Principles of Global Business Management-1


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Assignment – A

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


2. 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?


3. What is culture? What are the different components of culture? How study of cross cultural management is relevant in today’s globalize world.


4. Critically evaluate the various alternatives available to an organization to enter the foreign market. Give example for each one of them.


5. What is globalization? What are the main drivers of the globalization phenomenon? Do your think technologies play an important role in promoting International trade?


Assignment – B


Q1. Why do accounting systems of different countries differ? What are its implications on company engaged in international business?


Q2. What are the main responsibilities of the Human Resource Manager in a MNC? What are the different kinds of staffing policies in an global organization. What are the main advantages and disadvantages of Ethnocentric, Polycentric and Geocentric approaches to staffing policy?


Q3.Explain different types of organization structure in international business. What are the advantages and disadvantages of each one of them?



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?



  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?


  1. 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 :

a) Constant returns to scale

b) Factors of production can be transferred easily one sector to another

c) There is perfect competition in the market

d) Technological innovation is a unique feature of the market structure


2. Which of the following is not a form of Non Tariff Barrier

a) Subsidies

b) Local Content Requirement

c) Ad valorem Duties

d) Technical Standards


3. Which of the following is not an underlying principle of GATT?

a) Trade concessions by member countries will be reciprocated

b) Countries should grant preferential treatment to other member countries

c) Trade dispute between member countries to be settled by dispute settlement mechanism of GATT

d) Policies governing external trade should be transparent


4. Which of the following is not an example of Quantitative Restriction on trade?

a) Quotas

b) Voluntary Export Restraint

c) Embargo

d) Subsidies


5. India is an example of which type of Economic System

a) Mixed Economy

b) Command Economy

c) Market Economy

d) Centrally Planned Economy


6. In a command economy or centrally planned economy

a) Government owns and controls all resources

b) Society owns and controls all resources

c) Community owns and controls all resources

d) Private entities owns and controls all resources



7. Which of the following economic indicator is used to rank countries in terms of their individual wealth by World Bank?

a) GDP per capita

b) GNI per capita

c) PPP

d) GNI


8. Dumping which is a type of non tariff barriers means

a) Selling products at less than fair value

b) Selling goods that are mass produced in an economy

c) Selling goods utilizing old technology

d) Selling goods of inferior quality


9. In which type of trade agreement no duties are charged on imports from member countries

a) Preferential Trade Agreement

b) Free Trade Agreement

c) Custom Union

d) None of the above


10. Which of the following was not an achievement of the Uruguay Round of negotiations?

a) Agreement on services

b) Protection of Intellectual property rights

c) 10 year phase out of MFA

d) Agreement on Trade in Agriculture


11. WTO was formed during which round of negotiations ?

a) Uruguay Round

b) Doha Round

c) Singapore Round

d) Tokyo Round


12. How inflation and Exchange rate are related to each other?

a) Higher inflation leads to currency devaluations

b) Higher inflation leads to currency appreciation

c) High inflation leads to currency stability

d) There is no relation between inflation and exchange rate


13. External Debt is measured as

a) Total External Debt of a country

b) Debt as percentage of GDP

c) Total of Fiscal deficit and External borrowings

d) Both i and ii above


14. What is a convertible currency?

a) Currency that can be freely traded with other currencies

b) Currency that can be traded only with hard currencies

c) Currencies of the Asian Countries

d) Currencies of the developed countries


15. Currency Speculation is done to

a) Cover risk and earn profit

b) Cover risk

c) Maintain foreign currency account to earn interest

d) None of the above


16. ICICI and Prudential joined together to market Insurance products in India. This strategy is

a) a) exporting

b) b) licensing

c) c) joint venture

d) d) assembly operations


17. To sell to their subsidiaries in countries with lower corporate tax rates than that in the United States, American firms should make their transfer prices

a) a) low

b) b) high

c) c) moderate

d) d) no change

18. Which of the following is not a driver of globalization?

a) The fragmentation of consumer tastes between countries.

b) The competitive process

c) Multinational companies successfully persuading governments to lower trading barriers.

d) The need to gain economies of scale.

19. Hofstede argues that:

a) International firms can easily transfer their ways of working from one country to another.

b) Business does not need to take into account the norms and values of the countries where they operate.

c) Each country has a single culture.

d) National culture is more influential than organizational culture.

20. Several governments have reduced taxes on companies. Select one of the reasons below that help explain why governments are doing this.

a) To cut company production costs

b) To reduce government borrowing.

c) To reduce the budget deficit

d) To retain and attract investment by multinational companies.

21. Why might arbitration be an attractive option for settling disputes in international trade and investment cases?

a) It is more costly than going through national courts.

b) The decisions of the arbitrator can be widely enforced.

c) The proceedings are made public.

d) There is no right of appeal.


22. Acquiring and managing funds in the global market is the primary emphasis of

a) lawyers.

b) treasurers.

c) financial managers.

d) bankers.

e) accountants.


23. A strategy of ______ pricing involves using price as a competitive weapon in order to push competitors out of a national market.

a) premium

b) predatory

c) incremental

d) psychological


24. Implementing a global standardized advertising programme has the following advantage(s) to a firm internationalizing:

a) lower costs.

b) economic advantages.

c) creative talent can be more readily and efficiently tapped.

d) all of the above.


25. Countries in which the retail systems are fragmented tend to have:

a) longer distribution channels.

b) few suppliers.

c) less customers.

d) no cartels.


26. ______ has been a pioneer in the hypermarket retailing concept.

a) Virgin Megastores

b) Carrefour

c) Wal-Mart

d) Body Shop


27. What is the main benefit of acquisitions over other hierarchical entry modes?

a) Cheaper entry.

b) No corporate tax.

c) Rapid entry.

d) None of the above.


28. The term ‘royalties’ is closely associated with:

a) contract manufacturing.

b) piggybacking.

c) licensing.

d) direct exporting


29. The German rules for bookkeeping are said to be ‘conservative’. This means that the German rules are:

a) dating back to the 19th century

b) understating the value of assets and income

c) have been introduced by a right-wing government

d) overvaluing their assets


30. US rules on bookkeeping require a larger degree of disclosure than the German system. The reason for this difference is:

a) The Enron bookkeeping fraud in the US

b) The higher level of globalisation of the US economy

c) The high level of equity financed by share holders in the US

d) The higher level of equity is financed by the banks


31. The sum of all goods and services produced in a country during a year is called

a) real income.

b) gross domestic product.

c) real gross national product.

d) balance of trade.

e) gross international product.


32. Which of the following is not a part of strategic management?

a) Environmental Analysis

b) Evaluation and control

c) Capital budgeting

d) PEST analysis


33. Which of the following is not a type of departmentalization?

a) functional

b) product

c) geographical

d) hierarchy


34. Businesses tend to be more ____ when the decisions to be made are risky.

a) decentralized

b) productive

c) informal

d) line-and-staff oriented

e) centralized


35. An organization’s shared values, beliefs, traditions, philosophies, rules, and heroes represent its

a) organizational culture.

b) grapevine.

c) organizational manual.

d) formal organization.

e) information organization

36. In Porter’s Diamond it is argued that a nation will not be competitive when:

a) National firms have to face much domestic competition.

b) Domestic customers are very sophisticated.

c) Firms in the supply chain are themselves internationally competitive.

d) There is a shortage of ‘advanced factors’.


37. This export strategy involves selling a product from a home base, usually without any product modification.

a) exporting

b) licensing

c) joint venture

d) manufacturing


38. This entry strategy involves granting permits to a foreign company to use industry property, technical knowhow, or engineering design in a foreign market.

a) exporting

b) licensing

c) joint venture

d) manufacturing


39. This international organization wants to achieve a broad, multilateral, and free worldwide system of trading.

a) WTO

b) GSP


d) MFN


40. “Noise” does not affect this stage of the communication process.

a) sender

b) encoding

c) decoding

d) receiver

e) all of them can be affected



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