer -:The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic

Cooperation (BIMSTEC) is an international organisation of seven nations of South
Asia and Southeast Asia, housing 1.5 billion people and having a combined gross domestic
product of $3.5 trillion (2018).[4][5] The BIMSTEC member states
– Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, and Thailand[6] – are among
the countries dependent on the Bay of Bengal.
Fourteen priority sectors of cooperation have been identified and several BIMSTEC centres
have been established to focus on those sectors. [4][7] A BIMSTEC free trade agreement is
under negotiation (c. 2018), also referred to as the mini SAARC.
Leadership is rotated in alphabetical order of country names. The permanent secretariat is
in Dhaka, Bangladesh.

There are 14 main sectors of BIMSTEC along technological and economic cooperation
among south Asian and southeast Asian countries along the coast of the Bay of Bengal.
1. Trade & Investment
2. Transport & Communication
3. Energy
4. Tourism
5. Technology
6. Fisheries
7. Agriculture
8. Public Health
9. Poverty Alleviation
10. Counter-Terrorism & Transnational Crime
11. Environment & Disaster Management

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12. People-to-People Contact
13. Cultural Cooperation
14. Climate Change

Question d -: What is IMF? Write benefits of becoming IMF member of India.

Answer -:The International Monetary Fund (IMF) is an international organization

headquartered in Washington, D.C., consisting of 189 countries working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce poverty around the world while
periodically depending on the World Bank for its resources. Through the fund and other
activities such as the gathering of statistics and analysis, surveillance of its members'
economies, and the demand for particular policies, the IMF works to improve the economies
of its member countries.
 The organization's objectives stated in the Articles of Agreement are: to promote
international monetary co-operation, international trade, high employment, exchange-rate
stability, sustainable economic growth, and making resources available to member countries
in financial difficulty.
 IMF funds come from two major sources: quotas and loans. Quotas, which are pooled funds
of member nations, generate most IMF funds. The size of a member's quota depends on its
economic and financial importance in the world. Nations with larger economic importance
have larger quotas. The quotas are increased periodically as a means of boosting the IMF's
resources in the form of special drawing rights.

India also got the following benefits of becoming the IMF members such as :

1. Independence of the Indian Rupee

2. Membership of the World Bank
3. Availability of Foreign Currencies
4. Reputation in International Circle
5. Guidance and Advice
6. Timely Help
7. Freedom from Sterling
8. Sale and Purchase of Foreign Exchange
9. Economic Consultation 10. Help during Emergency.

Question e -: Write about UNCTAD and its functions.

Answer -: The need for reducing disparities between the rich and the poor was keenly felt at
the global level. Particularly developing countries in Asia, Africa and Latin America realized
the importance of global efforts to be undertaken in this direction. In order to fulfill the
above, the United Nations Conference on Trade and Development (UNCTAD) came to be
established on 30th December, 1964. The UN session aimed at attaining a minimum of 5
percent annual growth rate for the developing countries by the end of 1970. It sought the help
of developed countries to attain the above objective.
In 1960s, most of the developed countries became independent of their formal imperial
masters. These nations launched programmes of rapid industrialization of their backward
economies.

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 The UNCTAD was set up as the permanent organ of the UN General Assembly. It has its
own structure of subsidiary bodies and a full time secretariat. It has established a Trade and
Development Board to take policy decisions when the conference is not in session. It has 155
members, elected from among its members in proportion to geographical distribution. The
Board meets twice a year.

The main functions of the UNCTAD are as follows:

I. To promote international trade between the developed and under-developed countries

having diverse socio-economic organisations with special emphasis upon the
accelerated development of the under-developed countries.
II. To formulate the principles and policies concerning international trade and related
problems of economic development.
III. To make proposals for putting the said principles and policies into effect and to adopt
measures that may be relevant to this end.
IV. To generally review and facilitate the coordination of activities of other institutions
within the fold of the United Nations related to international trade and economic
development.

UNIT-5

Question a -: what do you mean by MNC’s?

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Answer -: A multinational corporation (MNC) has facilities and other assets in at least one
country other than its home country. A multinational company generally has offices and/or
factories in different countries and a centralized head office where they coordinate global
management. These companies, also known as international, stateless, or transnational
corporate organizations tend to have budgets that exceed those of many small countries.

A multinational corporation, or multinational enterprise, is an international corporation that

derives at least a quarter of its revenues outside its home country. Many multinational
enterprises are based in developed nations. Multinational advocates say they create high-
paying jobs and technologically advanced goods in countries that otherwise would not have
access to such opportunities or goods. However, critics of these enterprises believe these
corporations have undue political influence over governments, exploit developing nations,
and create job losses in their own home countries.

Types of Multinationals
There are four categories of multinationals that exist. They include:
 A decentralized corporation with a strong presence in its home country.
 A global, centralized corporation that acquires cost advantage where cheap resources
are available.
 A global company that builds on the parent corporation’s R&D.
 A transnational enterprise that uses all three categories.

Meanwhile, a multinational enterprise controls and manages plants in at least two countries.
This type of multinational will take part in foreign investment, as the company invests
directly in host country plants in order to stake an ownership claim, thereby avoiding
transaction costs. Apple Inc. is a great example of a multinational enterprise, as it tries to
maximize cost advantages through foreign investments in international plants. 

Question b -: Write advantages and limitations of MNC’s.

Answer -: Advantages of MNCs

 Access to Consumers – Access to consumers is one of the primary advantages that
the MNCs enjoy over companies with operations limited to smaller region. Increasing
accessibility to wider geographical regions allows the MNCs to have a larger pool of
potential customers and help them in expanding, growing at a faster pace as compared to
others.
 Accesses to Labor – MNCs enjoy access to cheap labor, which is a great advantage
over other companies. A firm having operations spread across different geographical areas
can have its production unit set up in countries with cheap labor. Some of the countries where
cheap labor is available is China, India, Pakistan etc.

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

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 Overall Development – The investment level, employment level, and income level of
the country increases due to the operation of MNC’s. Level of industrial and economic
development increases due to the growth of MNCs.
 Technology – The industry gets latest technology from foreign countries through
MNCs which help them improve on their technological parameter.
  R&D – MNCs help in improving the R&D for the economy.
 Exports & Imports – MNC operations also help in improving the Balance of
payment. This can be achieved by the increase in exports and decrease in the imports.
 MNCs help in breaking protectionalism and also helps in curbing local monopolies, if
at all it exists in the country.

Limitations of MNCs
 Uncertainty:
MNCs often scale down their production facilities and close the operations in situation of
economic uncertainty. They practise hire and fire; hence, people employed in MNCs often
lose their jobs.
Such uncertainty may lead to internal problems in the country.
 Control:
MNCs often exert control over the local government, both economically and politically. Such
control may even go against the interest of the nation as a whole.
 Transfer Pricing:
This is done by lowering the internal price structure. Through this, MNCs can reduce their
profits in the countries, where they operate and thus deprive their host countries from the
legitimate tax payouts.
 Environmental Imbalance:
MNCs can create environmental imbalances extracting natural resources and polluting the
environment of the host countries.
 Killing Domestic Producers:
MNCs can kill the local organizations while competing with the local firms.
 Profit Repatriation:
MNCs may repatriate their profits to their own country of origin, and thereby, deprive the
host countries from the benefit of new investment.
 Transnationalism:
The term ‘transnationalism’ indicates specific strategies of MNC/TNC to control production
facilities in more than one country through direct foreign investment. A very recent example
is Ford and General Motors.
These companies enjoy specific advantage of global market, availing low-cost transshipment
of their finished goods in markets where they can get a bargain-able price. To take an
example, in China many multinationals have their own production facilities not for China
market but for other markets, where the price offer is competitive.
 Micro-Multinationals:
Organizations of this type try to become global through Internet-based communication tools.
Basically, they are small business entities (mostly software companies) and coordinate their
activities across the borders through Internet. They establish their dispersed virtual business
with the employees, clients and resources located in various countries.
They enjoy economy of scale, as their cost of operation becomes relatively less for the use of
cheaper Internet, telephony and lower travelling costs. Hence, this type of organizations
quickly grow, creating unique business opportunities.

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 Globally Integrated Enterprises:
The globally integrated enterprise is a term coined in 2006 by Sam Palmisano, the CEO of
IBM Corp. This type of enterprises strategically integrates their production and value chain
worldwide. This is also known as the multinational model of the 20th century. For IBM, this
was a successful model to grow internationally, understanding customers, local market
requirements and cultivating local talent.
Now such enterprises can locate functions anywhere in the world, based on the right cost,
skills and environment. Palmisano mentions the Law of Global Integration, driven by three
forces—economics, expertise and openness.

Question c -: Why MNCs are existing in internartional business?

Answer -:Multinational enterprises are those enterprises which carry its production activities
in more than one country. These companies make sure of the supply of raw material to the
other country they are operating in.

Many of the multinational operate in different country because of many reasons such as low
labour costs, serving a huge market, cutting of their taxes and production costs, innovation in
technology and exploitation of resources. Today we are living in borderless world as there are
no boundaries that exist between the countries or nations. Globalisation is the new trend
changing the political and cultural order of the world.

Every operation that has been carried out by companies goes around the world. Innovation is
growing very fast and so do competitiveness. Globalisation can be define as “the increase in
the frequency and duration of linkages between countries leading to similarities in activities
of individuals, practices of companies, and policies of governments”

From the statement we can say that companies go global because of many reasons as now the
countries are linking to each other to share the information and wealth.irms become
multinational because they want to grow, expand and diversify their operations. Operating in
their home country won’t satisfy them so they go global. Using the resources of their home
country make it obsolete or bound them in a limit to not to go further. Then firm decides to
go global by making investment on their further growth.

Conclusion
At last it can be said that, the role of MNC in developing itself and the nations are very
important. It in one way helps to build and economy by various advantages. At the same time
it can have different repercussions if not properly strategized.
The above description gives all the major points in making of an MNC. Also the essay
describes the various parameters needed in making of an MNC.

Question d -: Werite main modes of foreign investment in MNCs.

Answer -: The main modes of foreign investment are

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 1 . Agreement with Local Firms for Sale of MNCs Products

A multinational firm can enter into an agreement with local firms for exporting the product
produced by it in the home country to them for sale in their countries. In this case, a
multinational firm allows the foreign firms to sell its product in the foreign markets and
control all aspects of sale operations.

2. Setting up of Subsidiaries:

The second mode for investment abroad by a multinational firm is to set up a wholly owned
subsidiary to operate in the foreign country. In this case a multinational firm has complete
control over its business operations ranging from the production of its product or service to
its sale to the ultimate use or consumers.A subsidiary of a multinational corporation in a
particular country is set up under the company act of that country. Such subsidiary firm
benefits from the managerial skills, financial resources, and international reputation of their
parent company. However, it enjoys some independence from the parent company.

3. Branches of Multinational Corporation:

Instead of establishing its subsidiaries, Multinational Corporation can set up their branches in
other countries. Being branches they are not legally independent business unit but are linked
with their parent company.

4. Foreign Collaboration or Joint Ventures:

Thirdly, the multinational corporations set up joint ventures with foreign firms to either
produce its product jointly with local companies of foreign countries for sale of the product in
the foreign markets. A multinational firm may set up its business operation in collaboration
with foreign local firms to obtain raw materials not available in the home country. More
often, to reduce its overall production costs multinational companies set up joint ventures
with local foreign firms to manufacture inputs or subcomponents in foreign markets to
produce the final product in the home country.

Question e -: Write disadvantages of MNCs.

Answer -:Disadvantages of MNCs

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

 Intellectual Property – Multinational companies also face issues pertaining to the

intellectual property that is not always applicable in case of purely domestic firms.

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

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

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

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

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

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