IBO-01 SOLVED ASSIGNMENT FOR MCOM

Course Code: IBO-01

Course Title: International Business Environment
Assignment Number: IBO-01/TMA/2017-18
Last Date of Submission: 15th March, 2018 (for Jul-2017 batch)
: 15th Sept, 2018(for Jan-2018 batch)

Question No.1 What are the underlying principles of balance of payments? Explain various
components of balance of payments with examples.

Solution: UNDERLYING PRINCIPLES OF BALANCE OF PAYMENTS

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The balance of payments is part of a larger system of social accounts recording the economic
activity of an economy and its various sections. The social accounts relate to economic
transactions not only within the domestic economy but also between the domestic economy and
the rest of the world.

Balance of payments is concerned with economic transactions, Five basic types of economic
transactions may be distinguished. They are:

a) Purchases and sales of goods and services against financial items i.e. the interchange of goods
and services against claims and monetary gold;

b) Barter, i.e. the interchange of goods and services against other goods and services;

c) The interchange of financial items against other financial items e.g. sale of securities for
money, or the repayment of commercial debts in money;

d) The provisions or acquisition of goods and services without requital, e.g. grants in 1aid;

e) The provision or acquisition of financial items without requital, e.g. in payment of taxes or as
a gift

The social accounts have common rules of credit and debit for recording economic transactions.
Credit entries are made for the provision of goods and services or of financial items, whether
they are sold, bartered, or acquired without requital. Debit entries are made for acquisition of
goods and services or of financial items, whether these items are purchased, obtained by barter,
or acquired without requital. For the first three types of transactions, the rules immediately result
in equal credit and debit entries. For the remaining types, a credit entry for goods and services or
financial items is matched by a debit entry for an unrequited transfer, and vice versa.
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Now, Residents term is certainly not identical with the term “citizen” though there is normally a
substantial overlap. As regards individuals, „residents‟ means those individuals whose general
center of interest can be said to rest in the given economy. They consume goods and services,
participate in the productive process or otherwise carry out economic activity within the territory
of the country on other than a temporary basis. Members of diplomatic and consular staffs and

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official mission, members of armed forces stationed abroad, and citizens undergoing medical
treatment or studying abroad are considered residents of their own rather than of the country
where they are staying. The extent to which other citizens living abroad are treated as residents
(travellers) or foreigners (emigrants) depends upon a number of factors such as permanence of
their living and the extent to which they shift their general “center of interest”. As regards non-
individuals a set of conventions have been evolved. For example, governments and non profit
bodies servicing resident individuals are residents of the respective countries. For, enterprises,
rules are somewhat complex particularly those concerning unit of corporate branches of foreign
multinationals, According to IMF rules, these are considered to be residents of countries where
they operate, though they are not a separate legal entity from the parent located abroad,
International organizations like the UN, the World Bank, the IMF are not considered to be
residents of any national economy even though their offices may be located within the territories

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of any number of countries.

COMPONENTS OF BALANCE OF PAYMENTS

The balance of payments is a collection of accounts conventionally grouped into three main
categories with subdivisions in each. Three main categories are:

1. The Current Account: Under this are included imports and exports of goods and services and
unilateral transfers, which reflect government and private gifts and grant

a. Merchandise: Merchandise exports valued on F.O.B.. (Free on board) basis, on private and
government account are the credit entries data for these items. They are calculated from the
various documents exporters fill and submit to designated authorities.

Imports valued at C.I.F. (Cost, Insurance and Freight) are the debit entries. The difference
between the totals of credits and debits appears in the „Net‟ column. This is the balance on
Merchandise Trade Account, a deficit, if negative and a surplus if positive.

b. Non-Monetary Gold Movements: Gold is both a commodity and a financial asset. It is

treated as a financial assets when it is held by the monetary authority. “Monetisation” of gold
refers to the transaction when the monetary authority acquires gold, from residents and non
residents to add to reserves. This get recorded as a debit entry in reserve account and the
offsetting credit entry is made in the non monetary gold account. Conversely, when the monetary
authority acquires gold demonetisation, reserve account shows a credit and the non monetary
gold movement account shows a debit. Gold imported (or exported) by other agencies form a
part of the merchandise trade account.

c. Invisibles: Credits under „invisibles‟ consist of services rendered by residents to non residents,
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income earned by residents on their ownership of foreign financial assets (interest, dividends
etc.), income earned from the use, by non residents, of non-financial assets such as patents and
copy rights owned by residents and the offsetting entries to the cash and in kind gifts received by
residents from non-resident. Debits consist of same items with the roles of residents and non-
residents reversed. A few examples may be cited as follows.

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The net balance between the credit and debit entries under the heads merchandise, non-monetary
gold movements taken together is the Current Account Balance. The net balance is taken as
deficit, if negative (debits exceed credits), a surplus, if positive (credits exceed debits).

2. The Capital Account : Under this are grouped transactions leading to changes in foreign
financial assets and liabilities of the country. It records the changes in the levels of international
financial assets and liabilities. The various classifications within the capital account are private,
banking and official. Distinction is also made between short term and long term capital flaws,
loans with original maturity of more than one year are classified as long term flows. Long term
foreign investment measures all capital investments made between countries, including both
direct foreign investment and purchases of securities with maturities exceeding one year. Short
term foreign investment measures flows of funds invested in securities with maturities of less

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than one year. Because of the short maturity, investors of such securities will often maintain their
funds in a given country for only a short time, causing short term investment flows to be quite
volatile over time.

a. Private-capital Flows: These flows consist of several type of transactions. Among them are:
long term loans received by individuals and companies (other than banking institutions),
investment by foreigners in the joint stock companies in India, repayment of long term loans by
non resident, obtained from residents, repatriation of Indian investments abroad, deposits in non-
resident (external) rupee accounts and in foreign currency non-resident accounts. Capital
outflows (debit entries) comprise investments by residents in shares and other financial assets
abroad, repayment of foreign loans by residents, repatriation of foreign investments in India,
long term loans made to non-residents and so forth. Short tern capital flows on private account
consists of short term borrowings and investments.

b. Banking: Capital movements in banking sector covers changes in foreign assets and liabilities
of commercial banks, whether privately owned or government owned and cooperative banks.
Assets consist of balances held by banks with their foreign branches or correspondent banks
abroad, and rupee assets representing loans granted by Indian banks to branches of foreign banks
in India and correspondent banks. Liabilities consist of Indian banks‟ debit balances in their
foreign accounts and credit balances held by non resident banks and few other institutions with
banks in India. Any increase in assets (or decrease in liabilities) will be a debit entry while a
decrease in assets (or increase in liability) a

c. Official Capital flows: this category covers transactions affecting foreign financial assets and
liabilities of the government of India and the Reserve Bank of India, excluding transactions
relating to official reserve assets. Government of India‟s purchase and repurchase from the IMF
are shown in a separate account. Loans received by the Government of India from foreign
governments and international institutions are treated as credit entries and amortization or
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repayment of such loans as debit.

3. The Reserve Account : In principle, this is not different from the capital account in as much
as it relates to financial assets and liabilities. However, in this category, only reserve assets are
included. These are the assets which the central bank of the country uses to settle the deficits and
surpluses that arises in the other two categories. The IMF account contains, as mentioned above,

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purchases (credits) and repurchases from the IMF. SDRs (Special Drawing Rights) are a reserve
asset created by the JMF and allocated to member countries from time to time. Subject to IMF
regulations, SDRs can be used to settle international payments between monetary authorities of
member countries. .An allocation is a credit and the utilization is a debit. The reserves and
Monetary Gold account increases (debits) and decreases (credits) in reserve assets. Reserve
assets consist of RBI holdings of gold and foreign exchange (in the form of balances with foreign
central banks and investments in foreign governments securities) and Government‟s holdings of
SDRs

Question No.2 a) Describe the effects of globalization on the world economy.

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Solution: The impact of globalization has undoubtedly led to economic growth.

In specific terms, the effect of globalization are as follows:

1. The major effect of globalization is that the global economy is becoming more integrated day by
day.
2. The volume of world trade has grown at a faster rate than the volume of world output.
3. There has been a trend of lowering the barriers to the free flow of goods, services and capital
among countries.
4. Foreign direct investment has been playing an important role in the global economy. In order to
become competitive, company have started investing in overseas operations.
5. Global operations have led to the emergence of Multilateral Trading Systems
6. Imports are penetrating deeper into the world’s largest economies as well.
7. The growth of world trade, foreign direct investment and imports leds to more foreign
competition in the domestic markets.
8. In order to compete with the foreign players, domestic firms are required to enbance the
production and distribution capabilities.
9. Companies have started looking the wodd as a market for their products.
10. Companies have started dispersing their manufacturing, marketing and research facilities
around the globe where cost and skill conditions are most favourable.
11. Opportunities have been increasing for the firms.
12. Innovations have started spreading faster.

b) Explain various approaches to globalization of the firm

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Solution:

From the point of view of international business globalization of the firm is very important.
There have been a number of approaches to globalization of the firm which are given below:

1. The Globalization according to Levitt of Harvard Business School was referred to as an alleged
consequence of markets in the world. It is the emergence of global markets for standardized

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consumer products enabling a firm to benefit from enormous economics of scale in production,
distribution, marketing and management. The impact of technology would be toward further
standardization. According to Levitt a successful globalized corporation does not abjure
customerization or differentiation and for the requirements of markets that differ in product
preferences, spending patterns and shopping preferences. Global Corporations accept these
differences only reluctantly.
2. In the Japanese view as presented by Ohame Kenichi Globalization is understood as a ‘business
chain’. A business chain comprises a firm’s main activities such as Research and Development,
engineering, manufacturing, marketing and sales and services. He distinguishes five steps in
globalization of a firm. Each of these steps involves the transfer of activities in the business
chain to a foreign location. it is in reference to development in the 1980s. Since 1980s had been
dominated by unprecedented flows of foreign direct investment as has been seen, mergers and

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acquisitions and strategic alliances as well as by ever-fiercer competition from Japanese and
South East Asian firm.; Ohame argued that these developments would constitute a new era in
international business. Companies and customers horizons would stretch, ‘beyond national
borders’, they would become global citizens.

a) Export: The entire range of activities is performed at home. Exports are often handled by an
exclusive local distributor.

b) Direct Sales and Marketing: If the product is accepted in the overseas market, it will lead to
establishment of an overseas sales campaign to provide better marketing, sales and service &
functions to the customers.

c) Direct Production : This step involves the establishment of local production activities.

d) Full Autonomy : All activities of the business chain as mentioned above are transformed to
the key national markets.

e) Global Integration : In the ultimate stage of globalization. according to Ohame, companies

conduct their R & D and finance their cash requirements on a worldwide scale and recruit their
personnel from all over the world.

3. Globalization is also presented in management centred concepts especially of Japanese firms (i)
Management Centred around the head office; (ii) Management delegated to overseas operating
units (iii) Management centering overseas operating units with regional coordination; and (iv)
Management with a global perspective and conscious integration of total system and sub-
system.
4. The fourth globalization strategy that of global supplies is one of export centred global
expansion. All systems such as R & D, procurement, sales, marketing, distribution and the
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organizational structure are designed so as to enhance export of products manufactured in the
home country in such an operation.

This process consists of four stages: (i) creation of a global vision, (ii) integration of overseas
organization and establishment of multiple corporate headquarters; (iii) promotion of a global
hybridization process; and (iv) globalization of personnel administration and the cultivation of
entrepreneurial middle management.

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5. Porter’s View of Globalization: An industry can be defined as global if there is some competitive
advantage to integrating activities on a worldwide basis. To diagnose the sources of competitive
advantage in any context, domestic or global, it is necessary to adopt a disaggregated view of
the firm which Porter calls ‘Value Chain’. “Every firm is a collection of discrete activities
performed to do business in its industry”, which he calls ‘value activities’. The activities
performed by a firm include such things as sales people selling the product, service technicians
performing repairs, scientists in the laboratory designing products, processes or accountants
keeping books. These functions are technical and physically distinct. The firm’s value chain
resides in a larger stream of activities termed as value system. Suppliers have value chains that
provide the purchased inputs to the firm’s chain, buyer’s have value chains in which the firm’s
product or service is employed, channels have value chains through which the firm’s product or
service passes. The connections among these activities become essential to competitive

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advantage. Value chain concept needs the notion of competitive scope. Competitive scope is the
breadth of activities the firm performs in competing in an industry. There are four basic
dimensions of competitive scope. They include: Segment scope, industry scope, vertical scope
and geographic scope.
6. Michael Taylor and Nigel Thrift considered that the emerging global corporation was the result
of the complex process of interlocking between the relatively autonomous development
sequences of subsidiaries, branches and affiliates. These firms grow into complex international
economic network.
7. Globalization: A Macro-Fordist view: This approach has been developed by Wisse Dekker,
former president of Philips who calls it “transnationalization of business”. Dekker defines
globalization as a relatively early stage in the internationalization of the firm. According to him
transnationalization takes place in the following steps.

 The local enterprise produces and sells in one and the same country.
 The international enterprise still produces entirely or predominantly in the parent country but
establishes sales in foreign markets. International firms are characterized by a strong central
organisation.
 The global enterprise is transfening part of its production process abroad – often limited to
assembling – to circumvent input barriers or because of transportation costs;
 Multinational enterprise bas complete production facilities, sometimes even R & D in a host of
countries. The MNC often has a federal structure, a network organisation in which synergy plays
an important role. Production in many cases is no longer local for local.

Question No.3 Explain various International Commodity Agreements.

Solution:
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There have been seven major international commodity agreements. These international
commodity agreements are given as follows:

1. International Rubber Agreement

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Only this agreement was negotiated under the Integrated Programme of Commodities. It was
concluded on 6th October 1979 and came provisionally in force in April 1982. However, the
agreement came into operational in November 1981 when the buffer stock manager started
buying natural rubber in order to stabilize prolonged decline in natural rubber. This agreement
got the support of producers and consumers. Malaysia‟s share was 41.5 percent, Indonesia‟s 23.5
per cent and Thailand‟s 13.8 per cent. There are three countries who together constitute 88 per
cent of world exports. The major consumers of natural rubber are: the US -25 per cent, European
Community -23 per cent and Japan – 11 per cent. The main concern of all consumers is assured
supply. Tyre manufacturers, specially those of radial tyres, needed more rubber. It was estimated
that the supply of rubber would grow slowly. Further, consumers were also afraid of inflationary
pressures and rise in commodity prices. It was also felt that high prices of petroleum had raised
the prices of products based on petro-chemicals. Hence tyre manufacturers were keen on stable

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prices. The International Natural Rubber Agreement used buffer stock operation to maintain
prices at specified level. There was expected to be regular review of prices at every 18 months.
Sale from buffer stock and purchase by buffer stock agency was made on the basis of stipulated
price. This agreement met with mixed success during its operation. It has managed to hold the
price within the specified stabilization range despite a very severe recession in rubber demand. It
is criticised that it was done at the cost of a continual accumulation of stocks.

2. International Sugar Agreement

There have been four international sugar agreements in post war period. The first one was signed
in 1953, second in 1958, with a five year gap, a third agreement was signed in 1968. After a four
year gap a fourth agreement was signed. Negotiation under the auspices of UNCTAD through
1983 and 1984 failed to result in any agreement. Sugar agreement operated entirely through
export controls. It did not achieve much success. One of the reasons for the agreements failure
was that sugar is produced by developed and developing countries. Further, holding stocks was
yet another problems.

3. International Tin Agreement

The first year international tin agreement became operational in 1956. These agreements have
subsequently renewed and sixth agreement came into force on a provisional basis. Since the US
did not become a party under the agreement, the International Tin Council has intervened in the
tin market both by negotiated supply restriction and through operation of buffer stock. This
intervention has been considered moderately successful.

4. International Cocoa Agreement

Cocoa trade has a long history of attempting to stabilize through buffer stock operations. In
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1956, the UN Committee on International Commodity Agreement was asked by the UN to hold a
conference. It passed a resolution requesting Food and Agricultural Organization (FAO) to
suggest method of stabilizing prices. The work of FA0 cocoa study group resulted in a draft of an
international commodity agreement on which an international conference was called in 1965.
Since then three subsequent conferences have been held- in 1966, 1967 and 1972. In 1972 the
agreement was ratified. It must be noted that the UNCTAD took over from FAO the work of the
cocoa study group although FAO continued to give technical assistance. Although a number of

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conferences were held, the UN negotiation conference which was held in New York. May to
June 1966 failed to reach the agreement. The major disagreement was how to decide the floor
price at which the buffer stock authority would intervene in the market. But a series of
negotiations could not result in an agreement. In 1972 a draft international cocoa agreement was
made.

The agreement included three provisions: (i) Minimum price of 23 US cents and maximum price
of 32 US cents per year; (ii) a quota adjustment mechanism; and (iii) a buffer stock of 250,000
tons capacity to be financed through a levy of 1 US cents per pound on exports and imports of
cocoa. Third international cocoa agreement was signed in 1980 and came into operation in 1981.

The agreements did not succeed because of two major reasons (a) the absence of Ivory Coast was

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a factor, (b) lack of adequate resources and (c) the buffer stock was completely inactive.

5. International Coffee Agreement

The first agreement became operational in 1963. The first agreement effectively formalized and
gave consumer sanction to this arrangement. There was some rise in prices. The second
agreement was terminated in 1972, the consumer export quotas was the most important
instrument to stabilize prices. The fourth agreement in 1986 had many difficulties in its
conclusion.

i) Renegotiation of quotas was expected to be there under which Brazil the main producer would
lose its quota to the new comer such as Indonesia and African countries.

ii) US had joined this agreement for a full six years period. Yet it noted funds upto 1986.

iii) The 1985 collapse of the International Tin Agreement, together with the dramatic fall in oil
prices through 1985 and 1986, have considerably reduced public confidence that international
control of commodity prices is feasible.

6. International Olive Oil Agreement

In 1956 and 1963 there were International Olive Oil Agreements. In 1955, under the auspices of
the U.N., 11 members participated of which 9 were exporting countries and 2 were importing
countries. In 1963 7 were exporting countries and 4 were importing countries. An International
Olive Oil Council was established in 1963. The duration of the agreements of 1959 and 1963
was four years each. The Olive Oil Council was expected to make studies of the olive oil market,
production, prices, etc. These agreements had price stabilization objective through price control.
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7. International Wheat Agreement

In the early twenties and the thirties wheat was brought under the control of four main producers.
The restrictions included those on acreage and export. The operation of the earlier wheat
agreement demonstrated the need for some form of sanction to enforce compliance by
participants.

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There were six international wheat agreements : in 1933, 1942, 1949, 1953, 1956 and 1959. The
duration of the agreements varied from failure 1942 of the agreement to 2-4 years. The major
instruments of control had been export quotas and acreage restriction in the 1933 agreement. In
the 1942 agreement there were more instruments and the International Wheat Council was
established. Other agreements included price and buffer stock. Wheat agreement was only one
multilateral contract.

To summarize, the international commodity agreements can only be successful provided that
they command consensus in their industries. Concensus may emerge when a dominant leader
offers leadership. The existing agreements are expected to be poorly drafted. Yet UNCTAD has
continued to contribute to commodity agreements through providing information, technical
assistance and convening various conferences. For example conference on tungston, olive oil,

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cocoa, etc. While the UNCTAD was reorganized in 1992 at its WII conference at Castegena
meeting, the Committee on commodities was undisturbed. It must also be noted that this is the
only international agency studying the subject with a view to stabilize the markets for primary
products.

Question No.4 Comment on the following:

a) Geographic environment do not affect demand pattern of the people living in the country.

Solution: Geographic environment is an important component the foreign environment and

refers to a country‟s climate, topography, natural resources and people. Everyone engaged in
international business must have some knowledge of geographic features of the foreign country
as these influence the nature and characteristics of a society. It also affect demand pattern of the
people living in the country. Geography is a major contributory factor to the development of
business systems, -trade centres and routes.

Different climatic conditions give rise to demand for different types of products. It is largely due
to climatic differences that people differ in their housing, clothing, food, medical and
recreational needs. Many a time needs are same, and demanded. But because of the climatic and
topographic differences, products need adaptation or modifications to suit local conditions.

Geographic conditions also affect a firm‟s plant location decision. A firm prefers to set up its
manufacturing plant in a country which has favourable climatic conditions, possesses suitable
topography and where raw materials, energy and labour are cheaply and abundantly available.
Foreign country‟s nearness to other markets and its strategic location on major trade routes are
other equally important considerations.
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Firms‟ distribution and logistics strategies are directly influenced by geographic conditions in the
foreign markets, Re-order points and safely level stocks are kept generally higher for those
countries or places which are not easily accessible and can be cut off suddenly and heavily due to
bad weather.

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Location of a country on the world map is an equally important consideration. It affects its trade
prospects with other countries. Landlocked countries such as Bolivia, Zambia and Zimbabwe
,are not only costly to reach but are also difficult to penetrate as trading with these countries
depend upon their relations with neighbouring countries through which goods have to cross.

Consumer demand for many a low priced and essential product is directly related to the number
of people living in a country. It is primarily due to large populations that the countries like China
and India have become the targets of the multinational corporations which are vying with one
another to gain a foothold in these markets, To arrive at a correct estimate of the market size,
however, one needs to take into account other factors also such as population growth, population
density and population distribution by age, income, location and occupation, taken together,

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these variables provide better estimates of the present and future market potentials and also help
in providing information relevant for communication, distribution, product quality and pricing
decisions.

b) High risks and rising R & D costs have not forced many TNCs to form technology related
strategic alliances.

Solution: High risks and rising R&D costs (especially in the area of new technologies) and the
rapid obsolescence of new products have forced many TNCs to form technology-related strategic
alliances to share development costs, acquire new technologies and make better use of scarce
qualified personnel. The substantial number of strategic alliances in existence now is a relatively
new phenomenon. There are indications, however, of an emerging trend towards a very high
proportion of agreements involving the development of and access to technologies.

The alliances of IBM with several other corporations for the purpose of developing its personal
computer are an example: the Lotus Corporation provided the application software, and
Microsoft wrote the operating system, for a micro-processor that was produced by Intel. IBM
(traditionally reluctant to conclude alliances) has now created alliances with more than 40
partners around the world, pooling technology and customer bases in the telecommunications
and related fields. Such alliances are often undertaken for the joint development of new
generations of products and to set industry standards. Transnational Corporations from the
United States and Europe are the most active participants in strategic alliances, most of which
take place in information technologies.

Technological alliances can be viewed as a way of providing collective protection to

technological advances among a few partners. The increasing incidence of such alliances
combined with the current pace and cost of technological development makes it more difficult
for developing countries to acquire technology through traditional non-equity arrangements.
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Many alliances also involve common actions for setting international standards that increase the
barriers to entry (including, for new products from developing countries) in the international
market. Some developing countries, have the potential and capability, however, to become
partners in technology alliances.

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For most developing countries, then, the acquisition of new technologies is likely to rely – at
least for the present – on intra-firm transfers by TNCs, rather than on inter-firm alliances
between independent firms.

c) The Regional Economic Groupings do not lead to increase in market size.

Solution: One of the apparent implications of regional economic groupings is increase in market
size. Instead of a third country exporter dealing separately with each country with limited
population or limited number of countries, he can deal with the entire grouping that is many
times bigger than the country/countries he was earlier dealing with. This has two implications.

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One is that the size of the export order is likely to be considerably large with the attendant
benefits of increased sales and scale of economies.

Secondly, if he is able to enter one country in the region on the basis of one approval of the one
set of documents by one set of authorities, it can safely be assumed that he will be able to reach
his products to other countries in the grouping with practically no restriction after the first point,
of entry. However, it is also true that if his products are rejected at the first entry point he will not
be able to enter any other country in the grouping through any other every point. But more than
this the greatest limitation that will probably be faced by many developing countries relate to
supply constraints. Having used to catering to small sized markets, many exporters from
developing countries may not find it very easy to execute large sized orders emanating from the
regional markets, due to supply constraints particularly within a limited period.

d) There is no difference between void agreement and unlawful agreement.

Solution: There is difference between void agreement and unlawful agreement which is given as
follows

Void Agreements : As defined under Section 2(g) of Indian Contract Act, 1872, void agreement
is an agreement not enforceable by law. It does not create any legal right or obligations. It is void
ab initio (right from the beginning) it is a nullity and destitute of all legal effects. An agreement
with a minor or with a lunatic or without consideration, or with an unlawful object is void.

Unlawful Agreement : As defined under Section 23 and Section 24 of Indian Contract Act,
1872 an agreement is unlawful and void if its object or consideration is unlawful or both are
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unlawful. The object or consideration of an agreement is unlawful if:

1. it is forbidden by law,
2. it defeats the provisions of any law,
3. it is fraudulent,
4. it implies or involves injury to the person or property of another and
5. the court regards it as immoral or opposed to public policy.

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Thus all unlawful agreements are void agreements but all void agreements are not unlawful
agreements.

Question No.5 Write short notes on of the following:

a) Socio cultural Environment

Solution: Business is as much a socio cultural phenomenon as it is an economic activity. Per

capita income in two countries may be the same, yet the consumption patterns in these countries
may differ. Socio cultural forces have considerable impact on products people consume; designs,

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colours and symbols they like; dresses they wear and emphasis they place on religion, work,
entertainment, family and other social relations. Socio cultural environment influences all
aspects of human behaviour and is pervasive in all facets of business operations,

Culture can be defined as a “sum total of man‟s knowledge, beliefs, art, morals, laws, customs
and any other capabilities and habits acquired by man as a member of society.” It is a distinctive
way of life of a group of people, their complete design of living. Culture thus refers to a man‟s
entire social heritage – a distinctive life style of a society and its total value system which is
intricately related to the consumption pattern of the people and management philosophies and
practices.

Furthermore, within each culture there are many subcultures that can have business significance.
Subcultures are found in all national cultures and failure to recognize them may create
impressions of sameness which in reality may not exist. A single national and political boundary
does not necessarily mean a single cultural entity. Canada, for instance, is divided between its
French and English heritages, althoug11 politically the country is one. Because of such
distinctive cultural division, a successful marketing strategy among the French Canadians might
not effectively work among the English Canadians or vice-versa. Similarly a single personnel
policy may not work with workers employed in two different plants if they belong to different
sub-cultural groups and differ in their work habits and underlying motivations.

Some of the important elements to understand a country‟s culture are: language, aesthetics,
education, religions and superstitions, attitudes and values, material culture, social groups and
organizations, and business customs and practices.

A person dealing with people from different cultures should be well aware of differences in the
number and nature of stages involved in business negotiations and formalities to be observed in
concluding business contracts. While in countries like the United States it is necessary to have
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final agreement in writing, this practice is not much appreciated in many West Asian countries
where oral agreement alone is considered more than sufficient

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b) India and Transfer of Technology

Solution: In the eighties, India entered into a large number of technology collaboration
agreements. It was considered that the Government should take active measures to facilitate the
transfer of technology. Government of India had guidelines. These guidelines included
provisions for fully exploring alternative sources of technology and provided that Indian party
should be free to sub-licence the technical know-how, product design and engineering design.

On 24 July, 199 1, the Government of India liberalized its policy. Under this policy the
commercial judgement of the entrepreneur regarding technology and terms were to be negotiated
for such transfer of foreign technology. Technology collaboration agreements are normally

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approved automatically by the Reserve Bank of India within the prescribed monetary and royalty
limits.

Foreign Technology Agreements from 1991 to 1998

YEAR No. of Technology Agreements

1991 661
1992 828
1993 691
1994 792
1995 982
1996 744
1997 660
1998 595

Source: Ministry of Industry, Annual Report, 1998-99.

As a result of liberalized policy, the number of technology agreements increased from 661 in the
year 1991 to 982 in the year 1995. This number further decreased to 595 in the year 1998. The
Country wise analysis of technology agreements shows that the largest number of technology
agreements was made with USA in the year 1998 followed by Germany, Japan and UK.

There are a few main limitations in transfer of technology to Indian firms :

1. Indian firms normally do not prepare sufficiently while they enter negotiations for technology
transfer;
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2. Indian firms, as evidence has shown, do not build a team of experts to enable the management
to negotiate an effective transfer of technology agreement. They do not normally take recourse
to design conference;
3. Very often, there are many legal loopholes in the technology collaboration agreements such as
lack of performance guarantee, lack of differentiation of technology from the changes of brand
name and trade mark;

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4. Indian buyer tends to subject himself to restrictive business clauses which include ban on
exports, area wise restrictions for exports, buying machinery and equipment from the sources
specified by the seller of technology which tends to increase the costs of production.
5. Since Indian firms do not normally spend money on R&D, the seller of technology is very often
not obliged to provide R&D facility to the buyer. This has landed Indian buyers into a situation of
repetitive import of technology.

c) Rationale of Regional Economic Groupings

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Solution: While the basic objective of all the groupings, irrespective of the form that each of
them might have taken, appears to be the same, viz. improving the welfare of people within the
region through creation of a larger production base and increased market size for producers and
greater choice to both producers and consumers, a number of factors seem to have contributed to
regional economic groupings gaining momentum in recent years.

Political Objective: The basic motive behind formation of the European Union was political,
i.e., to avoid future conflicts among European nations after the two world wars. The West
European countries, who had paid a very heavy price during the first and the second world wars
had, after considerable deliberations, decided to seek political unity through economic route.
With the support provided by USA under the Marshall Plan, they decided to form the United
Community by surrendering their individual national sovereign-ties to a regional body on trade
and economic matters. This gave birth to the European Common Market, to start with, and now
the countries are moving towards political and economic union.

Response to Slow Progress of Global Liberalization: One of the factors that has contributed to
formation of economic groups with emphasis on removal of mutual trade barriers can perhaps be
traced to the dissatisfaction, at the relatively slow progress, at international level, of attempts at
liberalization of international trade. The Uruguay Round of Trade Negotiations, which
commenced as far back as 1986 could, after all, be concluded during December 1993 only and
still there are a number of issues such as labour standards on which agreement is yet to be
reached. It is, therefore, no wonder if some countries had felt that, probably, it was better to
begin the trade liberalisation agenda by knocking down barriers among limited number of like
minded countries in the region, while at the same time continue working towards barrier removal
at global level. Regional Initiatives: One of the reasons for emergence of regional groupings can
be traced to a feeling, among countries belonging to a region, that it was far easier and made
better economic sense to trade more with the countries in the region rather than with countries
outside the region. The objective was to fully exploit the advantages offered by regional
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initiatives. This logic was behind the philosophy of South-South trade and the trade groupings
becoming region oriented. The poor countries in particular, given the small size of their markets,
looked at regional grouping as a better means to achieve their objective of import substituting
industrialisation since it gave them the benefit of an enlarged market.

Demonstration Effect: Another reason for the countries belonging to a particular region
flocking together, probably, was to improve their bargaining power when they noticed that
developments towards formation of groupings were taking place in other regions. This was more

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 IBO-01 SOLVED ASSIGNMENT FOR MCOM
in the form of demonstration effect or self defence mechanism mainly undertaken to avoid the
likely problems of isolation from the general trend.

Whatever were the reasons that have prompted a number of countries to form regional groupings
of some sort or the other; the groupings have proved one thing that it has been found easier for
producers, rather than consumers, to get together.

d) Essential Elements of a Valid Contract

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Solution: The law of contract enforces only those agreements which graduate to contract. The
agreements in order to be enforceable by the law of contract must graduate to a valid contract.
For the purpose, the agreement must fulfill certain essential conditions or elements. In the
absence of one or more of these elements the agreement is void ab initio (right from the
beginning). In view of this the agreement must have the following essential elements to be a
valid contract, as contained in Sec 10 of the Indian Contract Act 1872.

1. Parties : The agreement must be made between two or more parties/persons as one person
cannot form an agreement.
2. Offer and Acceptance : There must be a valid offer and valid acceptance of the offer. As such
the terms of the offer must be definite and certain and communicated to the person to whom
the offer is made and offer must be made with an intention to create legal obligations. The
acceptance of the offer must be absolute and unconditional and according to the mode
prescribed and must be communicated to the offeror
3. Intention to Create Legal Obligations: The parties must have the intention to create legally
binding obligations. Obligation should be commercial and not social or domestic.
4. Competency or capacity of the parties ( Section 11 and 12): The agreement must be between
parties who are competent or capable to contract. For the purpose parties should not be minors
or persons of unsound mind or disqualified front contracting by any law to which they are
subject.
5. Genuine consent (Sec-13) : There must be consensus ad idem for the validity of the agreement
which means consent given by the parties to the agreement must he real and genuine and it
should not be vitiated by mutual or common mistakes. The parties must understand and agree
the same thing (subject matter) in the same sense (terms).
6. Consideration (Sec-25) : The agreement must be supported by consideration.
7. Lawful object and consideration (Section 23 & 24) : The object as well as the consideration
must be lawful.
8. Certainty (Sec-29) : The agreement must be certain and not vague or indefinite.
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9. Possibility of performance (Sec 56(i)) : The agreement must not be entered into to do an act
impossible in itself i.e. the act must be capable of performance.
10. Agreement not declared void (Sec 26-30) : Here we are listing some of void agreements which
are against public policy as contained in the Act.
o Agreements in restraint of marriage (Sec -26)
o Agreements in respect of trade (Sec. 27)
o Agreements in restraint of legal proceedings (Sec. 28).
o Agreements by way of Wager

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