UNIT 5

INTERNATIONAL AND RECENT ISSUES IN ENVIRONMENT

International Business:
 International business is a term used to collectively describe all commercial
transactions (private and governmental, sales, investments, logistics, and transportation)
that take place between two or more regions, countries and nations beyond their political
boundary.
 Usually, private companies undertake such transactions for profit; governments undertake
them for profit and for political reasons. It refers to all those business activities which
involve cross border transactions of goods, services, resources between two or more
nations.
 Transaction of economic resources include capital, skills, people etc. for international
production of physical goods and services such as finance, banking, insurance,
construction etc.
 A multinational enterprise (MNE) is a company that has a worldwide approach to
markets and production or one with operations in more than a country. An MNE is often
called multinational corporation (MNC) or transnational company (TNC).
 Well known MNCs include fast food companies such as McDonald's and Yum Brands,
vehicle manufacturers such as General Motors, Ford Motor Company and Toyota,
consumer electronics companies like Samsung, LG and Sony, and energy companies
such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple
national markets.
International issues
 The international environment is very important today. Globalisation, the process
whereby businesses develop worldwide brands and products which they supply across the
world, and in which they employ labour in many different countries, has transformed
business relations.
 No country today can provide all of the resources necessary to fully develop its economic
potential and satisfy the needs of its population. By virtue of its location, Britain has
historically been a major trading nation.
 International trade has enabled it to gain from the advantages of specialisation by
exchanging its surplus goods for surpluses produced by other countries. Thus its
inhabitants can prosper from lower prices and higher living standards.
International trade involves making payment overseas for goods and services received
and the receiving of payments for goods and services supplied. The balance of payment is
a way of measuring a country's international trading in a given period of time.
 Ideally a country should sell a lot of exports to other countries, because high levels of
exports raises living standards for people in this country.
 At the same time it is good to import goods from overseas because this enables us to
enjoy more goods and services than we can produce ourselves.
European Union

 Britain is a member of the European Union which is one of the largest free trading areas
in the world. Within this area there is a freedom of movement of goods, services and
people.
 Most of the countries of the European Union have a common currency - the Euro.
  Britain loses out from not using the Euro as its currency because every time a business
person imports or exports goods within the European Union they have to exchange one
form of currency for another, often involving time and cost in making the exchange.

 A multinational company is one that produces and/or sells its goods in two or more
countries. Many multi-nationals operate in North America, Europe and at least one other
continent.

1. Multinational Corporations
 
Multinational firms arise because capital is much more mobile than
labor. Since cheap labor and raw material inputs are located in other
countries, multinational firms establish subsidiaries there. They are
often criticized as being runaway corporations.
Economists are not in agreement as to how multinational or
 Definition of MNC
transnational corporations should be defined. Multinational
corporations have many dimensions and can be viewed from several
perspectives (ownership, management, strategy and structural, etc.)
The following is an excerpt from Franklin Root, International Trade
and Investment

Some argue that ownership is a key criterion. A firm becomes

multinational only when the headquarter or parent company is
effectively owned by nationals of two or more countries.
For example, Shell and Unilever, controlled by British and Dutch
Ownership interests, are good examples. However, by ownership test, very few
criterion multinationals are multinational. The ownership of most MNCs are
uninational. (e.g., the Smith-Corona versus Brothers case)
Depending on the case, each is considered an American multinational
company in one case, and each is considered a foreign multinational
in another case. Thus, ownership does not really matter.

An international company is multinational if the managers of the

Nationality mix of parent company are nationals of several countries. Usually, managers
headquarter of the headquarters are nationals of the home country. This may be a
managers transitional phenomenon.
Very few companies pass this test currently.

 global profit maximization

Business Strategy some are home country oriented,
Others are host country oriented.
Successful firms: world-oriented, but must adapt to local markets.
 According to Franklin Root (1994), an MNC is a parent company
that
(i) engages in foreign production through its affiliates located in
several countries,
 Root's definition
(ii) exercises direct control over the policies of its affiliates, and
(iii) Implements business strategies in production, marketing, finance
and staffing that transcend national boundaries.
In other words, MNCs exhibit no loyalty to the country in which they
are incorporated. 
 
2. Three Stages of Evolution
(i)  initial inquiries ⇒ result in first exports.
(ii) Initially, firms rely on export agents. ⇒ expansion of export
Export Stage sales
(iii) ⇒ foreign sales branch or assembly operations are established
(to save transport cost)

 Why?
(i) There is a limit to foreign exports, due to tariffs, quotas and
transportation costs.
(ii) Wage rates may be lower in LDCs.
Foreign production
(iii) Environmental regulations may be lax in LDCs (e.g., China).
stage
Itai-Itai disease in Japan since the 1920s was caused by cadmium
poisoning. Contaminated effluents flowed into rice paddies and
water source.) Watch the movie, Erin Brochovich.
(iv) meet Consumer demands in the foreign countries

DFI versus Licensing

Once the firm chooses foreign production as a method of delivering
  goods to foreign markets, it must decide whether to establish a
foreign production subsidiary or license the technology to a foreign
firm.

 Licensing  Licensing is usually first experience (because it is easy)

e.g.: Kentucky Fried Chicken in the U.K.
MacDonald’s in Licensing does not require any capital expenditure
Moscow Financial risk is zero.
Royalty payment = a fixed % of sales
licensor may provide training, equipment, etc.

Problem: the parent firm cannot exercise any managerial

 control over the licensee (it is independent)
The licensee may transfer industrial secrets to other independent
firms, thereby creating rivals.

 It requires the decision of top management because it is a critical

step.
(i) it is risky (lack of information, large capital requirement)
US firms tend to establish subsidiaries in Canada first. Singer
Manufacturing Company established its foreign plants in Scotland
 Direct Investment and Australia in the 1850s.
(ii) plants are established in several countries
(iii) licensing is switched from independent producers to its
subsidiaries.
(iv) export continues (exports and FDI may be substitues or
complements)

The company becomes a multinational enterprise when it begins to

plan, organize and coordinate production, marketing, R&D,
 Multinational Stage
financing, and staffing.
For each of these operations, the firm must find the best location.

A company whose foreign sales are 25% or more of total sales. This
ratio is high for small countries, but low for large countries, e.g.
Nestle (98%: Dutch), Phillips (94%: Swiss).
Examples: Manufacturing MNCs
How to tell whether a
24 of top fifty firms are located in the U.S.
firm is multinational?
9 in Japan
Rule of Thumb
6 in Germany.
Petroleum companies: 6/10 located in the U.S.
Food/Restaurant Chains. 10/10 are headquartered in the U.S.
US Multinational Corporations: Exxon, GM, Ford, etc.

 
3. Motives for Foreign Direct Investment (FDI)
 New MNCs do not pop up randomly in foreign nations. It is the
  result of conscious planning by corporate managers. Investment
flows from regions of low anticipated profits to those of high returns.

A company may have reached a plateau satisfying domestic demand,

 1  Growth motive
which is not growing. Looking for new markets.
  Foreign direct investment is one way to expand. FDI is a means to
bypassing protective instruments in the importing country.
Examples:
 2 Bypass protection (i) European Community: imposed common external tariff against
in importing outsiders. US companies circumvented these barriers by setting up
countries subsidiaries.
(ii) Japanese corporations located auto assembly plants in the US, to
bypass VERs.
 

 Transportation costs are like tariffs in that they are barriers which
raise consumer prices. When transportation costs are high,
multinational firms want to build production plants close to either the
input source or to the market in order to save transportation costs.
 3 avoid high
Multinational firms (e.g. Toyota) that invest and build production
transport costs
plants in the United States are better off selling products directly to
American consumers than the exporting firms that utilize the New
Orleans port to ship and distribute products through New Orleans.

 Japanese firms (e.g., Komatsu) invest here to produce heavy

construction machines to avoid excessive exchange rate fluctuations.
Also, Japanese automobile firms have plants to produce automobile
parts. For instance, Toyota imports engines and transmissions from
Japanese plants, and produce the rest in the U.S.
Toyota is behind GM and Volkswagen in China, and plans to expand
its production in China and has no plans to build more plants in North
America. (China's autoparts are cheaper.) It may have been a mistake
 4 avoid Exchange for Toyota to overexpand its plants in the US. GM and Volkswagen
Rate fluctuations have expanded their production plants in Shanghai.

A Komatsu machine used in ethanol production in Ida Grove, Iowa.

 The most certain method of preventing actual or potential

competition is to acquire foreign businesses.
 5 competition GM purchased Monarch (GM Canada) and Opel (GM Germany). It
did not buy Toyota, Datsun (Nissan) and Volkswagen. They later
became competitors.
   A foreign country may have cheap labor or land. United Fruit has
established banana-producing facilities in Honduras.
Due to high transportation costs, FPE does not hold. ⇒Cheap foreign
labor. Labor costs tend to differ among nations. MNCs can hold
 6 reduce costs down costs by locating part of all their productive facilities abroad.
(Maquildoras)
Komatsu first established its European factory in Belgium in 1967,
and its American subsidiary in 1970. Over the years it established
many other subsiaries throughout Europe, Russia, America and Asia.

Foreign collaboration is such an alliance of domestic (native) and abroad (non-native) entities
like individuals, firms, companies, organizations, governments, etc., that come together with an
intention to finalize a contract on some tasks or jobs or projects.

FOREIGN COLLBRATION
Indian government keeps very positive attitude towards the Foreign Investment, due to Which
India is going through lot of liberalization and is one the best choice of Foreign Investors. Indian
government is committed towards economic development of the country and for which Foreign
Investment is required.
Definitions:
Foreign collaboration is an alliance of resident and non-resident entities to carry on the
agreed task (work) collectively
(OR)
“Foreign collaboration includes ongoing business activities of sharing information related
to financing, technology, engineering, management consultancy, logistics, marketing, etc., which
are generally, offered by a non-resident (foreign) entity to a resident (domestic or native) entity
in exchange of cheap skilled and semi-skilled labour, inexpensive high-quality raw-materials,
low cost hi-tech infrastructure facilities, strategic (favorable) geographic location, and so on,
with an approval (permission) from a governmental authority like the ministry of finance of a
resident country.”
“Foreign collaboration is an alliance incorporated to carry on the agreed task collectively with
the participation (role) of resident and non-resident entities.”

Foreign collaboration is thus an alliance (a union or an association) formed for mutual benefit of
collaborating parties.

Meaning of Foreign Collaboration

Following important points convey the meaning of foreign collaboration:
1. Foreign collaboration is a mutual co-operation between one or more resident and non-
resident entities.
2. It is a strategic alliance between one or more resident and non-resident entities.
3. Only two or more resident (native) entities cannot make a foreign collaboration possible.
For its formation and as per above definitions, it is mandatory that one or more non-
 resident (foreign) entities must always collaborate with one or more resident (domestic)
entities.
4. Before starting a foreign collaboration, both entities, a resident and non-resident company
must always seek approval (permission) from the governmental authority of the domestic
country.
5. During an ongoing process of seeking permission, the collaborating entities prepare a
preliminary agreement.
6. According to this preliminary agreement, for example, the non-resident company agrees
to provide finance, technology, machinery, know-how, management consultancy,
technical experts, and so on. On the other hand, resident company promises to supply
cheap labour, low-cost and quality raw-materials, ample land for setting factories, etc.
7. After obtaining the necessary permission, individual representative of a resident and non-
resident entity sign this preliminary agreement. Signature acts as a written acceptance to
each other's expectations, terms and conditions. After signatures are exchanged, a
contract is executed, and foreign collaboration gets established. Contract is a legally
enforceable agreement. All contracts are agreements, but all agreements need not
necessarily be a contract.
8. After establishing foreign collaboration, resident and non-resident entity start business
together in the domestic country.
9. Collaborating entities share their profits as per the profit-sharing ratio mentioned in their
executed contract.
10. The tenure (term) of the foreign collaboration is specified in the written contract.

Types of foreign collaboration:

There are two types of foreign collaborations:

a) Financial collaboration (foreign equity participation) where foreign equity alone is

Involved:
b) Technical collaboration (technology transfer) involving licensing of technology by
The foreign collaborator on due compensation. –

There are two approving authorities

1) Reserve Bank of India, and
2) Department of Industrial Development in the Ministry of Industry, Government
of India.
The main characteristics or features of foreign collaboration are as follows:
1. A type of partnership.
2. Requires an approval of the government.
3. Entities are from developed and developing country.
4. Benefits to developed country.
5. Benefits to developing country.
6. Establishes business relationships.
7. Initiation of foreign collaboration.
8. Better utilization of resources.
9. Scope of foreign collaboration.
10. Miscellaneous features.
Now let's discuss each feature of foreign collaboration one by one.
1. A type of partnership
Foreign collaboration is a type of partnership (alliance) between a domestic entity and an
abroad based entity. In such an alliance, each partner plays some crucial roles, which are as
follows:
1. Generally, an abroad based entity provides support for finance, technology, engineering,
management, etc.
2. On the other hand, a domestic based entity provides cheap labour, high-quality raw materials,
land and so on.
Here, domestic and abroad based entity share their profits as per profit-sharing ratio mentioned
in their contract (legally enforceable agreement).
2. Requires an approval of the government
Before initiating foreign collaboration, collaborating entities (domestic and abroad) must
seek permission from the government of the domestic country.
The government gives approval only when the contract of foreign collaboration is prepared in
accordance with the industrial or foreign policy of its country.

3. Entities are from developed and developing country

In foreign collaboration, one or more abroad entities are generally from developed
countries like U.S.A., Germany, Japan, etc. Whereas, a domestic entity is from a developing
country or less-developed country (LDC). Some examples of developing countries are India, Sri-
Lanka, Indonesia, and so on.
4. Benefits to developed country
1. Foreign collaboration helps a developed country earn good returns on its overall investments
made in a domestic country.
2. It also aids a developed country earn a good reputation for providing financial and technical
assistance (support) to the developing country.
5. Benefits to developing country
1. Foreign collaboration helps a developing country to get finance, technology, machinery, know-
how, management and technical expertise, etc. from a developed country.
2. It also assists a developing country to achieve a faster economic growth.
6. Establishes business relationships
Foreign collaboration establishes business (trade) relationships among different countries.
It removes their economic gaps (hurdles) and brings them closer to each other.
7. Initiation of foreign collaboration
1. At governmental level foreign collaboration, a government of some abroad country collaborates with
the government of a domestic country.
2. Similarly, at corporate level foreign collaboration, a company from some abroad country collaborates
with the company from a domestic country. These companies may be either private or public in
nature.
8. Better utilization of resources
Though developed countries are good with finance, technology, management and
technical expertise, generally, they face difficulties to meet a continuous supply of low-cost
labour and quality raw materials.
On the other hand, generally, a developing country has more availability of low-cost labour and
plenty of quality raw materials.
Foreign collaboration brings developed and developing country together and helps them to
satisfy each other's needs by exchanging their excess resources. Finally, this leads to a better
utilization of available resources.
9. Scope of foreign collaboration
The scope of foreign collaboration is very wide. It covers core business activities such as:
1. Finance,
2. Production,
3. Management and Technical consultancy,
4. Advertising and Marketing, etc.
10. Miscellaneous features
Miscellaneous features of foreign collaboration are listed as follows:
1. Foreign collaboration reduces unemployment in a developing country.
2. It improves infrastructure in a developing country.
3. It helps to increase revenue of the governments in the form of taxes and duties.
4. It also aids to achieve economic growth (progress) of developed and developing country.

Objectives of foreign collaboration:

1. Improve the financial growth of the collaborating entities.
2. Occupy a major share for the collaborating entities.
3. Reduce the higher operating cost of a non-resident entity.
4. Make an optimum and effective use of a resource in residents’ entity’s country.
5. Generate employment in the resident entity’s country.
International Economic Institutions:
a. International financial institutions (IFIs) are financial institutions that have been established
(or chartered) by more than one country, and hence are subjects of international law.
b. Their owners or shareholders are generally national governments, although other international
institutions and other organizations occasionally figure as shareholders.
c. The most prominent IFIs are creations of multiple nations, although some bilateral financial
institutions (created by two countries) exist and are technically IFIs.
Multilateral development banks (MDB).
Multilateral development bank (MDB) is an institution, created by a group of countries that
provides financing and professional advising for the purpose of development.
MDBs have large memberships including both developed donor countries and developing
borrower countries.
MDBs finance projects in the form of long-term loans at market rates, very-long-term loans (also
known as credits) below market rates, and through grants.
The following are usually classified as the main MDBs:
 World Bank
 European Investment Bank
 African Development Bank
 Asian Development Bank
 European Bank for Reconstruction and Development
 Inter-American Development Bank Group
Bretton Woods institutions
The best-known IFIs were established after World War II to assist in the reconstruction of
Europe and provide mechanisms for international cooperation in managing the global financial
system.
They include the World Bank, the IMF, and the International Finance Corporation.
International monitory fund
 The International Monetary Fund (IMF) is an international organization that was
created on July 22, 1944 at the Bretton Woods Conference and came into existence on
December 27, 1945 when 29 countries signed the Articles of Agreement. It originally had
45 members.
 The IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the
world’s international payment system post-World War II.
 Countries contribute money to a pool through a quota system from which countries with
payment imbalances can borrow funds temporarily.
 The IMF describes itself as “an organization of 188 countries, working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around the
world.
 The organization's stated objectives are to promote international economic cooperation,
international trade, employment, and exchange rate stability, including by making
financial resources available to member countries to meet balance of payments needs.
 Its headquarters are in Washington, D.C., United States.
 The International Monetary Fund was originally created as part of the Bretton Woods
system exchange agreement in 1944 During the Great Depression,
 The IMF was formally organized on December 27, 1945, when the first 29 countries
signed its Articles of Agreement.
 Christian legrde was confirmed as Managing Director of the IMF for a five-year term
starting on July 5, 2011.
 In 1947, France became the first country to borrow from the IMF
Benefits
Member countries of the IMF have access to information on the economic policies of all
member countries, the opportunity to influence other members’ economic policies, technical
assistance in banking, fiscal affairs, and exchange matters, financial support in times of payment
difficulties, and increased opportunities for trade and investment.
Board of Governors
The Board of Governors consists of one governor and one alternate governor for each
member country. Each member country appoints its two governors. The Board normally meets
once a year and is responsible for electing or appointing executive directors to the Executive
Board. While the Board of Governors is officially responsible for approving quota increases,
special drawing right allocations, the admittance of new members, compulsory withdrawal of
members, and amendments to the Articles of Agreement and By-Laws, in practice it has
delegated most of its powers to the IMF's Executive Board.
Criticisms
 Developed countries were seen to have a more dominant role and control over less
developed countries
  The Fund worked on the incorrect assumption that all payments disequilibria were caused
domestically.
 The effects of Fund policies were anti-developmental.
 The accusation that harsh policy conditions were self-defeating where a vicious circle
developed when members refused loans due to harsh conditionality, making their
economy worse and eventually taking loans as a drastic medicine.
 The point that the Fund's policies lack a clear economic rationale. Its policy foundations
were theoretical and unclear due to differing opinions and departmental rivalries whilst
dealing with countries with widely varying economic circumstances.
Functions of International Monetary fund:
The IMF does a number of supervisory works relating to financial dealings between different
countries. Some of the works done by IMF are:
 Helping in international trade, that is business between countries
 Looking after exchange rates
 Looking after balance of payments
 Helping member countries in economic development
 It also provides machinery for international consultations.

Objectives of IMF
The main objectives of the Fund, as summarized in the Articles of Agreement, are as follows:
(i) To promote international monetary cooperation through a permanent institution that provides
the machinery for consultation and collaboration on international monetary problems.
(ii) To facilitate the expansion and balanced growth of international trade, and to contribute
thereby to the promotion and maintenance of high levels of employment and real income and to
the development of the productive resources of all members as primary objectives of economic
policy.
(iii) To promote exchange stability, to maintain orderly exchange arrangements among members,
and to avoid competitive exchange depreciations.
(iv) To assist in the establishment of a multilateral system of payments in respect to current
transactions between members and in the elimination of foreign exchange restrictions which
hamper the growth of world trade?
(v) To give confidence to members by the Fund's resources available to them under adequate
safeguards, thus providing them with opportunity to correct maladjustments in their balance of
payments without resorting to measures destructive of national or international prosperity.
(vi) In accordance with the above, to shorten the duration and lesson the degree of disequilibrium
in the international balance of payments of members.

World trade organization:

 The World Trade Organization (WTO) is an organization that intends to supervise and
liberalize international trade. The organization officially commenced on January 1, 1995 under
the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT),
which commenced in 1948.
  The organization deals with regulation of trade between participating countries; it provides a
framework for negotiating and formalizing trade agreements, and a dispute resolution process
aimed at enforcing participants' adherence to WTO agreements, which are signed by
representatives of member governments and ratified by their parliaments.
 The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established
after World War II in the wake of other new multilateral institutions dedicated to international
economic cooperation — notably the Bretton Woods institutions known as the World Bank and
the International Monetary Fund
 The point that the Fund's policies lack a clear economic rationale. Its policy foundations were
theoretical and unclear due to differing opinions and departmental rivalries whilst dealing with
countries with widely varying economic circumstances.
 The organization is attempting to complete negotiations on the Doha Development Round, which
was launched in 2001 with an explicit focus on addressing the needs of developing countries.
 The Doha Development Round or Doha Development Agenda (DDA) is the current trade-
negotiation round of the World Trade Organization (WTO) which commenced in November
2001. Its objective is to lower trade barriers around the world, which will help facilitate the
increase of global trade..
 The organization is attempting to complete negotiations on the Doha Development Round, which
was launched in 2001 with an explicit focus on addressing the needs of developing countries.
GATT rounds of negotiations
The GATT was the only multilateral instrument governing international trade from 1946
until the WTO was established on January 1, 1995. Despite attempts in the mid 1950s and 1960s
to create some form of institutional mechanism for international trade, the GATT continued to
operate for almost half a century as a semi-institutionalized multilateral treaty regime on a
provisional basis

Functions of WTO
The former GATT was not really an organization; it was merely a legal arrangement. On
the other hand, the WTO is a new international organization set up as a permanent body. It is
designed to play the role of a watchdog in the spheres of trade in goods, trade in services, foreign
investment, intellectual property rights, etc. Article III has set out the following five functions of
WTO;
(i) The WTO shall facilitate the implementation, administration and operation and further the
objectives of this Agreement and of the Multilateral Trade Agreements, and shall also provide
the frame work for the implementation, administration and operation of the plurilateral Trade
Agreements.
(ii) The WTO shall provide the forum for negotiations among its members concerning their
multilateral trade relations in matters dealt with under the Agreement in the Annexes to this
Agreement.
(iii) The WTO shall administer the Understanding on Rules and Procedures Governing the
Settlement of Disputes.
(iv) The WTO shall administer Trade Policy Review Mechanism.
(v) With a view to achieving greater coherence in global economic policy making, the WTO
shall cooperate, as appropriate, with the international Monetary Fund (IMF) and with the
International Bank for Reconstruction and Development (IBRD) and its affiliated agencies.
Objectives of WTO
Important objectives of WTO are mentioned below:
(i) To implement the new world trade system as visualized in the Agreement;
(ii) To promote World Trade in a manner that benefits every country;
(iii) To ensure that developing countries secure a better balance in the sharing of the advantages
resulting from the expansion of international trade corresponding to their developmental needs;
(iv) To demolish all hurdles to an open world trading system and usher in international economic
renaissance because the world trade is an effective instrument to foster economic growth;
(v) To enhance competitiveness among all trading partners so as to benefit consumers and help
in global integration;
(vi) To increase the level of production and productivity with a view to ensuring level of
employment in the world;
(vii) To expand and utilize world resources to the best;
(viii) To improve the level of living for the global population and speed up economic
development of the member nations.

World Bank:
 The World Bank is an international financial institution that provides loans to developing
countries for capital programs.
 The World Bank's official goal is the reduction of poverty.
 According to the World Bank's Articles of Agreement (as amended effective 16 February 1989),
all of its decisions must be guided by a commitment to promote foreign investment, international
trade, and facilitate capital investment.
 The World Bank is one of four institutions created at the Bretton Woods Conference in 1944.
The International Monetary Fund (IMF), a related institution, is another. Delegates from many
countries attended the Bretton Woods Conference. The most powerful countries in attendance
were the United States and United Kingdom, which dominated negotiations .
 Although both are based in Washington, D.C., the World Bank is traditionally headed by a citizen
of the United States while the IMF is led by a European citizen.
Objectives of World Bank
The World Bank was established to promote long-term foreign investment loans on reasonable
terms. The, purposes of the Bank, as set forth in the 'Articles of Agreement’ are as follows:
(i) To assist in the reconstruction and development of territories of members by facilitating the
investment of capital for productive purpose including;
(a) The restoration of economies destroyed or disrupted by war;
(b) The reconversion of productive facilities to peaceful needs; and
(c) The encouragement of the development of productive facilities and resources in less
developing countries;
(ii) To promote private investment by means of guarantee or participation in loans and other
investments made by private investors.
(iii) When private capital is not available on reasonable terms, to supplement private investment
by providing on suitable conditions finance for productive purpose out of its own capital funds
raised by it and its other resources.
(iv) To promote the long-range balanced growth of international trade and the maintenance of
equilibrium in balances of payments by encouraging international investment for the
development of the productive resources of members, thereby assisting in raising productivity,
the standard of living, and conditions of labour in their territories.
(v) To arrange the loans made or guaranteed by it in relation to international loans through other
channels so that the more useful and urgent projects, large and small alike, will be dealt with
first.
(vi) To conduct its operations with due regard to the effect of international investment on
business conditions in the territories of members and in the immediate postwar years, to assist in
bringing about a smooth transition from a wartime to peacetime economy
Functions of the world bank:
World Bank performs the following functions:
(i) Granting reconstruction loans to war devastated countries.
(ii) Granting developmental loans to underdeveloped countries.
(iii) Providing loans to governments for agriculture, irrigation, power, transport, water supply,
educations, health, etc
(iv) Providing loans to private concerns for specified projects.
(v) Promoting foreign investment by guaranteeing loans provided by other organizations.
(vi)Providing technical, economic and monetary advice to member countries for specific projects
(vii) Encouraging industrial development of underdeveloped countries by promoting economic
reforms.
Foreign Trade Policies:
i. International trade is the exchange of capital, goods, and services across international borders
or territories.
ii. In most countries, such trade represents a significant share of gross domestic product (GDP).
iii. While international trade has been present throughout much of history (see Silk Road, Amber
Road), it’s economic, social, and political importance has been on the rise in recent centuries.
iv. Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system.
v. Increasing international trade is crucial to the continuance of globalization.
vi. Without international trade, nations would be limited to the goods and services produced within
their own borders.

vii. International trade is, in principle, not different from domestic trade as the motivation and
the behavior of parties involved in a trade do not change fundamentally regardless of
whether trade is across a border or not.

viii. The main difference is that international trade is typically more costly than domestic
trade. The reason is that a border typically imposes additional costs such as tariffs, time
 costs due to border delays and costs associated with country differences such as language,
the legal system or culture.

ix. Another difference between domestic and international trade is that factors of production
such as capital and labor are typically more mobile within a country than across
countries.

x. Thus international trade is mostly restricted to trade in goods and services, and only to a
lesser extent to trade in capital, labor or other factors of production. Trade in goods and
services can serve as a substitute for trade in factors of production.
xi. International trade is also a branch of economics, which, together with international finance,
forms the larger branch of international economics.