International Business Environment-2

Assignment – A

Question 1. The world’s poorest countries are at a competitive disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade is not in interest of these countries. Discuss.

Question 2. How do you think the successful conclusion of the multilateral agreement to liberalize regulations governing FDI will benefit the world economy.

Question 3. Discuss the National Competitive Advantage Theory of International Trade. How this theory is different from other theories.

Question 4. On what basis countries as classified as low income, middle income and high income countries? Do you think economic status of a country will influence its global business.

Question 5. Explain different types of Economic System. What are the major challenges faced by the command economies while transiting to a market economy?

Assignment – B

Question 1. Explain the following terms i) Tariff ii) Subsidies and Countervailing Duties iii) Quotas iv) Voluntary Export Restraint v) Local Content Requirement. Why do advanced countries insist on elimination of subsidies.

Question 2. Explain the achievement of EU in integrating its member countries. How formation of EU is beneficial for India.

Question 3. How is WTO different from GATT?. What are the main issued in the Doha Development Agenda and what are the implications for the developing countries?

Case Study

The Daewoo Group and the Asian Financial Crisis

In 1999, the Daewoo Group, Korea’s second largest chaebol, or family owned business conglomerate, collapsed under $57 billion in debt and was forced to split into independent companies. The Asian Financial crisis and its aftermath finally took its toll on the expansion-minded Daewoo and forced both Daewoo and the Korean government to decide how to dissolve the chaebol.

Kim Woo-Choong started Daewoo in 1967 as a small textile company with only five employees and $10,000 as capital. In just 30 years, Mr Kim had grown Daewoo into a diversified company with 250,000 employees worldwide as well as over 30 domestic companies and 300 oversear subsidiaries that generated sales of more than $100 billion annually. However, some estimates that Daewoo and its subcontractors employed 2.5 million people in Korea. Although Daewoo started in textiles, it quickly moved into other fields, first heavy and chemicals industries in the 1970, and then technology intensive industries in the 1980s. By the end of 1999, Daewoo was organized into six major divisions :

Trading Division

Heavy Industry and Shipbuilding

Construction and Hotel

Motor Vehicle Division’

Electronics and Telecommunications

Finance and Services

However, Daewoo was struggling. Its $50 billion debt was 40 percent greater than in 1998, equaling 13 percent of Korea’s entire GDP. A good share of that total $10 billion, was owed to overseas creditors. Its debt-to-equity ratio (total debt divided by share-holders equity) in 199 was 5 to 1, which was higher than the 4 to 1 average of other large cheabol, but it was significantly higher than the U.S average, which usually is around 1 to 1 but which rarely climbs above 2 to 1. Of course, there is no way of knowing the true picture of Daewoo’s financial information because of the climate of secrecy in Korean companies. In addition it is possible that Daewoo’s estimated debt might be greatly underestimated because no one knows whether or not the $50 million figure included debt of foreign subsidiaries.

How did Daewoo get into such a terrible position, and how much did the nature of the Korean economy and the Asian Financial crisis affect Daewoo?

Korean Economy

The impact of the Asian financial crisis on Korea was partly a result of the economic system of state intervention adopted by Korea in the mid-1950s. Modeled after the Japanese economic system, the Korean authoritarian government targeted export growth as the key for the country’s future. Initially, the government adopted a strategy of import substitution, and that later gave way to a strategy of “export or die”. Significant incentives were given to exporters, such as access to low cost money (often borrowed abroad in dollars and loaned to companies at below market interest rates in Korean won), lower corporate income taxes, tariff exemptions, tax holidays for domestic suppliers of export firms, reduced rates on public utilities, and monopoly rights for new export markets. Clearly, the government wanted Korean companies to export

The chaebol, of which the four largest were Hyundai, Daewoo, Samsung and the LGgroup, become the dominant business institutions during the rise in the Korean economy. They were among the largest companies in the world and were very diversified, as can be seen by the Daewoo’s investment and business choices. They were held together by ownership, management and family ties. In particular, family ties played an key role in controlling the chaebol. Until the 1980s, the bank in Korea provided most of the funding to the chaebol, and were owned and controlled by the government. Because of the importance of the exporting the chaebol were all tied to general trading companies. The chaebol received lots of support from the government, and they were very loyal to the government, giving rise to the charges of corruption.

Most chaebol were initially involved in the light industry, such as textile production, but the government realized that companies first shift to heavy industry and then to technology industries. Daewoo transitioned to heavy industry in 1976 when the Korean government asked President Kim to acquire an ailing industrial firm rather than let the firm go out of business and create unemployment.

Asian Financial Crisis and Its impact on Korea

The country continued to liberalize, and democracy finally came into being in 1988 with the introduction of a new constitution and the election of Kim Young-Sam, the first democratic president in Korea’s history. The economy also continued to grow at 5 to 8 percent annually during early to mid-1990s, led primarily by exports and the World Bank predicted that Korea would have the seventh largest economy in the world by 2020. However, the Asian financial crisis brought that growth to halt. After the Thai bhat was devalued on July 2, 1997, the Korean won soon followed, and the Korean stock market crashed as well. By the end of 1997, the South Korean won was 46.2 percent lower than its pre devaluation rate. At the time the crisis hit, Korea’s external debt was estimated to be $110 billion to $150 billion, 60 percent of it maturing in less than one year. In addition, Korea had another $368 billion of domestic debt.

Korea’s banks had been a tool to state industrial policy, with the government ordering banks to make loans to certain companies even if they were not healthy. Banks borrowed mony in dollars and lent them to firms in won, shifting the burden of foreign exchange from the firms to the banks. Hanbo steel and Kia Motors went bankrupt leaving some banks with huge losses. The Korean won fell in the fall of 1997 causing the government to raise interest rate to support the won and resulting in more problem loans. Bad loans at the nine largest financial institutions in Korea ranged from 94 percent to 376 percent of the banks capital, making the banks technically insolvent.

The chaebol were also very overextended. The top five chaebol were in average of 140 businesses, ranging from semi-conductor manufacture to shipbuilding to auto manufacturing. This was happening during a time when most companies in the industrial world were selling off unrelated businesses and focusing on their core competencies. Twenty five of the top 30 chaebol had debt-to-equity ratio of over 5 to 1, as noted earlier. Compare this to Toyota Motor of Japan, which had a debt-to-equity ratio in 1998 of 0.7 to 1.

During this crisis, Korea began to negotiate with the IMF for help. The IMF agreed to help, but only if Korea raised interest rates to support its currency, reduce its budget deficits, reformed its banks, restructured its chaebol, improved financial disclosure, devalued the currency (to stimulate export even more), promoted exports, and restrict imports. In return for a pledge to introduce the reforms, the IMF released funds to Korea to help it pay off its foreign debt and to keep its bank from going bankrupt. This in turn brought in more money from foreign banks that were encouraged by Korea’s pledge to reform.

One of the IMF’s key area was banking reform. The IMF encouraged Korea to open up its banking sector to foreign investment, hoping that an infusion of foreign banking expertise might help the Korean banks to make better loans. OF course, foreign banks had made a sizable number of bad loans in Asia as well. In addition, the IMF encouraged the Korean government to pass good bankruptcy laws to allow bad companies, including banks to fail. However, IMF hoped that Korean banking institutions would merge, forming fewer but stronger banks. In addition, the IMF encouraged banking reforms in order to cut the links between bankers and politics, tighten supervision and regulation of he banking industry, and improve accounting disclosure.

Impact of the crisis on Daewoo

While the financial crisis was going on, Daewoo’s president Kim ignored the warning signs and continued to expand. In 1998, a year when the Daewoo Group lost money, it added 14 new firms to its existing 275 subsidiaries. While Samsung and LG were cutting back Daewoo added 40 percent more debt.

Finally Korean President Kim Dae Jung had enough. He ordered the banks to stop lending to chaebol until they come up with and began to execute a plan to sell off businesses and to focus on their core competencies. But that didn’t stop Daewoo. TO get access to more money to feed its growth, Daewoo issued corporate bonds. Which were purchased by Investment Trust Companies (ITCs), finance companies associated with chaebol. The ITCs purchased nearly $20 billion in corporate bonds.

In early 1999, Daewoo announced a plan to sell off some of its business to comply with government restructuring requirements before the government took more drastic action, such as nationalization. However, the plans limped along until July 1999. At that point, with Korea still in deep recession, Daewoo announced that it would go bankrupt unless its Korean creditors backed it off. It basically could not even its service its interest payments of $500 million a month, let alone its principal. The government immediately stepped in and froze Daewoo’s loans until November 1999. This shock rippled through Korea, because nobody thought a chaebol would ever be allowed to collapse. That had never happened before, and the close ties between government and business were such that is was never expected to happen. The shock of Daewoo’s announcement negatively affected the corporate bond market, and the ITCs came under pressure because of their huge exposure to Daewoo. Negotiations in Korea involved 60 banks, some owned by the government, others in the private sector. On September 16, 1999, Daewoo asked its foreign creditors for a moratorium on interest payments until March 2000, so the instability spread to the international markets.

Daewoo’s Future

By the nd of 1999, Daewoo’s President Kim was left with few options to solve Daewoo’s problems. One possibility was to dismantle Daewoo and let it have only auto related businesses. All of the other businesses would be sold off to domestic or foreign investors, and the name would be changed to something other than Daewoo. Another option for President Kim was to sell some of Daewoo’s auto assest. Ford, DaimlerChrysler and

General Motors showed interest, but selling Daewoo Motor, the second largest automaker

in Korea, would be a big blow to the country.

As the Korean economy began to recover in 1999, some felt that the chaebol should weather the storm and not allow themselves to be broken up. However, President Kim Dae Jung had mandated that the chaebol get their debt-to-equity ratios from 5 to 1 to 2 to1 by the end of 1999, and that goal seemed impossible unless there was a huge infusion of equity capital or either a write off of debt through debt restructuring with the banks or selling off of debt-laden business to others. Under immense pressure caused by the debt and by accusations of fraud and embezzlement, President Kim Woo-Choong abandoned his company and fled the country. The government separated the Daewoo subsidiaries and worked with creditors to convert the debt into equity, to set up subsidiaries on debt workout programs and to look for buyers.

After a year of negotiations, General Motors purchased a portion of the $1.2 billion Daewoo Motors in April 2002for $400 million. It agreed to keep only three manufacturing plants- two in Korea and one in Vietnam- leaving creditors scrambling to sell its other plants in Eastern Europe, Asia and the Middle east. By mid-2202, the Korean economy was showing promising signs of recovery and reform. In 2001, the economy grew by 3 percent and was expected to grow by 5 to 6 percent in 2002. The government has done away with debt-based management of the large chaebol and is working to dissolve the large conglomerates to better compete internationally. Of the top 30 chaebol that existed prior to the economic crisis only 14 remain.

The improving economy helped General Motors make its decision to purchase Daewoo Motor, but GM is faced with new decision : How to market Daewoo cars and reduce the $830 million of Daewoo debt. Should GM continue selling Daewoo cars in the United States and Europe and and compete with its own brands? Without increasing its debt, will it be able to restore 37% share of the market in Korea?

Question 1. What are the key mistakes Kim Woo-Choong made in formulating and implementing Daewoo’s strategy and how did the economic crisis in Korea and in rest of Asia affect that strategy?

Question 2. How would you describe Korea’s economic system before its economy was affected by the Asian Financial crisis? What was the role of IMF in reforming the economic system in Korea?

Assignment – C

1. Which one of the following is not an assumption of the Ricardo Model :
i. Constant returns to scale
ii. Factors of production can be transferred easily one sector to another
iii. There is perfect competition in the market
iv. Technological innovation is a unique feature of the market structure

2. Which of the following is not a form of Non Tariff Barrier
i. Subsidies
ii. Local Content Requirement
iii. Ad valorem Duties
iv. Technical Standards

3. For a US trader a direct quote will be :
i. US$ 1 = 56.7 Yen
ii. GBP 1 = 34.5 Yen
iii. GBP 1 = 35.6 Euro
iv. None of the above

4. Which of the following is an example of depreciation of Indian Rupee
i. Now US$ 1 = 45 INR after 3 months US$ 1 = 50 INR
ii. Now US$ 1 = 50 INR after 3 months US$ 1 = 45 INR
iii. Both i and ii above
iv. None of the above

5. A currency is said to be at a premium when :
i. Spot rate is higher then the forward rate
ii. Forward rate is higher then the spot rate
iii. Forward rate is equal to the spot rate
iv. None of the above

6. Which of the following statement describes the Heckscher-Ohlin Theory
i. Countries should export goods that are made of factors of production that are available in abundance in the economy
ii. Countries should produce and export those goods in which they have absolute advantage
iii. Countries should produce and export those goods in which they have comparative advantage
iv. Increase in the endowment of one of the factors will reduce the production of goods that intensively use the other factor

7. “If US is capital rich and innovation increases the productivity of capital, then labour intensive industries in US will get hurt” is
i. Stolper-Samuelson Theorem
ii. Leontief Paradox
iii. Rybczynski Theorem
iv. Heckscher-Ohlin Theory

8. Which of the following is not part of Current Account transactions of a country?
i. Merchandise trade
ii. Unilateral Transfers
iii. Receipts from FDI abroad
iv. Change in forex reserve of a country

9. In an economy which out of the following is not the reasons for internal debt i.e excess of government expenses over revenue, are :
i. Poorly managed tax system
ii. Huge expenses on defense and welfare program
iii. State owned enterprises have huge losses
iv. Impressive economic growth

10. Which of the following is not an underlying principle of GATT?
i. Trade concessions by member countries will be reciprocated
ii. Countries should grant preferential treatment to other member countries
iii. Trade dispute between member countries to be settled by dispute settlement mechanism of GATT
iv. Policies governing external trade should be transparent

11. Which of the following is not an objective of NAFTA:
i. Access to financial services
ii. To investigate environment and labour abuses
iii. No change in tariff
iv. Protection for investment

12. Which of the following is not a type of regional economic integration?
i. Free Trade Area
ii. Customs Union
iii. Common Market
iv. GATT

13. EU is an example of which type of regional economic integration?
i. Economic Integration
ii. Customs Union
iii. Free Trade Agreement
iv. Preferential Trade Agreement

14. Which of the following is an example of regional trade agreement among Asian Countries?
i. SAPTA
ii. CARICOM
iii. EEC
iv. CACM

15. Which of the following is not founder member country of ASEAN?
i. Cambodia
ii. Singapore
iii. India
iv. Vietnam

16. GATT was formed in which year and by how many countries?
i. 1920, 15 countries
ii. 1947, 23 countries
iii. 1947, 15 countries
iv. 1935, 23 countries

17. Which of the following is not an example of Quantitative Restriction on trade?
i. Quotas
ii. Voluntary Export Restraint
iii. Embargo
iv. Subsidies

18. India is an example of which type of Economic System
i. Mixed Economy
ii. Command Economy
iii. Market Economy
iv. Centrally Planned Economy

19. In a command economy or centrally planned economy
i. Government owns and controls all resources
ii. Society owns and controls all resources
iii. Community owns and controls all resources
iv. Private entities owns and controls all resources

20. Which of the following economic indicator is used to rank countries in terms of their individual wealth by World Bank?
i. GDP per capita
ii. GNI per capita
iii. PPP
iv. GNI

21. Dumping which is a type of non tariff barriers means
i. Selling products at less than fair value
ii. Selling goods that are mass produced in an economy
iii. Selling goods utilizing old technology
iv. Selling goods of inferior quality

22. Which of the following pair is wrongly matched?
i. Theory of Absolute Advantage – Adam Smith
ii. Theory of Comparative Advantage – David Ricardo
iii. Heckscher-Ohlin Theory – Wassily Leontif
iv. Product Life Cycle Theory – Raymond Vernon

23. According to Porter, which of the following factors will not help in determining the Global Competitive Advantage of the company?
i. Monopoly market conditions i.e Absence of Rivals
ii. Firm Strategy
iii. Presence of related and supporting industry
iv. Factor conditions

24. Observation that “US exports were less capital intensive the US imports” which is the contradiction to the HO model is known as
i. Leontif Paradox
ii. Stopler-Samuelson Theorem
iii. Rybczynski Theorem
iv. New Product Life Cycle Theorem

25. In which type of trade agreement no duties are charged on imports from member countries
i. Preferential Trade Agreement
ii. Free Trade Agreement
iii. Custom Union
iv. None of the above

26. GATT stands for
i. General Agreement on Trade and Tariffs
ii. General Agreement on Tariffs and Trade
iii. General Arrangement on Tariffs and Trade
iv. General Arrangement on Trade and Tariffs

27. Which of the following was not an achievement of the Uruguay Round of negotiations?
i. Agreement on services
ii. Protection of Intellectual property rights
iii. 10 year phase out of MFA
iv. Agreement on Trade in Agriculture

28. Which of the following countries is not a member of ASEAN?
i. Thailand
ii. China
iii. Vietnam
iv. Singapore

29. Glasnost and Perestroika were introduced by which Soviet Leader?
i. Mikhail Gorbachev
ii. Leonid Brezhnev
iii. Yuri Andropov
iv. Konstantin Chernenko

30. Which of the following country was first to disintegrate from Soviet Republic?
i. Ukraine
ii. Lithuania
iii. Turkmenistan
iv. Tajikistan

31. Which if the following country was not the member of the European Coal and Steel Community (ECSC)?
i. Belgium
ii. France
iii. Spain
iv. Germany

32. Neo-mercantilist theory is different from the Mercantilist theory as neo-mercantilist theory proposes that
i. A country should have favourable balance of trade
ii. Countries should trade with each other for social and political objectives
iii. Country should promote import and restrict export
iv. Country should export those products which they can produce more efficiently

33. WTO was formed during which round of negotiations ?
i. Uruguay Round
ii. Doha Round
iii. Singapore Round
iv. Tokyo Round

34. Which of the following is an example of cross exchange rate?
i. USD 1 = 50.6 Euro
ii. USD 1 = 45.7 GBP
iii. Yen 1 = 34.5 Euro
iv. USD 1 = 45.9 INR

35. How inflation and Exchange rate are related to each other?
i. Higher inflation leads to currency devaluations
ii. Higher inflation leads to currency appreciation
iii. High inflation leads to currency stability
iv. There is no relation between inflation and exchange rate

36. External Debt is measured as
i. Total External Debt of a country
ii. Debt as percentage of GDP
iii. Total of Fiscal deficit and External borrowings
iv. Both i and ii above

37. What does transition to market economy means?
i. Liberalizing economic activity
ii. Control of economy by government
iii. Imposing trade restrictions
iv. All of the above

38. Which of the following countries is not a member of MERCOSUR?
i. Brazil
ii. Argentina
iii. Paraguay
iv. Mexico

39. What is a convertible currency?
i. Currency that can be freely traded with other currencies
ii. Currency that can be traded only with hard currencies
iii. Currencies of the Asian Countries
iv. Currencies of the developed countries

40. Currency Speculation is done to
i. Cover risk and earn profit
ii. Cover risk
iii. Maintain foreign currency account to earn interest
iv. None of the above