Wednesday, February 25, 2009

1st class test

Q.1 Define Exchange Rate system. What are the advantage & Disadvantages of a floating Exchange Rate?

Q.2 write Short note on Two of the followings:

(a) Barriers to IB
(b) motives for internationalization of firms
(c) Political Risk & its factors

Friday, February 13, 2009

IB INFORMATION & COMMUNICATION

New information technology modes include electronic mail, corporate and public databases, application systems, fax, video and computer conferencing. These modes are considered to be some of the driving forces of internationalisation. These new IT modes have a major impact on the coordination of headquarters-subsidiary relations. In fact, most of the MNCs have developed these new modes of IT.
IT enables the management to solve the problems which are intensified by international scope of business process in terms of geographical distances, scattered members in a decentralised organisation who need to create and process information in many places and different time zones between senders and recipients of information that pose additional problems.

The globalisation of companies increases the dynamics and complexity of their relations with the environment. MNCs cannot fully rely on adaptive structural changes due to rapid external changes. They have to organise their business processes in order to allow greater flexibility.
Therefore, MNCs should deliberately design or redesign existing international business processes.

Neural Networks: The next information technology breakthrough is the neural networks which change the way people do their jobs. Neural networks combine computer software and chips that are capable of mimicking brain functions. These brain networks are currently regarded as one of the most important forms of emerging information technology and they are going to have an impact on the way work is done in the years to come. For example, Mellon Bank's Visa and Master Card operation in Washington is put in neural computer network. This is more sophisticated and better able to compare purchases with customer behaviours. These systems are being used for many other jobs as well. IBM France uses this system to provide early warning failure in industrial machinery such as motors, cleaning tools and pneumatic robots. The future will see the emergence of new network chips that will dramatically increase both the speed of operations and their work applications. These chips will be used to mimic operations and carry them out the way humans do.
Neural networks will also allow computers to run factories. For example, when a purchase order
is issued to a vendor, he simultaneously enters the order in the online database. The entire activities in the operation are entered into the online database. Finally, when the goods are received, a person at the receiving-end will check a computer terminal to ensure that the shipment corresponds to the purchase order in the database. If it does, the employee will enter this information into the database and computer will automatically issue a cheque to the supplier. If it does not, the employer is empowered to refuse the shipment and goods will be returned to the supplier.

The information technology brought significant and dramatic changes through various
techniques like
•• Business Process Reengineering,
•• Enterprise Resource Planning and
•• Supply Chain Management.





Business Process Reengineering

Business process reengineering has developed at a fast rate towards a new management
philosophy. The business process reengineering (BPR) changes the perspective of international
management from a structural to a process view of headquarters-subsidiary relations. The engineering of international business process needs special attention due to multifaceted deeper structure of multinational corporations. This, in turn increases the complexity of business processes influencing the options for redesign.

INTERNATIONAL BUSINESS PROCESS

Business Process Reengineering has been contemplating to overcome some of the problems
raised by the structural specialisation. It stresses the radical changes of processes concerning
different departments. Redesign of process is one of the aspects of management of business processes.
The other aspects include: management of ongoing business processes, improvement of business processes, and reengineering of business processes .

•• Management of Ongoing Business Processes: Managers coordinate the relationship between the headquarters and subsidiaries. Previously, the relationship between the headquarters and subsidiaries was based on structural relationship. Now, it is changed to interaction process due to the business process reengineering. The broad range of business interaction between headquarters and subsidiaries include: strategic planning, budgeting, developing and launching new products and logistics .

•• Improvements of Business Processes: Management of business process also includes
continuous improvement. Normally, managers of global business manage their departments
or country concerned only but not the process crossing departments or countries. This often
results in suboptimal solutions of a business process concerning a particular department only.
Marginal improvements can be achieved by using the techniques like Overhead Value Analysis
(OY A), Total Quality Management (TQA), Just-in- Time Production (JIT) or Computer
Integrated Manufacturing (CIM). Business Process Re-engineering can bring radical change
in the activities of MNCs .

•• Reengineering of Business Processes: OVA and TQM could bring 10% to 20% cost reduction only. But BPR takes a holistic view of the total process attempting to integrate all the
stakeholders of international business like suppliers, customers, market intermediaries etc.
Integration should not end at :1ational boundaries. In view of increasing globalisation of many
industries, BPR should be enlarged beyond national boundaries and it should be the total process rather than a few aspects of MNCs.

Management of International Business Process

Traditionally managers of MNCs manage the international business operations mostly through
coordinating the operation of subsidiaries based on the policies and strategies formulated by the
headquarters. Coordination activity is based on the size, age, technology, environmental dynamics and the degree of internationality of the global company. The headquarters-subsidiary coordination was mostly done through correspondence.
Subsidiaries work under specific situations. Therefore, the efficiency of coordination depends
upon employing the coordination techniques apt for the subsidiary specifics. Coordination also
depends on the character of strategic business unit or functional departments.
In addition to correspondence, coordination has been taking place by using the instruments
like:
•• Face-to-face meetings
•• Personnel instructions
•• Visits for strategic planning.
In addition, managers of international business use technocratic instruments of coordination
like:
•• Rules
•• Programs
•• Written document in operational and well-structured decisions.

Characteristics of BPR

The characteristics of business process reengineering include:
•• From Structure to Process Orientation: In a global context, process orientation changes the perspective from structural relationship between headquarters and subsidiaries to the interaction process between them.

The Contents and Boundaries of Business Processes: Generally, the number of business processes vary from 10 to 20. For example, IBM uses 18 business processes. Some of these processes are: production, customer fulfilment, customer feedback and hardware development.
Business Process Owners and Responsibility: Top management of the company assumes the ownership and responsibility of business process.
International Business Processes: All the processes of MNCs need not be international. The internationality of the company determines how many business processes have international scope. The international operations include: global sourcing, manufacturing at different global locations etc.
Customer-Orientation: BPR is completely customer-oriented and aims at maximisation of
customer satisfaction. Hence, customers should be integrated into the redesign.
Reengineering as a radical change of business process.
Holistic View of Processes Instead of Piecemeal Engineering: BPR takes a holistic view of network of parallel and sequential processes. The subprocesses should not be too many. IBM reduced their 140 subprocesses to 18 processes.
Top-down Approach of Business Process Reengineering: International BPR follows topdown approach due to broad, cross-functional, cross-departmental and cross-boarder scope.
Benchmarking of Business Process Reengineering: BPR aims at continuous improvement and radical' innovations in order to reduce cost and time and enhance organisational flexibility and customer satisfaction. TQM and JIT concepts help in enhancing efficiency of separate processes. But BPR through its holistc approach enhances the efficiency of the total system.

Role of IT in International Business:
It is viewed that the new IT is an enabler of process reengineering. IT opens new dimensions of process reoganisation. The proportion of information, operations and management varies tremendously between and within business processes. The hardware and software of IT have a spectrum of abilities to support informational or operational or even managerial activities with respect to the individual business process.

.
The use of computers increased the pace of business, globalisation, increased competition.
Electronic Data Interchange (EDI) facilitated the speedy, secured and accurate transfer of documents across the globe. Computers make possible a paperless working system. If the computer of a businessman is linked up with those of his customers and suppliers all the transactions can be done electronically. All these and a few other developments have brought a phenomenal change in global trade and commerce.

"E-Business is about using the convenience, availability and world-wide reach to enhance
existing businesses or creating new virtual business."
IBM defines e-business as "a secure, flexible and integrated approach to deliver differentiated business value by combining the systems and processes that run core business operations with the simplicity and reach made possible by Internet technology. "

According to the concept developed by the IBM, E-business combines the traditional information systems with the vast reach ofthe Web and connect critical business systems directly to critical business constituencies - customers, employees and suppliers via Intranets, Extranets and via the Web.
E-business can be divided into three areas.
They are (a) within the organisation,
(b) businessto- business (B2B) dealings and
(c) business-to-customer (B2C) transactions.

(a) Within The Organisation
E-business within the organisation uses the Intranet. The Intranet uses Internet standards
for electronic communication. People on the Intranet are able to see organisation-specific web sites. Because of the firewalls and other security measures outsiders cannot have access
to these organisation-specific Intranet web sites. The Intranet web sites allow the employees to obtain information and place orders online. Depending on the security policies of the organisation or company, people may be allowed to connect over the Internet via virtual private networks (VPN) to the Intranet using encryption lines and strong authentication for identification purposes.

(b) Business-To-Business (B2B) Dealings

The second area is the business-to-business (B2B) dealings. Business-to-business (B2B) dealings take place over the Extranet. ''The Extranet consists of two lntranets connected via the Internet, whereby two organisations are allowed to see confidential data of the another." Normally only that much information which is necessary for the business to take place is made available to the partner over the extranet. Business-to-business networks have existed long before the Internet came into use. Many organisations have had used private networks to deal with their business partners. But maintaining the private networks proved too expensive'to the business concerns. Costs of usage of business-to-business solutions through the Internet have come down dramatically. Use of virtual private networks (VPNs)' keep the costs low at the same time keeping the business transactions private.

(c) Business-to-Customer (B2C) Transactions
The third area of e-business is bus1l1ess-to-customer transactions. This is selling the goods and
services through the Internet to the innumerable customers spread all over the world. In this business concerns establish virtual shops and offer goods and services to whoever visits their web sites.
"Traditionally this is what most people know as e-commerce; selling products on the web."s
Global Business Context:
Multinational and transnational companies by using the operation of e-business can arrange for production of some components/parts in one country and other
components in other countries. These production activities in various countries and final assemble of the product in the third country can be co-ordinated more efficiently through e-business operations.
In fact, the finished goods or finally assembled products can be shipped directly to the market.

E-Business Categories:
Electronic business is a super-set of business cases. E-commerce is one of the aspects of e-business. Some other important aspects of e-business, which are successfully carried through the Internet are e-auctioning, e-banking, e-directories, e-engineering, e-franchising, e-gambling, e-Iearning, e-mailing, e-marketing, e-operational resource management, e-supply and e-trading.
Those aspects of business, which are digitized, work well on the Internet.

E- COMMERCE RELATED CONCEPTS
>(i) E-Commerce
e-commerce" is the process of two or more parties making business transactions via computer and some type of network, e.g., a direct connection or the Internet. This includes business-to-business transactions, online retail, and the digitalisation of the financial industry. Some experts and leading 'Netropreneurs' even argue that e-commerce includes all the steps that occur in any business cycle, such as placing ads, completing invoices, and providing customer support. The term e-.commerce, often used interchangeably with IBM's coined term e· business, covers a lot of ground and refers to all these areas."

E-commerce (electronic commerce or EC) is the buying and selling of goods and services via the communications capabilities of private and public computer networks, including the Internet. The term e-tailing is sometimes used for online retail selling.
E-commerce can be divided into:
•• Electronic Data Interchange (EDI), the business-to-business exchange of data .
•• Gathering and use of demographic data through Web contracts .
•• E-tailing or "virtual storefronts" on Web sites with online catalogues, sometimes gathered into
a "virtual mall."
•• E-mail and fax and their use as media for reaching prospective and established customers .
•• Business-to-business buying and selling .
•• The security of business transactions.
(ii) Electronic Data Interchange
The term electronic data interchange has many definitions. American National Standards Institute (ANSI) has defined it as:
"Electronic Data Interchange (EDI) is the transmission, in a standard syntax, of unambiguous information of business or strategic significance between computers of independent organisations.

Electronic Data Interchange is the transfer of business documents, such as purchase orders and invoices, between computers as per a set of standards.8 EDI facilitates the transfer of business documents stored in structured formats - through mutually agreed messaging protocols - from one computer application to another. The users of EDI do not have to change their internal databases.
In simple terms, EDI is computer-to-computer communication using a standard data
format to exchange business information electronically between independent organisations. The goal of EDI is the elimination of paper work and increased response-time. E-commerce, on the other hand, is a concept reflective of the infrastructure and technology available for conducting business using the electronic media.

Uses of EDl :
EDI addresses many problems arising out of paper based information systems.
In a paper based information system, a number of delays occur. Lot of time is required, sometimes, for physical movement of documents from one party to the other. Further, delays are caused by the manual processing which requires one to key and rekey the information along the time line. Delays in transporting and keying information result in ordering delays, billing delays, payment delays,
poor customer service, and poor management information. Some of the problems with paper-based information systems that EDI can address are:
(i) Labour Costs: In a paper based system, manual processing is required for data keying,
document storage and retrieval, document matching, envelope stuffing etc.
(ii) Errors: In the paper based system the same information is required to be keyed in a number of times. Hence, the paper based information system is not only labour intensive but also error-prone.
(iii) Inventory: In addition to the delays and uncertainties, in paper based system lot of paper is required to record a variety of information.
(iv) Uncertainty: Uncertainty exists in three areas. First, delay in transportation and keying mean that timing is uncertain. Secondly, the sender does not know whether the matter dispatched will reach the party intended to or not. Thirdly, uncertainty regarding payment.
It is difficult to tell when the bank will disburse the cheque. In EDI uncertainty with regard to timings is discarded in some cases and lessened in others. This enables a firm to forecast cash flows more accurately. Mail and processing delays are eliminated. A content acknowledgement provides the buyer fast feedback on whether the order will be honoured or whether the buyer must look elsewhere. This lessens the need for safety stock. One-time keying means that labour costs can be reduced and payment can be processed' through the settlement system the day after initiation.

(3) E-mail
E-mail is "the exchange of text message and computer files over a communications network such as a local area network or the Internet, usually between computers or terminals." It is also defined as "an electronic text message".
Communication is the basis of all businesses. "The Internet breaks into the traditional communication markets. Postal services and telecommunications companies
are losing market share to the electronic communication, especially e-mail. E-mail combines the strengths of phone calls and letters. The advantage of a phone call is its immediacy and the letter has the advantage that everything is in written form. The Internet enables instant communication in written form, either bye-mail or online chat."

"More and more businesses are talking digitally to each other. Other than a phone call, e-mails can contain more than just the text.· It is possible to attach files, which may, for example, contaip formatted documents, presentations, images or sounds. Information can be shared much more easily."!

(iv) Internet

Internet is "the world wide collection of networks and gateways that use the TCP/IP suite of protocols to communicate with one another. At the heart of the Internet is a backbone of high-speed data communication lines between major modes or host computers, consisting of thousands of commercial, government, educational and other computer systems, that route data and messages.

One or more Internet nodes can go off line without endangering the Internet as a whole or causing communications on the Internet to stop."


RELATED OPERATIONS:

E.Auctioning

Auctioning on the Internet has become popular nowadays. In traditional methods of auctioning all those who would like to participate in the auction either assemble at one place or bid· over the phone. Some, who are busy may find it difficult to spare time to participate in the auction. But nowadays all those who have Internet connection can participate in the auction by sitting in the home itself.
The Internet enables everyone, irrespective of the country to which he belongs and
where he is located, can visit the auction web site with a click and participate in the auction. In eauctioning the people who want to participate in the auction visit the web site with a click, go through the details of the goods offered on the concerned web pages and place the price or prices they would like to offer on the web page. The auctioneer waits until a certain value has been reached or a time
limit has been passed and then hands out the goods to the highest bidder. Http://www.ebay.com/.
http://www.qxl.cc.uk/,
http:/www.recardo.de/ are some of the popular auction web sites which provide
an opportunity for everyone to become either a bidder or an auctioneer, or both at the same time for two different products. In this category of business the web site becomes an infrastructure for exchanging goods based on the auction model, which works basically by setting the prices by demand.

E-Banking
Electronic banking is one of the most successful online businesses. E-banking allows customers to access their accounts and execute orders through a simple-to-use web site. Electronic banking saves individuals and companies' time and money. Online banking allows the customers to selfservice themselves. Customers can get money from an automated teller machine (ATM) instead of walking up to the cash desk in the bank, can view their accounts, transfer funds and can pay bills.

E-Marketing
In traditional marketing the marketing team could not get immediate results on the customer reaction. They conducted market surveys, processed the data and prepared the reports. On the basis of those reports the management took decisions, formulated the policies, prepared the plans and implemented them. For all this they took lot of time. Those who took less time and acted quick outwitted their competitors. In the pre-information age this worked well. But in the information age the information flowing back from the customer in real-time, needs to be passed on to the appropriate
department within the company to react in real-time to the ever faster changing demands or the customers. The Internet allows companies to react to individual customer demands immediately without any loss of time. It does not matter where the customer is located. This is called e-marketing.

E-Trading
E-trading, where the basic requirements are a PC, a modem and the Internet connection, the investor can log on to an online trading portal, go through a comprehensive database of information, use the online analytical tools, and pass on instructions to a friendly and reliable online broker. online trading is the perfect combination of the medium of net catering to a real life concept. Online trading is the perfect solution to investor needs. It brings together under one site all the relevant factors to enable an informed investment, rather cheaply to the user. Before the Internet was introduced buying and selling stocks at the right time was dependent on the availability of a well-informed broker, who used to be ever busy and never available to a small individual investor. The other sources of information relating to the prices were newspapers, magazines, telecommunication systems, radio
and television. They were relatively slow, costly and less exhaustive. Retrieving the relevant information and processing that information was difficult. The Internet has changed the way stocks are traded. E-trading is also called E-broking. E-broking offers the real-time stock prices to every desk throughout the world. People are able to react in real-time to changes in the stock market.

Everyone with an Internet bank account is able to buy and sell stock.

Motives of Internationalization of Firms

Motives of Internationalization of Firms

The factors which motivate or provoke firms to go international may be broadly divided into two groups :
(1) Pull factors
(2) Push factors


(1) Pull Factors:

Those factors or forces which attract the foreign firms to do business in Foreign market are come under this categories. Such attraction include, broadly, the relative profitability & growth prospects. These are also called Proactive reasons. The followings are important Pull Factors :

(a) Profit Advantage : IB could be more profitable than the domestic. But if not profitable than Total Profit would be increase & thus it become again profitable.

(b) Growth opportunities:
· To increase sales
· To increase market share of the firms

(2) Push Factors:

It refers to the compulsion of the domestic market such as saturation of the market, which prompt companies to internationalize. These reasons are also called Reactive reasons. The followings are important push factors:

(a) Competition: Increase competition in domestic market is one of the main cause & consequences of globalization.
(b) Domestic market constraints:
· Surplus production in home market
· Decline the demand of the domestic product in the home market
· Small domestic market in size or limited home market
· To take the benefit of economies of scale by producing mass production
(c) Political Stability Vs. Political Instability

Wednesday, February 4, 2009

The global financial system (GFS)


Financial system - Introduction
Recent changes in the global financial markets:
• Globalisation of financial markets.
• Increase in the amount of money involved in financial transactions.
• Increasing domination of institutional investors.
• Increase of new financial instruments and products.
• Increase use and importance of technology.
• Impact of the internet (online banking online dealing).
• Increase competition between banks (corporate banking decline).
• Trend towards deregulation of the financial sector.
• Emergence of EU and Euro.
• Increasing importance of emerging markets.



Financial system – Introduction
Financial System is the group of individuals, intermediaries and
institutions that can potentially interact or participate in transactions
that involve real or financial assets.
The financial assets are instruments that facilitate transactions in
real assets or constitute the subject of a transaction between market
participants.
The financial markets facilitate the trading of financial assets
between market participants and
The financial intermediaries facilitate the financial transactions of
market participants.



The role of a financial system – Principles
The Financial System provides the environment in which the
individual investors and companies operate.
Financial system participants:
– Individuals.
– Companies.
– Financial institutions, private and public organisations.
– Governments.
Functions of the financial system:
– Facilitations of transfer of money.
– Primary and secondary security markets.
– Financial services.



The role of a financial system – Principles 2
In a financial system different parties participate in or perform
different functions but the common feature of all those functions is
The transfer of money from surplus to deficit economic agents.
Examples:
– Bank deposits.
– Use of means of payments (cheques or electronically).
– Managing risk through investing in pensions or using insurance.
– Direct investment through buying and selling equities and bonds.
Transfer of funds from ultimate Lenders to ultimate borrowers can
Be made through direct lending; through trading in organised
securities markets or indirectly through financial intermediaries.



Lenders and borrowers in a financial system
• End users:
– Ultimate Lenders.
– Ultimate Borrowers.
• Intermediate Lenders and borrowers
– Financial institutions.
– Dealers.
– Market makers.
• Financial intermediaries
– Brokers.
– Banks, Clearing houses.
Issues:
1. Motivation and interests of the end users.
2. Motivation and interests of financial intermediaries.
3. Function of financial intermediaries.



Saving and Lending
Savings is the surplus of the income over expenditure.
In most developed economies, the majority of the individuals and
households are net savers, i.e. surplus economic agents.
Investment is the acquisition of real assets that are used in the
production of goods or services by companies (the original term
used by the economists).
Financial Investment is a term used by financial press for
acquisition of financial assets by individuals.
Individuals has less investment opportunities than companies.



Borrowing
The deficit economic agents have current consumption higher than
their current income.
Borrowers are deficit economic agents such as:
– Companies.
– Government or local government authorities.
– Individuals and households.
Deficit economic agents have to liquidate existing financial assets to
finance their investments or incur financial liabilities, i.e. debts.
• Borrowers are interested at:
1. Minimising the cost of borrowing.
2. Maximising the length of time of the loan.



Lenders, borrowers and Financial assets
In a transaction, the financial asset of one party is liability for the
other party.
In aggregate, the financial surpluses and deficits must be equal.
Sectors in a closed economy:
– Households or private sector.
– Companies or corporate sector.
– Government.
Assuming that households have a financial surplus and companies
have financial deficit.
If government runs a deficit, the private sector surplus has to be
equal to the sum of the government and corporate sector deficit.



Financial Institutions
Financial institutions (FI) are companies that act as mediators
between surplus and deficit economic agents.
Financial Institutions:
– Deposit takers (banks).
– Non-deposit takers.
Functions of financial institutions:
– provision of payment mechanism.
– facilitation of lending and borrowing.
– provision of insurance, foreign exchange and other services.
• Liabilities of the banks are used as money.
• Banks are increase and facilitate money supply.
• Banks are closely regulated.



FIs as companies
Financial institutions are companies and use labour and capital to
provide efficient services.
• Financial crises, economic recession periods or industry
consolidation forces FI to become more efficient.
– High street premises vs. internet banking.
– Labour efficiency.
FI use capital (input) and provide loans (output) that generates
economic rents.
• Deposit-taking FI:
– Input: customer deposits.
– Output: loans.
• Non-deposit-taking FI:
– Input: funds from savers (for insurance, pensions, unit trusts, mutual funds).
– Output: investments in FA and deposits/loans to other FI.


FIs as Intermediaries - Functions
Financial institutions mainly receive deposit from surplus
economic agents and provide loans to deficit economic
agents but also provide a range of other services.
• Intermediation by FI also involves offering services not
only to ultimate lenders and borrowers but also to other
transacting parties .
• The role/functions of FI as intermediaries are:
– Provision of payment mechanism
– Creation of desirable assets and liabilities
– Maturity transformation
– Risk transformation/management
– Liquidity provision
– Cost efficiency (transaction, information and search costs)
– Provision of efficient monitoring mechanism.


FIs as Intermed. – Provision of Payment Mechanism.
• Most payments do not involve exchange of cash
• Many FI such as commercial banks offer options to pay by:
– Cheques
– Credit cards
– Electronic transfers
– Debit cards etc.
• Opportunities to use non-cash payments are also offered by
other non-bank financial intermediaries.
• Competition in prices and quality of services provide wide
choice to market participants.
• Electronic transactions in fund transfers are increasingly
common between domestic and foreign residents.
• The efficiency of system of payments facilitates economic
growth.



FIs as Intermediaries – Asset & Liability creation
• Creation of financial assets and liabilities:
• Examples:
– A bank attracts deposits of customers with surplus funds by creating a
number of different deposit and savings accounts (current accounts,
savings accounts etc).
– A bank offers a number of different loans to individuals and companies
(mortgages, short-term loans, consumer loans etc).
– A financial company raises equity capital and loans to provide lease
services to corporate clients.
– An insurance company provides insurance services to households and
companies.
– A mutual funds company offers investment opportunities.



Financial Markets
Financial markets (FMs) are organised and highly regulated
mechanisms that facilitate the transactions between investors
and companies or other market participants that act as investors
or intermediaries.
• No need to be in a specific physical location.
• Financial claims or financial instruments that represent
investors’ assets and liabilities are traded in the FMs.
1. Financial instruments that can be traded directly:
Shares, corporate and government bonds, treasury bills.
2. Financial instruments that cannot be traded directly:
Life assurance benefits, pension benefits, bank or savings deposits.



Financial Markets & Financial Instruments
• Classification of FM by the type of interest rate that the traded
financial instruments offer:
1. Instruments that pay fixed rate of interest (bonds, some mortgages).
2. Instruments that pay variable rate of interest (bank deposits, equities).
• Classification of FM by the time to the residual maturity of the
traded financial instruments:
1. Money markets: where the maturity is less than a year.
2. Capital markets: where the maturity is higher than one year.
• Classification of FM by the type of issue:
1. Primary markets.
2. Secondary markets.

The global financial system (GFS)

The global financial system (GFS) is a financial system consisting of institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, and private institutions acting on the global scale, e.g., banks and hedge funds

Contents:
1 History
2 Institutions
2.1 International institutions
2.2 Government institutions
2.3 Private participants
2.4 Legal frameworks and treatises
3 Perspectives 4 Criticism, discussions and reform

History
The history of financial institutions must be differentiated from economic history and history of money. In Europe, it may have started with the first commodity exchange, the Bruges Bourse in 1309 and the first financiers and banks in the 1400–1600s in central and western Europe. The first global financiers the Fuggers (1487) in Germany; the first stock company in England (Russia Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange {the Amsterdam Stock Exchange 1602).Milestones in the history of financial institutions are the Gold Standard (1871–1932), the founding of International Monetary Fund (IMF), World Bank at Bretton Woods, and the abolishment of fixed exchange rates in 1973.

Institutions
International institutions
The most prominent international institutions are the IMF, the World Bank and the WTO:
1.)The International Monetary Fund (http://www.imf.org/) keeps account of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g., currency crisis, problems meeting balance of payment when in deficit and debt default. Membership is based on quotas, or the amount of money a country provides to the fund relative to the size of its role in the international trading system.
2)The World Bank (http://www.worldbank.org/) aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. The other multilateral development banks and other international financial institutions also play specific regional or functional roles.
3)The World Trade Organization (http://www.wto.org/) settles trade disputes and negotiates international trade agreements in its rounds of talks (currently the Doha Round)

Government institutions
Governments act in various ways as actors in the GFS: they pass the laws and regulations for financial markets and set the tax burden for private players, e.g., banks, funds and exchanges. They also participate actively through discretionary spending. They are closely tied (though in most countries independent of) to central banks that issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market.

Private participants
Players acting in the stock-, bond-, foreign exchange-, derivatives- and commodities-markets and investment banking are
Commercial banks
Pension funds
Hedge funds and Private Equity
Legal frameworks and treatises
Eurozone
North American Free Trade Agreement (NAFTA)
Mercosur
Commonwealth of Independent States (CIS)
Perspectives
There are three primary approaches to viewing and understanding the global financial system.
The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labelled as the Washington Consensus. This view is challenged by a social democratic front which advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution. Examples include slowing down the rate of financial transactions, or enforcing regulations on the behaviour of private firms. Outside of this contention of authority and the individual, neoMarxists are highly critical of the modern financial system in that it promotes inequality between state players, particularly holding the view that the political North abuse the financial system to exercise control of developing countries' economies.

Criticism, discussions and reform
Among the many critics of the GFS are:
The ATTAC network
Joseph Stiglitz
George Soros
Stefan G. Dunbar
Pope Benedict has urged a major overhaul of the global financial system

Tuesday, February 3, 2009

Exchange rate system

An exchange rate is the current market price for which one currency can be exchanged for another. If the U.S. exchange rate for the Canadian Dollar is $1.60, this means that 1 American Dollar can be exchanged for 1.6 Canadian dollars.
Exchange Rate Systems is of three types:

(1) Free-Floating Systems

A free-floating exchange rate system is one in which governments and central banks do not participate in the foreign exchange market.

The free-floating exchange rate system is a theoretical system only.

The advantage of a free-floating exchange rate system is self-regulation.

The disadvantage of a free-floating exchange rate system is the unpredictability of the exchange rate.

(2)Managed Float Systems

A managed float is a system of floating exchange rates in which some governments or central banks seek to influence their exchange rates.

A government or central bank cannot control the exchange rate but they often try to influence their rate at least for a short time.

(3)Fixed Exchange Rates

A system of fixed exchange rates is one in which exchange rates are fixed by government policy.

A Commodity Standard

A commodity standard system is a fixed exchange rate system in which the prices of various currencies are fixed relative to a given quantity of some commodity.

The most important commodity standard system in history is the gold standard.


In order to print money, gold had to be owned by a particular country and international payments had to be redeemable in gold at the stated rate.

The gold standard was self-regulating.

The self-regulation system required that adjustments to international imbalances come through massive changes in the economy.


Fixed Exchange Rates through Currency Board Arrangements

A currency board arrangement is a kind of commodity standard fixed exchange rate system in which there is explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed rate and a currency board to ensure fulfillment of the legal obligations this arrangement entails.

The simplest version is to only issue domestic currency when the currency board has an equivalent amount of the foreign currency to which the domestic currency is pegged.

This system severely limits an independent monetary policy by the country with the currency board.


Fixed Exchange Rates through Intervention

The post World War II system was set at Bretton Woods by international agreement.

Currencies were fixed in value in terms of other currencies.

Currency values were maintained by active intervention of governments and central banks by adjusting monetary and fiscal policies.

The unwillingness of countries to subjugate their monetary/fiscal policies to international considerations caused the breakdown of the system.

The United States withdrew from the Bretton Woods system when President Nixon announced the United States would no longer redeem foreign-held dollars for gold.

Fixed exchange rate systems make exchange rates more predictable.

Once exchange rates diverge significantly from their set values, bringing them back in line is very disruptive.

Coordinating monetary and fiscal policies to maintain exchange rates is not impossible, as the eleven-member European Union with its common currency, the euro, attests.

IMPACT OF WTO ON INDIA

WTO
World Trade Organisation: India is one of the (out of 104) founder members of the WTO. The GATT was not an organization but it was only a legal agreement. On the other hand WTO is designed to play the role of watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights etc.

There was much heated discussion and arguments for and against regarding India becoming a
member of the WTO.
India was one of the 76 Governments that became members of the WTO on the first day of the
formation of WTO. Thus, India was one of the founder members of the WTO .

BENEFITS TO INDIA

The GATT secretariat estimated that largest increase in the level of merchandise trade in goods (in general, it would be US $ 745 billion .by the end of 2005) will be in the areas of clothing (60 per cent), agriculture, forestry and fishery products (20 per cent) and processed food and beverages (19 per cent). India's competitive advantage lies in these fields. Hence, it is logical to believe that India will obtain large gains in these sectors.
India's textile and clothing exports will increase due to the phasing out of Multi-fibre An'angement (MFA) by 2005 .

· The reduction in agricultural subsidies and barriers to export of agricultural products, agricultural exports from India will increase .
· The multilateral rules and disciplines relating to anti-dumping, subsidies and countervailing measures, safeguards and disputes settlement machinery will ensure greater security and predictability of international trade. This would be favourable environment for India's international business .
· India along with other developing countries has the market access to a number of advanced countries due to the imposition of the clauses concerning to trade without discrimination.

DISADVANTAGE TO INDIA

Despite the benefits of WTO to India, many economists and sociologists argue that, India would be
in a disadvantageous position by becoming a member of WTO. Their argument include:
.
· Trade Related Intellectual Property Rights (TRIPs) : Protection of intellectual property rights (patents, copyrights, trademarks etc.) has been made stringent. It is argued that the TRIPs agreement goes against the Indian Patents Act, 1970. Only process patents can be granted in food, chemicals and medicines under the Indian Patents Act. TRIPs agreement provides for granting product patents also. Under TRIPs patents can be granted to methods of agriculture and horticulture, bio-technological process including living organism like plants and animals. The duration of patents under TRIPs is 20 years .
· Introduction of product patents in India will lead to hike in drug prices by the MNCs who have the product patent. This will hit the poor people who will not have the generic option open .
· The extension of intellectual property right to agriculture has negative effects on India. Presently, plant breeding and seed production are largely, in the public domain. Indian scientists have undertaken plant breeding and multiplication is in the hands of National and State Seed Corporations. Government, through this machinery, provides seed to Indian farmers at very low prices. Indian scientists, in future will find it extremely difficult to breed new varieties and Indian research institutions will be unable to compete financially with MNCs and will be denied access to patented genetic material. MNCs will get the control over our genetic resources and as such the control over food production would be jeopardised .
· Patenting has also been extended to a large area of micro-organisms .
· Application of TRIMs agreement undermines any plan or strategy of self-reliant growth based on local technology and resources .
· Services : Service sector like insurance, banking, telecommunications, transportation is backward in India compared to that of developed countries. Therefore, inclusion of trade in services is detrimental to the interest of India. Liberalisation of service sector would be under tremendous pressure.

Organisation structure for IB

Lecture No. -7
Topic- Organizational structures for IB
Lecture Outcome-
Meaning, Factors influencing organization structure, options of designing of organizations, types of basic organization structure, choosing a best suitable structure, related issues in choosing

Organizational structures for IB
Organizational structures ( often called organization charts) is its basic vehicle through which strategy is implemented & through which the work of the organization is actually implemented. In fact, strategy, determines the structures needed for implementation.through its design, the firm shall:
-Allocate organizational resources
-assign tasks to its employees
-instruct employees about the firm’s rules, procedures, & expectationsrelating to their jobs, &
-collect & transmit information necessary for problem solving & decision making etc.
Factors influencing organization structure
Environment : which includes:
Internal environment : management orientation
Organization size
Employee strength
External Environment: uncetaintity
Differentiation & integration
Globalization Vs local responsiveness
Options for Designing of Organisations of MNC’s
TWO:
Vertical/ Tall Organisations:
Vertical/tall organisations refer to increase in the length of the organisation's hierarchy chain of command. The hierarchical chain of command represents the company's authority - accountability relationship between superiors and subordinates. Authority and responsibility flow from the top to the bottom through all the levels of the hierarchy. Accountability flows from the lowest level to the highest level. Employees at each level should report to their superior, who in turn should report to his boss. Thus, the activities are reported to the top. Authority is more centralized in tall organisation.
(2) Horizontal/Flat Organisations
Horizontal/flat organisations refer to an increase in breadth of an organisation's structure. The increasing bio-professionalisation and multi-professionalisation and wide acceptance for empowerment allowed even the large business firms to reduce the number of hierarchical levels of their organisations. Consequently, large sized firms also started adopting horizontal/f1at organization by delayering.
In fact, this structure is well suited for the small size business firms.
Authority is more decentralised in relatively flat structures. Manager with broad span of control must grant more authority to his subordinates. Decisions are more likf!ly to be made by the employees who are at the helm of affairs and more familiar with the situations and ground realities.
Organisational l;lctivities are mostly performed informally. Professional managers are treated as real professionalists. .
Basic organizational structures are as follows:
(1)International division structure
(2)Worldwide functional structure
(3)Geographic area structure

(4)Global Product division structure

(5)Mixed structure
(6)Matrix structure

(7)Networked structure
(8)Strategic Business Unit Structure

(9)Decentralized Business Unit Structure

Choosing a structure
Although there are no standard requirements, a relatively small no. of variables can help in choosing an organizational form that best fits the needs of a given firm in a given set of circumstances. These are
(1)the relative importance in the present & future of foreign & domestic markets to the firm’s competitive strategy.
(2)The historical background of the firm & its evolutionary stage in global operations
(3)The nature of the firm’s business & its product strategy
(4)The management traits & management philosophy of the firm
(5)The availability of & willingness to invest in internationally experienced management personnel
(6)The capacity of a firm to adjust to major organizational changes
(7)The degree of centralization & the extent to which the firms wants to decentralized its power of decision making & grant autonomy to its subsidiaries

Related issues in global organization design
There are eight major issues
(1)centralization vs. decentralization
(2)role of subsidiary director
(3)non traditional organizational arrangements
(4)changing role of information technology in organizing
(5)need for integrating mechanism
(6)control systems
(7)managing corporate culture
(8)managing change in international business