Unit 5: International finance and contemporary issues in IB (9 hours)

Types of FDI - Greenfield investment, Mergers & Acquisition, strategic alliances; benefits and
drawbacks of FDI. Overview of exchange rate systems. Contemporary issues in international business:
Outsourcing and its potential for India; international business and sustainable development.

Foreign direct investment (FDI) is an investment from a party in one country into a business or
corporation in another country with the intention of establishing a lasting interest. Lasting interest
differentiates FDI from foreign portfolio investments, where investors passively hold securities from a
foreign country. A foreign direct investment can be made by obtaining a lasting interest or by expanding
one’s business into a foreign country.
An investment into a foreign firm is considered an FDI if it establishes a lasting interest. A lasting
interest is established when an investor obtains at least 10% of the voting power in a firm.
The key to foreign direct investment is the element of control. Control represents the intent to actively
manage and influence a foreign firm’s operations. This is the major differentiating factor between FDI
and a passive foreign portfolio investment.
For this reason, a 10% stake in the foreign company’s voting stock is necessary to define FDI. However,
there are cases where this criterion is not always applied. For example, it is possible to exert control
over more widely traded firms despite owning a smaller percentage of voting stock.
Types of FDI
Companies that want to expand their interests internationally generally make physical investments and
purchases in another country. They purchase, lease, or otherwise acquire assets in their host country
including facilities such as plants, office space, or other types of buildings. These acquisitions may
come in the form of new or existing facilities. In the business world, these investments are called
greenfield and brownfield investments.
What is a Greenfield Investment?
In economics, a greenfield investment (GI) refers to a type of foreign direct investment (FDI) where a
company establishes operations in a foreign country. In a greenfield investment, the company constructs
new (“green”) facilities (sales office, manufacturing facility, etc.) cross-border from the ground up.

A greenfield investment is a form of market entry commonly used when a company wants to achieve
the highest degree of control over its foreign activities. It can be compared to other foreign direct

DR. ANUJ 1
investments such as the purchase of foreign securities or the acquisition of a majority stake in a foreign
company in which the parent company exercises little to no control over daily business operations.
Apart from potential tax breaks or subsidies in establishing a greenfield investment, the overarching
goal of such an investment is to achieve a high level of control over business operations and to avoid
intermediary costs.
Advantages of a Greenfield Investment
There are numerous advantages to a greenfield investment, including the following:
i. High level of control over business operations
ii. High level of quality control over the manufacturing and sale of products and/or services
iii. High control over brand image and staffing
iv. Economies of scale and economies of scope can be achieved in terms of marketing, research
and development, and production
v. Bypassing trade restrictions
vi. Creating jobs for the economy where the greenfield investment is taking place
Disadvantages of a Greenfield Investment
There are, of course, potential disadvantages as well, such as the following:
i. An extremely high-risk investment – a greenfield investment is the riskiest form of foreign
direct investment
ii. Potentially high market entry cost (barriers to entry)
iii. Government regulations that may hamper foreign direct investments
iv. High fixed costs involved in establishing a greenfield location
Real World Examples
In 2006, Hyundai Motor Company received approval to make around one billion euros with a major
greenfield investment in Nošovice in the Czech Republic. The automaker established a new
manufacturing plant that employed up to 3,000 individuals in its first year of operation. The Czech
Government provided tax relief and subsidies to prompt the greenfield investment, in hopes of boosting
the country’s economy and lowering the unemployment rate.
What is a Brownfield Investment?
In economics, a brownfield investment (BI) is a type of foreign direct investment (FDI) where a
company invests in an existing facility to start its operations in the foreign country. In other words, a
brownfield investment is the lease or purchase of a pre-existing facility in a foreign country.

brownfield investment is often undertaken when a company wants to invest and start operations in a
new country but does not want to incur the high start-up costs associated with a greenfield investment
(a greenfield investment is a foreign direct investment where, instead of using existing businesses in
the foreign country, the investor opens their own new business there – basically, a “from the ground up”
DR. ANUJ 2
approach). The underlying rationale behind a brownfield investment is to enter into a new foreign
market through businesses that already have a presence there.
In a brownfield investment, the company either invests in existing facilities and infrastructure through
a merger and acquisition (M&A) deal or leases existing facilities in the foreign country.
Advantages of a Brownfield Investment
A brownfield investment offers several advantages, including the following:
i. The ability to gain access to a new foreign market swiftly
ii. Lower fixed costs due to using already established facilities, infrastructure, and network
iii. Lower staffing and training costs, due to the presence of already-employed workers at the facility
iv. May include existing approvals and licenses from the government or regulators
v. Depending if the facility is made to fit, whether modifications exist, or if the facility can be
utilized without major alterations and upgrades, a brownfield investment can be a very cost-
effective option when compared to a greenfield investment
Disadvantages of a Brownfield Investment
A brownfield investment comes with a few potential disadvantages as well, among them, the following:
i. The facility or infrastructure may require major upgrades, which would increase the foreign
investment cost
ii. The facility may be old and, therefore, require high maintenance and upkeep cost
iii. There may be operational inefficiencies if the facility cannot be adapted to new production needs
iv. There may be scalability and expansion issues related to using already constructed facilities
v. Locational constraints
vi. There may be unforeseen tax and regulatory issues
Real World Examples
Vodafone in India
Vodafone is a telecommunications company headquartered in London and Newbury, Berkshire. In 2007,
the telecom firm completed the acquisition of a majority stake in Mumbai, India-based Hutchison Essar
for $10.9 billion in cash. Through the acquisition, Vodafone was able to penetrate into the fast-growing
Indian telecommunications industry which, at that time, was adding nearly six million subscribers
monthly.
Tata Motors in the United Kingdom
Tata Motors was the largest automobile company in India during 2007-08. At that time, the Indian
automaker was the leader in the production of commercial vehicles and was the world’s second- and
fourth-largest bus and truck manufacturer, respectively.

In June 2008, Tata acquired Jaguar Land Rover’s businesses in an all-cash transaction valued at $2.3
billion. Through the acquisition, the Indian automaker was able to obtain intellectual property rights,
manufacturing plants, two design centers in the United Kingdom, and a world-renowned network of
National Sales Companies.
Mergers & Acquisition

DR. ANUJ 3
A merger is a business deal where two existing, independent companies combine to form a new, singular
legal entity. Mergers are voluntary. Typically, both companies are of a similar size and scope, and both
stand to gain from the transaction.
Mergers happen for a variety of reasons: They can allow each company to enter a new market, sell a
new product, or offer a new service. They can also reduce operational costs, improve management,
change pricing models, or lower tax liabilities. Ultimately, companies merge to increase size, scale, and
revenue. In other words, mergers help companies make more money.
How Mergers Work
Mergers are often spearheaded and facilitated by an investment banker. They source deals, value
companies, forecast outcomes, and make sure both companies have their houses in order (a process
known as due diligence). Corporate lawyers also oversee M&A deals, ensuring, among other things,
that the transaction complies with federal and state regulations.
Mergers are generally funded by cash, equity (stocks), or both. When two companies merge,
shareholders in each company are issued stock (equal to the value of their old stock) in the new
company.
Types of Mergers
Companies can merge in a variety of ways.
Horizontal: Horizontal mergers occur when two companies that already offer the same products or
services combine. These mergers help companies reduce competition and dominate the market. For
example, gas giant Exxon combined with gas giant Mobil back in 1998 to form ExxonMobil. At the
time, that horizontal deal valued the new company at $81 billion.
Market Extension: A market extension merger is a horizontal merger that allows two companies that
sell the same product to operate in a new market. For example, if a U.S. regional bank in the east merged
with a U.S. regional bank in the west to form the U.S. Bank of the East and West, that would be a market
extension merger. These types of consolidations help companies drive more revenue by expanding
where they do business.

Vertical: Companies merge vertically if the two companies operate within each other’s supply chain.
Think of a home construction company purchasing a window pane manufacturer or a winery buying a
glass bottle manufacturer. Vertical mergers help companies reduce costs because they effectively cut
out the middleman.

Cogeneric: Cogeneric mergers happen when companies that offer different products or
services combine to operate in the same sphere and sell to the same customer base. These types
of mergers allow companies to sell new products, which is why they’re also known as product
extension mergers. For instance, famous ketchup manufacturer H. J. Heinz Co. was able to
make revenue off of The Kraft Foods Group’s popular macaroni and cheese (and vice versa)
once the companies merged to form The Kraft Heinz Company back in 2015.
Pros and Cons of Mergers
Here are some of the most common advantages and disadvantages of mergers from a business
perspective.
Pros

DR. ANUJ 4
 • They can turbocharge growth. As we mentioned earlier, mergers help companies launch
new products or enter new markets, often more cheaply or efficiently than they would
be able to do so on their own.
• They help companies achieve economies of scale. That is, mergers enable companies
to reach a size and scale that comes with cost reductions — essentially the business
version of buying in bulk.
• They give companies access to capital, as they’re essentially pooling their budgets and
resources together. Merging companies have the option of consolidating operations and,
by extension, driving more dollars to the bottom line.
Cons
• They’re costly and time-consuming. Mergers are complex legal transactions and there
are lots of steps both sides must take — and fund — before two companies can become
one.
• They’re stressful. Mergers are often associated with layoffs or significant changes in
existing workplace culture, so they can affect performance, turnover, and management
of the companies’ respective workforce.
• They don’t always pan out. There are a number of ways in which a merger can go
sideways. For instance, they’re subject to antitrust laws: The federal government could
take legal steps to block a deal if it was concerned the new company would form a
monopoly and lessen competition in the market.
Acquisition
A business acquisition occurs when one company (the acquirer) buys most or all shares in another
company (the target) to assume control of its assets and operations.
Acquisitions are often amicable, meaning both companies are on-board with and negotiate the terms of
the transaction. However, the word “acquisition” is sometimes used interchangeably with “takeover,”
which can be hostile. In other words, one company might wrest control of — or acquire — another
company by buying a majority stake against the wishes of the target company’s board of directors or
management.
Acquisitions are often coordinated by investment bankers or lawyers. Large companies, including
private equity firms, often have internal teams that manage the process.
Types of Acquisitions
Companies consolidate for a variety of reasons and in a number of ways. The most common types of
acquisitions include:
Horizontal Acquisition: A horizontal acquisition occurs when a company buys another company that
offers similar products or services. So, for instance, if one streaming network were to purchase another
streaming network, that would be considered a horizontal acquisition.
Real-world examples include:

• Facebook purchasing Instagram for $1 billion in 2012

• Verizon Wireless purchasing British telecommunications company Vodafone for $130 billion
in cash and stock in 2013.
• Marriott International forming the world’s largest hotel chain upon acquiring Starwood Hotels
and Resorts Worldwide for $13 billion in 2016
DR. ANUJ 5
Vertical Acquisition: A vertical acquisition occurs when a company buys another company that
produces a product in its existing supply chain. So, for instance, if a streaming network purchases a film
or television production company, that would be considered a vertical acquisition.
Real-world examples include:

• Swedish furniture company Ikea continually buying acres of forest.

• CVS Health Corporation’s 2018 $69 billion purchase of Aetna
• Online retail giant Amazon purchasing grocer Whole Foods Market for $13.7 billion in 2017
Congeneric Acquisition: A congeneric acquisition occurs when one company buys another company
that offers different products or services but caters to the same customer base. So if a streaming network
were to buy a smart television manufacturer, that would be considered a congeneric acquisition.
Real-world examples include:

• Consumer goods giant Procter & Gamble Co. purchasing razor-and-battery company Gillette
for $57 billion in 2005
• Coca-cola buying Glaceau, the maker of Vitaminwater, for $4.1 billion in 2007
Conglomerate Acquisition: A conglomerate acquisition occurs when one company buys another
company from a completely separate industry. So if a streaming network buys a crayon company, that
would be considered a conglomerate acquisition.
Real-world examples include:

• Microsoft acquiring professional networking site LinkedIn for $26.2 billion in 2016
• Multinational holding firm Berkshire Hathaway buying Heinz for $23.3 billion in 2013
Pros and Cons of Acquisitions
There are many reasons why a company might decide to acquire another company — or to allow another
company to acquire it. Understanding these reasons, along with the potential drawbacks of an
acquisition, are important if you’re interested in pursuing a career in M&A.
Pros

• They can increase market share. Acquisitions are often one of the quickest ways to enter a new
market. Say you’re a grocery company with stores on the East Coast and want to expand to
West Coast metros. You could consider acquiring a grocery chain that has stores in your desired
locations. Alternately, you could offer a new product to juice sales by acquiring a company that
already manufactures that product.
• They can lower costs. Acquisitions help companies reach economies of scale — cost reductions
that occur when production increases. While complex, you can effectively think of this
economics concept as the business equivalent of buying in bulk.
• They reduce or eliminate competition. If our fictional streaming network, for instance, were to
buy another streaming network, they would acquire (and, by extension, no longer have to
compete for) its customers.
Cons

• They take time. While potentially a way to accelerate growth, acquisitions are still complex
legal arrangements, subject to internal and external negotiations, investigations, audits, and
reviews. They can take months or, even, a few years to complete.
• They cost money. The acquirer has to pay for the target company in cash, stock, and/or
borrowed funds (known as a leveraged buyout). There are also legal fees and tax implications
DR. ANUJ 6
 associated with each deal. (Get familiar with the legal side of M&A with the Latham & Watkins
Mergers and Acquisitions Virtual Experience Program.)
• They can be mispriced. While M&A professionals rely on a variety of business valuation
methods, it still can be tricky to pinpoint how much exactly a company is worth. Valuations,
after all, are subject to market and economic conditions outside a business’ control. Given that
inherent volatility, there’s generally at least some risk associated with each transaction.
STRATEGIC ALLIANCES
Strategic alliance refers to the collaboration between two companies for a particular project. The
companies could be experts in their respective fields and come together to solve a common problem in
the market and make better gains subsequently.
Parties involved in an alliance will benefit from an effective business process, entry to a new market,
or optimum resource utilization. Thus, it is a boon in running a business, and a company should be
aware of both pros and cons before finalizing and zeroing on global strategic alliance.
The Objectives of the alliance should be defined clearly. Apart from this, the firm has to be selective in
choosing the partner, looking at the bigger picture thereby, planning on a long-term range becomes a
relatively easier task to execute.
Examples
Let us understand why a strategic alliance company is formed and how their process is curated with the
help of a couple of examples.
Example #1
Retro Corporations, a fashion brand with a headquarters in Los Angeles and Modern & Co
headquartered out of Massachusetts who manufactured customized footwear came together and formed
a new brand that exclusively produced camping, hiking, and mountaineering clothes, footwear, and
accessories.
Parallelly, their existing businesses kept growing at their own paces and their new collaboration
concentrated on a completely new segment of the market. Therefore, the pricing, marketing strategies,
and budgeting protocols were completely different.
However, they came to terms with regard to these parameters mutually and grew the business to an
extent of expanding their operations in 5 other countries in the next 2 financial years.
Example #2
The world’s largest brand in the coffee market, Starbucks entered a multi-billion market in India through
one of the most historic partnerships in the country. As a result, the first of the confidence of this
collaboration was over a 10% jump in the Tata Consumer share.
The 50-50 partnership between Tata and Starbucks came at an initial investment of $80 million and 50
outlets across the country in 2012. Despite the government norms supporting Starbucks to enter the
Indian markets on their own, they chose to partner with Tata because of their expertise with the Indian
retail market, consumer behaviour, and other such vital data points.
Let us understand the different types of global strategic alliances through the discussion below.
1. Joint Venture: Two companies forming a strategic alliance is said to be a joint venture, when an
alliance results in a new child company. For example, suppose two companies, X and Y, combine
to form an alliance resulting in a new company XYZ. It is said to be a JV. Depending on the
partnership in the alliance, a JV can be a 50-50 JV or a majority-owned venture. Example: Google
DR. ANUJ 7
 and NASA, together with developing google earth, TATA, and SIA together ventured into forming
Vistara airlines in India; Mahindra-Renault also formed a not so popular and unsuccessful JV in
the automobile sector.
2. Equity: A strategic equity alliance is when one company buys a significant amount of equity in
another company. For example, suppose the company buys 45% of the equity in a target company,
and this trade will give the acquiring company significant influence in the Target Company. Both
companies are said to have formed a strategic equity alliance. Example: Panasonic, in collaboration
with Tesla motors (2009) for using their batteries in the car, Walmart had invested in Indian e-
commerce giant Flipkart.
3. Non-Equity: A non-equity strategic alliance is when two companies agree to share resources to
result in synergy. Example: Partnership between Starbucks and Kroger.
Reasons
While most governments across the globe support foreign brands to open shop in their countries without
much barrier, why many companies choose to form a strategic alliance company is both fascinating and
important to understand.

• Forming a strategic alliance is profitable as it results in economies of scale, if properly planned

and executed.
• Often to compete with the best player in the industry, any of the two other players will ally.
• In an industry where the risk is high due to the nature of the business, two-player teams form
alliances to mitigate the risk. It is the most suitable strategy when a company wants to enter a
new market.
• They often produce synergy and technical upgrade of skills to improve the business process.
• In a market where the competition is cut-throat or very high, the strategic alliance will help the
companies deal with competitiveness.
• Build brand awareness by using the goodwill of any of the already established companies.
Risks
Collaborating with another company to form a global strategic alliance is not all flowers and roses when
it comes to ground realities. It is important to gauge the risks involved with such collaborations before
agreeing to terms. Let us understand the risks through the points below.

• There are often hidden costs that may not be visible initially, which will hamper profitability or
financial difficulties.
• It is challenging to manage the newly formed entity due to institutional and cultural differences.
• Any actions taken outside the agreement can affect the relationship and, thus, companies’ trust.
• Data confidentiality is at risk as both participating companies share sensitive information and
can be easily misused.
• A company that has commanded in an alliance can misuse its position and thus deviate from
the actual purpose.
• There may be quality issues related to the production of goods from an effectively formed
alliance.
• Due to an alliance, a company with a better say in a particular process may lose control of the
operation to the stronger company.
BENEFITS AND DRAWBACKS OF FDI
Let’s take a look at what are the most important benefits that FDI can unleash upon the host nation are:

DR. ANUJ 8
 i. Economic Development: By bringing capital into the host nation, FDI can promote economic
development. This capital can be utilised to improve technologies, create new jobs, and
construct infrastructure.
ii. Job Creation: When foreign companies invest in a host nation, they frequently open positions
for the local labour force. This brings down unemployment rates and raises living standards.
iii. Transfer of Technology and Skills: FDI provides the host country with modern technologies
and management techniques.
iv. Increased Exports: FDI can help enterprises in the host country gain access to foreign markets.
When foreign businesses establish operations in a nation, they frequently export goods and
services, boosting the export earnings of the host country.
v. Infrastructure Development: The construction of infrastructure, including roads, ports, and
communication networks, may be aided by foreign investment.
Although FDI is vital to national growth, here are some of its drawbacks:
i. Loss of Domestic Control: The possible loss of control over domestic resources and industry is
a significant worry with FDI. Foreign investors who buy local businesses may have a say in
important choices that affect the economy and sovereignty of the host nation.
ii. Competition for Resources: Increased foreign direct investment may result in competition for
local resources, such as labour and raw materials.
iii. Vulnerability to Global Economic Trends: Host countries that depend substantially on foreign
direct investment are susceptible to changes in the global economy. FDI may decline in
response to a downturn in the world economy, which could impact the host nation's stability.
iv. Political Risks: FDI can put host nations at risk for political instability. Foreign investors may
experience uncertainty due to changes in government policy or unfavourable political
environments.

OVERVIEW OF EXCHANGE RATE SYSTEMS

The foreign exchange rate is the rate at which one country’s currency can be exchanged for
another country’s currency. Foreign exchange rates are influenced by various factors, including
supply and demand dynamics in the foreign exchange market, economic indicators,
geopolitical events, and central bank policies. For example, the Indian rupee (₹) in India, the
Pound (£) in England, and the Dollar ($) in the United States of America. However, a country’s
currency cannot be used in another country; For example, the Indian rupee (₹) cannot be
directly acceptable in the USA. In today’s world, countries have economic relations with each
other. Thus, there is an increase in interdependence among the countries.
Takeaways:
• Central banks often intervene in the foreign exchange market to stabilize or influence
their currency’s value, using tools like interest rates and foreign exchange reserves.
• Businesses and investors face exchange rate risk, as fluctuations can impact the value
of international transactions, investments, and profits.
• Exchange rates serve as an essential indicator of global economic conditions, reflecting
economic health, inflation rates, and political stability.
Features of Foreign Exchange Rate
The foremost and primary characteristics of foreign exchange rates are as follows.

DR. ANUJ 9
 1. Comparative Values: The comparative value of the currency is also shown. The
exchange rate helps countries make transactions with international partners more
efficiently, thus making them free from barriers. Exchange rates, therefore, play an
essential role in terms of function.
2. Fixing Rates: Economists have also determined the economic well-being of a country
through exchange rate monitoring. To fix rates, the authorities must act if too much
fluctuation occurs in currency exchange rates. It also enables stability in the economy
and prevents an economic downturn from occurring.
3. Demand Grows and Export Increases: Increased demand for imports usually drives up
a country’s exchange rate. This makes it more expensive for people in that country to
buy imported goods. When imports become pricier, demand decreases, causing the
country’s currency to become cheaper than others. As a result, products from that
country become more affordable for global buyers, leading to increased demand and
higher exports.

Types of Foreign Exchange Rates

There are three types of exchange rates; namely, Fixed Exchange Rate, Flexible Exchange Rate,
and Managed Floating Exchange Rate.

1. Fixed Exchange Rate

Under this system, the exchange rate for the currency is fixed by the government. Thus, the
government is responsible to maintain the stability of the exchange rate. Each country
maintains the value of its currency in terms of some ‘external standard’ like gold, silver, another
precious metal, or another country’s currency.
The main purpose of a fixed exchange rate is to maintain stability in the country’s foreign trade
and capital flows.

DR. ANUJ 10
 i. The central bank or government purchases foreign exchange when the rate of foreign
currency rises and sells foreign exchange when the rates fall to maintain the stability of
the exchange rate.
ii. Thus, government has to maintain large reserves of foreign currencies to maintain a
fixed exchange rate.
iii. When the value of one currency(domestic) is tied to another currency then this process
is known as pegging and that’s why the fixed exchange rate system is also referred to
as the Pegged Exchange Rate System.
iv. When the value of one currency(domestic) is fixed in terms of another currency or in
terms of gold, then it is called the Parity Value of currency.
Methods of Fixed Exchange Rate in Earlier Times
1. Gold Standard System (1870-1914): As per this system, gold was taken as the common unit
of parity between the currencies of different countries. Each country defines the value of its
currency in terms of gold. Accordingly, the value of one currency is fixed in terms of another
country’s currency after considering the gold value of each currency.
For example,
1£(UK Pound)= 5g of gold
1$(US Dollar)= 2g of gold
then the exchange rate would be £1(UK Pound) = $2.5(US Dollar)
2. Bretton Woods System (1944-1971): The gold standard system was replaced by the Bretton
Woods System. This system was adopted to have clarity in the system. Even in the fixed
exchange rate, it allowed some adjustments, thus it is called the ‘adjusted peg system of
exchange rate’. Under this system:
• Countries were required to fix their currency against the US Dollar($).
• US Dollar was assigned gold value at a fixed price.
• The value of one currency say £(UK Pound) was pegged in terms of the US Dollar($),
which ultimately implies the value of the currency in gold.
• Gold was considered an ultimate unit of parity.
• International Monetary Fund (IMF) worked as a central institution in controlling this
system.
This is the system that was abandoned and replaced by the Flexible Exchange rate in 1977.
Merits of Fixed Exchange Rate System
i. It ensures stability in the exchange rate. Thus, it helps in promoting foreign trade.
ii. It helps the government to control inflation in the economy.
iii. It stops speculating in the foreign exchange market.
iv. It promotes capital movements in the domestic country as there are no uncertainties
about foreign rates.
v. It helps in preventing capital outflow.
Demerits of Fixed Exchange Rate System

DR. ANUJ 11
 i. It requires high reserves of gold. Thus, it hinders the movement of capital or foreign
exchange.
ii. It may result in the undervaluation or overvaluation of the currency.
iii. It discourages the objective of having free markets.
iv. The country which follows this system may find it difficult to tackle depression or
recession.
Fixed Exchange Rate has been discontinued because of many demerits of the system by all
leading economies, including India.
2. Flexible Exchange Rate System
Under this system, the exchange rate for the currency is fixed by the forces of demand and
supply of different currencies in the foreign exchange market. This system is also called the
Floating Rate of Exchange or Free Exchange Rate. It is so because it is determined by the free
play of supply and demand forces in the international money market.
• Under the Flexible Exchange Rate system, there is no intervention by the government.
• It is called flexible because the rate changes with the change in the market forces.
• The exchange rate is determined through interactions of banks, firms, and other
institutions that want to buy and sell foreign exchange in the foreign exchange market.
• The rate at which the demand for foreign currency is equal to its supply is called the
Par Rate of Exchange, Normal Rate, or Equilibrium Rate of Foreign Exchange.
Merits of Flexible Exchange Rate System
i. With the flexible exchange rate system, there is no need for the government to hold any
reserve.
ii. It eliminates the problem of overvaluation or undervaluation of the currency.
iii. It encourages venture capital in the form of foreign exchange.
iv. It also enhances efficiency in the allocation of resources.
Demerits of the Flexible Exchange Rate System
i. It encourages speculation in the economy.
ii. There is no stability in the economy as the exchange rate keeps on fluctuating as per
demand and supply.
iii. Under this, coordination of macro policies becomes inconvenient.
iv. There is uncertainty in the economy that discourages international trade.
3. Managed Floating Exchange Rate
It is the combination of the fixed rate system (the managed part) and the flexible rate system
(the floating part), thus, it is also called a Hybrid System. It refers to the system in which the
foreign exchange rate is determined by the market forces and the central bank stabilizes the
exchange rate in case of appreciation or depreciation of the domestic currency.
• Under this system, the central bank acts as a bulk buyer or seller of foreign exchange
to control the fluctuation in the exchange rate. The central bank sells foreign exchange
when the exchange rate is high to bring it down and vice versa. It is done for the
protection of the interest of importers and exporters.

DR. ANUJ 12
 • For this purpose, the central bank maintains the reserves of foreign exchange so that
the exchange rate stays within a targeted value.
• If a country manipulates the exchange rate by not following the rules and regulations,
then it is known as Dirty Floating.
• However, the central bank follows the necessary rules and regulations to influence the
exchange rate.
Example of Managed Floating Exchange Rate
Suppose India has adopted Managed Floating System, and the Reserve Bank of India (Central
Bank) wants to keep the exchange rate $1 = ₹60. And let’s assume that the Reserve Bank of
India is ready to tolerate small fluctuations, like from 59.75 to 60.25; i.e., .25.
If the value remains within the above limit, then there is no intervention. But if due to excess
demand for the Indian rupee the value of the rupee starts declining below 59.75/$. Then, in that
case, RBI will start increasing the supply of rupees by selling the rupees for dollars and
acquiring holding of dollars.
Similarly, due to the excess supply of the Indian rupee if the value of the rupee starts increasing
above 60.25/$. Then, in that case, RBI will start increasing the demand for Indian rupees by
exchanging the dollars for rupees and running down its holding of dollars.
Hence, in this way, the Reserve Bank of India maintains the exchange rate.
Other types of Exchange Rate System
Over the time period, because of the different changes in the global economic events, the
exchange rate systems have evolved. Besides, fixed, flexible, and managed floating exchange
rate systems, the other types of exchange rate systems are:
• Adjustable Peg System: An exchange rate system in which the member countries fix
the exchange rate of their currencies against one specific currency is known as
Adjustable Peg System. This exchange rate is fixed for a specific time period. However,
in some cases, the currency can be repegged even before the expiry of the fixed time
period. The currency can be repegged at a lower rate; i.e., devaluation, or at a higher
rate; i.e., revaluation of currency.
• Wider Band System: An exchange rate system in which the member country can change
its currency’s exchange value within a range of 10 percent is known as Wider Band
System. It means that the country is allowed to devalue or revalue its currency by 10
percent to facilitate the adjustments in the Balance of Payments. For example, if a
country has a surplus in its Balance of Payments account, then its currency can be
appreciated by maximum of 10% from its parity value to correct the disequilibrium.
• Crawling Peg System: An exchange rate system which lies between the dirty floating
system add adjustable peg system is known as Crawling Peg System. In this system, a
country can specify the parity value for its currency and permits a small variation
around that parity value. This rate of parity is adjusted regularly based on the
requirements of the International Reserve of the country and changes in its money
supply and prices.

DR. ANUJ 13
CONTEMPORARY ISSUES IN INTERNATIONAL BUSINESS
From the U.K.’s unprecedented decision to leave the European Union to the historic and
divisive presidential elections globally was a year of large-scale change and uncertainty.
Nowhere, perhaps, was it felt more keenly than in the world of international business. Political,
economic, and environmental issues are increasingly becoming the remit of international
business leaders as much as governments. Expanding business overseas means reaching new
clients or customers and potentially boosting profits. Despite all the uncertainty and the
challenges that have yet to reveal themselves, there are some of the contemporary issues in
conducting business on a global scale that you should always consider before leaping into new
international operations. Some of the contemporary issues in international business are as
follows:
1. International company structure: If your aim is to be competitive globally, you must have
a team in place that’s up for the challenge. One fundamental consideration is the structure
of your organization and the location of your teams.
For instance, will your company be run from one central headquarters? Or will you have
offices and representatives “on the ground” in key markets abroad? If so, how will these
teams be organized, what autonomy will they have, and how will they coordinate working
across time zones? If not, will you consider hiring local market experts who understand
the culture of your target markets, but will work centrally?
Coca-Cola offers one example of effective multinational business structure. The company
is organized into continental groups, each overseen by a President. The central Presidents
manage Presidents of smaller, country-based, or regional subdivisions. Despite its diverse
global presence, the Coca-Cola brand and product is controlled centrally and consistent
around the world.
2. Foreign laws and regulations: Along with getting your company structure in place, gaining
a comprehensive understanding of the local laws and regulations governing your target
markets is key. From tax implications through to trading laws, navigating legal
requirements is a central function for any successful international business. Eligibility to
trade is a significant consideration, as are potential tariffs and the legal costs associated
with entering new markets.
Airbnb ran into trouble in 2014, with a crackdown on advertised rental properties falling
outside local housing and tourism regulations. The company was forced to pay a €30,000
fine for a breach of local tourism laws in Barcelona.
3. International accounting: Of the main legal areas to consider when it comes to doing
international business, tax compliance is perhaps the most crucial. Accounting can present
a challenge to multinational businesses who may be liable for corporation tax abroad.
Different tax systems, rates, and compliance requirements can make the accounting
function of a multinational organization significantly challenging.
Accounting strategy is key to maximizing revenue, and the location where your business
is registered can impact your tax liability. Mitigating the risk of multiple layers of taxation
makes good business sense for any organization trading abroad. Being aware of tax treaties
between countries where your business is trading will help to ensure you’re not paying
double taxes unnecessarily.
4. Cost calculation and global pricing strategy: Setting the price for your products and
services can present challenges when doing business overseas and should be another major

DR. ANUJ 14
 consideration of your strategy. You must consider costs to remain competitive, while still
ensuring profit. Researching the prices of direct, local-market competitors can give you a
benchmark, however, it remains essential to ensure the math still works in your favour. For
instance, the cost of production and shipping, labour, marketing, and distribution, as well
as your margin, must be a taken into account for your business to be viable.
5. Universal payment methods: The proliferation of international e-commerce websites has
made selling goods overseas easier and more affordable for businesses and consumers.
However, payment methods that are commonly accepted in your home market might be
unavailable abroad. Determining acceptable payment methods and ensuring secure
processing must be a central consideration for businesses who seeks to trade
internationally.
Accepting well-known global payment methods through companies like Worldpay, as well
as accepting local payment methods, such as JCB in Asia or Yandex Money in Russia, can
be a good option for large international businesses. Accepting wire transfers, PayPal
payments, and Bitcoin, are other possibilities, with Bitcoin users benefiting from no bank
or credit card transaction fees. Despite the risk of fluctuating value, the lack of fees is one
of the reasons a number of online companies, including WordPress, the Apple App Store,
Expedia, and a number of Etsy sellers accept Bitcoin.
6. Currency rates: While price setting and payment methods are major considerations,
currency rate fluctuation is one of the most challenging international business problems to
navigate. Monitoring exchange rates must therefore be a central part of the strategy for all
international businesses. However, global economic volatility can make forecasting profit
especially difficult, particularly when rates fluctuate at unpredictable levels.
Major fluctuations can seriously impact the balance of business expenses and profit. For
instance, if your company is paying suppliers and production costs in U.S. dollars but
selling in markets with a weaker or more unpredictable currency, your company could end
up with a much smaller margin — or even a loss.
7. Communication difficulties and cultural differences: Good communication is at the heart
of effective international business strategy. However, communicating across cultures can
be a very real challenge. At Hult, developing cross-cultural competency and
communication skills are a core focus inside and outside of the classroom.
Effective communication with colleagues, clients, and customers abroad is essential for
success in international business. And it’s often more than just a language barrier you need
to think about — nonverbal communication can make or break business deals too. Do your
research and know how different cultural values and norms — such as shaking hands —
can and should influence the way you communicate in a professional context. Being aware
of acceptable business etiquette abroad, and how things like religious and cultural
traditions can influence this, will help you to better navigate potential communication
problems in international business.
8. Political risks: An obvious risk for international business is political uncertainty and
instability. Countries and emerging markets that may offer considerable opportunities for
expanding global businesses may also pose challenges, which more established markets
do not. Before considering expansion into a new or unknown market, a risk assessment of
the economic and political landscape is critical.

DR. ANUJ 15
 Issues such as ill-defined or unstable policies and corrupt practices can be hugely
problematic in emerging markets. Changes in governments can bring changes in policy,
regulations, and interest rates that can prove damaging to foreign business and investment.
9. Worldwide environmental issues: As the environmental risks and effects of climate change
are becoming better understood, sustainability is high on the agenda of many major global
corporations. Recent international legislations and proposals, such as the UN’s Sustainable
Development Goals, have put environmental issues at the forefront of international
business development. On a practical level, if you’re considering expanding your business
overseas, it’s important to be aware of the country-specific environmental regulations and
issues associated with your industry. Some key considerations include how your
production methods might impact the local environment through waste and pollution.
OUTSOURCING AND ITS POTENTIAL FOR INDIA
As the global market becomes more competitive, businesses are seeking ways to cut costs and
improve their efficiency. Through outsourcing their IT, finance, tax, and accounting functions
to countries like India. With its abundant pool of skilled and educated professionals, India has
become a significant destination for companies seeking innovative solutions. While the United
States remains the largest outsourcer, other countries like the United Kingdom, Australia,
Canada, and Singapore are also turning to India for cost-effective talent. India’s English-
speaking workforce, reasonable labour costs, and business-friendly policies make it an ideal
location for a talent hunt.
IT – What functions are countries outsourcing to India?
The demand for skilled workers in the tech sector is increasing rapidly. Despite emerging
competition from Eastern Europe, Latin America, and the rest of the Asia-Pacific region, India
remains the top destination for IT outsourcing. India is also an attractive option for hiring web
developers as their salaries are lower compared to those abovementioned regions. A Korn
Ferry study predicts that India will have a 1 million surplus of skilled tech workers and become
the technology leader by 2030. Indian IT & BPM outsourcing industry has established over
1,000 delivery facilities in approximately 80 countries. In the next five years, the IT sector’s
export revenue is projected to increase by eight to nine percent annually. The Indian
government is also investing heavily in infrastructure to support this growth.
Roles they are outsourcing for

• IT infrastructure & management Website • Website development

Hosting • Application (software) development
• Application (software) support or • Database development
management
• Database management

Human Resources – What functions are countries outsourcing to India ?

Human Resources outsourcing is crucial for businesses of all sizes. By transferring HR
responsibilities to an external vendor, businesses can save time, resources, and money spent on
routine HR tasks. Utilizing HR outsourcing in India enables companies to access a vast pool
of talent while adhering to complex local labour laws. Understanding the process of HR
DR. ANUJ 16
outsourcing can help professionals make the right decisions when guiding their employers. It
involves a contractual agreement where a business transfer some or all its HR responsibilities
to an external vendor.
Countries outsource the following HR functions to India:

• Recruitment and onboarding • Benefits administration

• Talent acquisition • Retirement planning
• Background screening, drug tests, and • Counselling
reference checks • Workplace risk management
• Training and upskilling • Safety management
• Performance management • Law Compliance
• Payroll processing

BPO – What functions are countries outsourcing to India?

Business process outsourcing (BPO) means hiring an external company to handle one or more
of an organization’s tasks according to specific performance goals. A common example of
business process outsourcing is when a company hires another company to handle their payroll
tasks. By doing this, the company can save time and money, while also making sure their
employees are paid correctly and on schedule.
Here is some common Backoffice work that other countries are outsourcing to India:

• Financial planning, analysis, and • Accounts Receivable/Accounts Payable

strategies Management
• Financial statements and reports • Cost Accounting
• Tax reporting and filing • Bookkeeping

Why countries outsource bookkeeping functions to India?

The market for bookkeeping and tax services is growing rapidly.
Many small and medium-sized enterprises (SMEs) as well as CPA firms are outsourcing work
to India to reduce costs while maintaining high quality. India has a large pool of talent, with
over 350,000 members of the Institute of Chartered Accountants of India as of April 1, 2022.
This indicates that the country has the necessary skills and knowledge to provide excellent
services to businesses in the United States.
Bookkeeping:
Many companies outsource different bookkeeping roles to India. Among the popular
bookkeeping roles that are outsourced to India are:

• Accounts Payable • Payroll Processing

• Accounts Receivable: Bank • Tax reporting and filing
Reconciliation
DR. ANUJ 17
 • General Ledger Maintenance
Indian accounting professionals can handle a range of services, from bookkeeping to financial
statement preparation, and they have the expertise to manage even the most complex projects.
Common tax services that are outsourced to India
India is a preferred destination for outsourcing various tax-related tasks by companies from
different countries, especially the US. The US tax system is complex, with multiple tiers, with
taxes imposed by federal, state, and sometimes local governments. As a result, there is a wide
range of tax forms, and corporations have to abide by stricter tax regulations.

• Tax Preparation • Transfer Pricing.

• Tax Compliance: • Tax Research:
• Tax Planning:

INTERNATIONAL BUSINESS AND SUSTAINABLE DEVELOPMENT

Sustaining living conditions to meet essential needs, such as food and water, is a natural
survival instinct. As such, the concept of sustainability dates back six million years or so, for
as long as humans have existed.
The actual term itself is much younger: according to the World Energy Foundation, the German
word ‘Nachhaltigkeit’, meaning ‘sustained yield’, first appeared in a handbook of forestry
published 400 years ago, recommending forests should never be harvested more than they can
regenerate.
In Great Britain, modern corporate responsibility took hold during the industrial revolution in
the 19th century. In 1853, for example, Sir Titus Salt opened a new mill with a model village
for his workers at Saltaire, now a World Heritage Site, while in the 1890s, William Hesketh
Lever, founder of Lever Brothers, invented a revolutionary new product – Sunlight Soap – to
make cleanliness and hygiene available to the masses.
The concept of sustainability as we know it evolved from the 1972 United Nations (UN)
Conference on the Human Environment or ‘Stockholm Conference’, the UN’s first major
conference dedicated to international environmental issues.
In 1987, the Brundtland Commission defined sustainable development as “development that
meets the needs of the present without compromising the ability of future generations to meet
their own needs”.
Then, in 2015, every member state signed up to the United Nations (UN) 2030 Agenda for
Sustainable Development to transform the world for the better.
Prosperity through partnership
A plan of action for people, planet and prosperity, the agenda’s 17 Sustainable Development
Goals (SDGs) seek to end poverty and other depravations, improve health and education,
reduce inequality, tackle climate change, protect the environment and build a fairer, more
resilient global economy.

DR. ANUJ 18
Partnership and the cooperation – of all countries, stakeholders and people – lie at its heart.
Businesses, as major sources of employment, innovation, R&D, manufacturing, production and
wealth generation, clearly have a critical role to play across all SDGs, especially the goal “to
ensure that all human beings can enjoy prosperous and fulfilling lives and that economic, social
and technological progress occurs in harmony with nature”. This not only includes developing
the new knowledge, technology, people, practices and processes required to tackle depravation,
improve prosperity, reduce inequality and protect the external environment.
Businesses are also required to minimise their own environmental footprint and promote
gender equality, good health and wellbeing within the workplace and business practices.
Expectations of corporate social responsibility are growing, not least from members of the
public as customers, shareholder, suppliers and partners.
Capgemini research conducted in 2020 with 7,500 consumers and 750 large organisations
found consumer preferences to be strongly impacted by sustainability:
• 64% of consumers say buying sustainable products makes them feel happy when shopping.
• 52% feel an emotional connection with a product or organisation which is sustainable.
• 79% are changing purchase preference based on the social or environmental impact of
their purchase.
• 53% switched to lesser-known brand(s)/organisation(s) whose products/services they
perceive as sustainable.
There is also greater transparency and accountability though sources of governance,
investment, funding and contracts, government in particular.
McKinsey suggests that the financial performance of companies directly corresponds to how
well they contend with environmental, social, governance (ESG). Investors now question a
company’s carbon footprint, water usage, community development efforts, and board diversity.
Most of today’s commercial contracts contain some form of sustainability provision. In the
UK, Government Buying Standards (GBS) stipulate the need for sustainable procurement of
goods and services.
The demand is worldwide, evidenced by the 2017 launch of ISO 20400, the world’s first
International Standard for sustainable procurement, to help organisations develop and
implement sustainable purchasing practices and policies.

DR. ANUJ 19