Question

5. Why do firms enter the foreign market as multinationals rather than adopting other modes of entry?

6. What is offshoring? What are global value chains (GVCs)? What are its benefits and costs? What are its implications in income distribution for both countries (sending and receiving offshoring services)?

7. What is the role of foreign exchange market in international business? Define fixed and flexible exchange rate regime. Explain in detail the advantages of each regime.

8. What was the arrangement of nominal exchange rate under Bretton Woods System? How did it expect to manage the bank run? Was it successful?

Pls answer all queations, Thanks a lot!!

Answer 1

5. Why do firms enter the foreign market as multinationals rather than adopting other modes of entry?

Firms are entering into foreign market because they forecast the net profit in another country. There are many types of entry for the firms to enter in foreign markets as multinationals. These are as follows.

Indirect Exporting: Companies can, while going international, use domestically based agents who operate on a commission basis without taking title to goods, or merchants who sell the products of the company in international markets. They can also use the distribution facilities of other firms in the international markets.

2. Direct Exporting: A company may decide to export its products itself. The company develops overseas contacts, undertakes marketing research, handles documentation and transportation and decides the marketing mix Companies can use foreign-based agents or distributors. An agent may agree to handle the company’s product exclusively, or may handle products of other companies too. An agent does not take title to the products and works on commission. Distributors take title to the products company appoints distributors when after-sales service is required as they are likely to possess the necessary resources. The advantages of foreign-based agents and distributors are that they are familiar with the market and have business contacts.

3. Licensing: Under licensing, a foreign licensor provides a local licensee with access to technologies, patents, trademarks, know-how or brand/company name in exchange for financial or some other form of compensation. The licensee has exclusive rights to produce and market the product in the specified area for a limited period. The licensor usually gets royalty or license fees on the sale of the product.

4. Franchising: franchising is used in service industries such as restaurants, hotels and retailing where the franchiser exerts a high degree of control on the franchisees based in the overseas market. In franchising, the franchiser, like McDonald’s, lends operating procedures, quality control, as well as the product and trade name.

5. Direct Investment: The company entering the foreign market invests in foreign-based manufacturing facilities. The company commits maximum amount of capital and managerial efforts in this mode of entry. Direct investment means that the company has control and significant stake in its operations in other countries. The complete form of participation in foreign countries is 100 per cent ownership, which can be established as a start-up, or can be achieved by acquiring local companies.

6.. What is offshoring? What are global value chains (GVCs)? What are its benefits and costs? What are its implications in income distribution for both countries (sending and receiving offshoring services)?

The moving of various operations of a company to another country for reasons such as lower labor costs or more favorable economic conditions in that other country. It is sometimes used broadly to include substitution of a service from any foreign source for a service formerly produced internally to the firm. In other cases, only imported services from subsidiaries or other closely related suppliers are included. A further complication is that intermediate goods, such as partially completed computers, are not consistently included in the scope of the term the global value chain includes all of the people and activities involved in the production of a good or service and its global level supply, distribution and post sales activities known as the supply chain. GVC is similar to Industry Level Value Chain but encompasses operations at the global level.

7. What is the role of foreign exchange market in international business? Define fixed and flexible exchange rate regime. Explain in detail the advantages of each regime.

(a) Fixed Exchange Rate:

Fixed exchange rate is the rate which is officially fixed by the government or monetary authority and not determined by market forces. Only a very small deviation from this fixed value is possible. In this system, foreign central banks stand ready to buy and sell their currencies at a fixed price. A typical kind of this system was used under Gold Standard System in which each country committed itself to convert freely its currency into gold at a fixed price.

In other words, value of each currency was defined in terms of gold and, therefore, exchange rate was fixed according to the gold value of currencies that have to be exchanged. This was called mint par value of exchange. Later on Fixed Exchange Rate System prevailed in the world under an agreement reached in July 1994.

Advantages: (i) It ensures stability in exchange rate which encourages foreign trade, (ii) It contributes to the coordination of macro policies of countries in an interdependent world economy, (iii) Fixed exchange rate ensures that major economic disturbances in the member countries do not occur, (iv) It prevents capital outflow, (v) Fixed exchange rates are more conducive to expansion of world trade because it prevents risk and uncertainty in transactions, (vi) It prevents speculation in foreign exchange market.

(b) Flexible Exchange Rate:

The system of exchange rate in which rate of exchange is determined by forces of demand and supply of foreign exchange market is called Flexible Exchange Rate System. Here, value of currency is allowed to fluctuate or adjust freely according to change in demand and supply of foreign exchange.

There is no official intervention in foreign exchange market. Under this system, the central bank, without intervention, allows the exchange rate to adjust so as to equate the supply and demand for foreign currency in India, it is flexible exchange rate which is being determined. The foreign exchange market is busy at all times by changes in the exchange rate.

Advantages: (i) Deficit or surplus in BOP is automatically corrected, (ii) There is no need for government to hold any foreign exchange reserve, (iii) It helps in optimum resource allocation, (iv) It frees the government from problem of BOP

Sorry to say that can’t find the answer for nominal exchange rate under Bretton Woods System.