MBA-III SEMESTER

INTERNATIONAL BUSINESS MANAGEMENT

Unit-III- International Financial Framework

Balance of Payments
The balance of payments, also known as balance of international payments and
abbreviated BoP, of a country is the record of all economic transactions between the
residents of the country and the rest of the world in a particular period (over a quarter of
a year or more commonly over a year). These transactions are made by individuals, firms
and government bodies. Thus, the balance of payments includes all external visible and
non-visible transactions of a country. It represents a summation of a country’s current
demand and supply of claims on foreign currencies and of foreign claims on its currency.
The transactions include payments for the country's exports and imports of goods,
services, financial capital, and financial transfers. It is prepared in a single currency,
typically the domestic currency for the country concerned. Sources of funds for a nation,
such as exports or the receipts of loans and investments, are recorded as positive or surplus
items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as
negative or deficit items.
When all components of the BOP accounts are included, they must sum to zero with no
overall surplus or deficit. For example, if a country is importing more than it exports, its
trade balance will be in deficit, but the shortfall will have to be counterbalanced in other
ways – such as by funds earned from its foreign investments, by running down central
bank reserves or by receiving loans from other countries.
While the overall BOP accounts will always balance when all types of payments are
included, imbalances are possible on individual elements of the BOP, such as the current
account, the capital account excluding the central bank's reserve account, or the sum of
the two. Imbalances in the latter sum can result in surplus countries accumulating wealth,
while deficit nations become increasingly indebted. The term balance of payments often
refers to this sum: a country's balance of payments is said to be in surplus (equivalently,
the balance of payments is positive) by a specific amount if sources of funds (such as
export goods sold, and bonds sold) exceed uses of funds (such as paying for imported

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goods and paying for foreign bonds purchased) by that amount. There is said to be a
balance of payments deficit (the balance of payments is said to be negative) if the former
is less than the latter. A BOP surplus (or deficit) is accompanied by an accumulation (or
decumulation) of foreign exchange reserves by the central bank.
The transactions in BOP are categorized in.
(1) Current Account:
Current account refers to an account which records all the transactions relating to export
and import of goods and services and unilateral transfers during a given period of time.
Current account contains the receipts and payments relating to all the transactions of
visible items, invisible items and unilateral transfers.
Components of Current Account:
The main components of Current Account are:
1. Export and Import of Goods (Merchandise Transactions or Visible Trade):
A major part of transactions in foreign trade is in the form of export and import of goods
(visible items). Payment for imports of goods is written on the negative side (debit items)
and receipt from exports is shown on the positive side (credit items). The balance of these
visible exports and imports is known as balance of trade (or trade balance).
2. Export and Import of Services (Invisible Trade):
It includes a large variety of non- factor services (known as invisible items) sold and
purchased by the residents of a country, to and from the rest of the world. Payments are
either received or made to other countries for use of these services.
Services are generally of three kinds:
(a) Shipping,
(b) Banking, and
(c) Insurance.
Payments for these services are recorded on the negative side and receipts on the positive
side.
3. Unilateral or Unrequited Transfers to and from abroad (One sided Transactions):
Unilateral transfers include gifts, donations, personal remittances and other ‘one-way’
transactions. These refer to those receipts and payments, which take place without any
service in return. Receipt of unilateral transfers from rest of the world is shown on the

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credit side and unilateral transfers to rest of the world on the debit side.
4. Income receipts and payments to and from abroad:
It includes investment income in the form of interest, rent and profits.
(2) Capital Account: Capital account of BOP records all those transactions, between the
residents of a country and the rest of the world, which cause a change in the assets or
liabilities of the residents of the country or its government. It is related to claims and
liabilities of financial nature.
Capital Account is used to:
(i) Finance deficit in current account; or
(ii) Absorb surplus of current account.
Capital accounts are concerned with financial transfers. So, it does not have a direct effect
on income, output and employment of the country.
Components of Capital Account:
The main components of capital account are:
1. Borrowings and landings to and from abroad: It includes:
A. All transactions relating to borrowings from abroad by private sector, government, etc.
Receipts of such loans and repayment of loans by foreigners are recorded on the positive
(credit) side.
B. All transactions of lending abroad by private sector and government. Lending abroad
and repayment of loans abroad is recorded as negative or debit item.
2. Investments to and from abroad: It includes:
A. Investments by rest of the world in shares of Indian companies, real estate in India, etc.
Investments from abroad are recorded on the positive (credit) side as they bring in foreign
exchange.
B. Investments by Indian residents in shares of foreign companies, real estate abroad, etc.
Such investments to abroad are recorded on the negative (debit) side as they lead to
outflow of foreign exchange.
3. Change in Foreign Exchange Reserves:
The foreign exchange reserves are the financial assets of the government held in the
central bank. A change in reserves serves as the financing item in India’s BOP. So, any
withdrawal from the reserves is recorded on the positive (credit) side and any addition to

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these reserves is recorded on the negative (debit) side. It must be noted that ‘change in
reserves’ is recorded in the BOP account and not ‘reserves.
4) Errors and omissions: Sometimes the balance of payment does not balance. This
imbalance is shown in the BOP as errors and omissions. BOP is compiled using the double
entry bookkeeping system consisting of assets and liabilities.
Causes producing disequilibrium in the balance of payments of a country are: 1. Trade
Cycles 2. Huge Developmental and Investment Programmes 3. Changing Export Demand
4. Population Growth 5. Huge External Borrowings 6. Inflation 7. Demonstration Effect 8.
Reciprocal Demands!

Disequilibrium in a country’s balance of payments position may arise either for a short
period or for a long period.

Any disequilibrium in the balance of payments arises owing to a large number of causes or
factors operating simultaneously. Types of disequilibrium differ from country to country,
while the different kinds of disequilibrium and their causes in the same country will differ
at different times.

However, following are the important causes producing disequilibrium in the balance
of payments of a country:

1. Trade Cycles:

Cyclical fluctuations, their phases and amplitudes, differences in different countries,

generally produce cyclical disequilibrium.

2. Huge Developmental and Investment Programmes:

Huge development and investment programmes in the developing economies are the root
causes of the disequilibrium in the balance of payments of these countries. Their propensity
to import goes on increasing for want of capital for rapid industrialization; while exports
may not be boosted to that extent as these is the primary producing countries.

Moreover, their exports quantum of primary commodities may decline as newly-created

domestic industries may require them. Thus, there will be structural changes in the balance
of payments and structural disequilibrium will result.

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3. Changing Export Demand:

A vast increase in the domestic production of foodstuffs, raw materials, substitute goods,
etc. in advanced countries has decreased their need for import from the agrarian
underdeveloped countries. Thus, export demand has considerably changed, resulting in
structural disequilibrium in these countries.

Similarly, advanced countries also will suffer in their exports as a result of loss of their
markets in developing countries owing to the tendency of the poor nations for self-reliance
and their ways and means of curtailing their imports. But disequilibrium (deficit) in balance
of payments seems to be more persistent in the underdeveloped or developing nations than
in the advanced rich nations.

4. Population Growth:

High population growth in poor countries also had adversely affected their balance of
payments position. It is easy to see that an increase in population increases the needs of
these countries for imports and decreases the capacity to export.

5. Huge External Borrowings:

Another reason for a surplus or deficit in the balance of payments arises out of international
borrowing and investment. A country may tend to have an adverse balance of payments
when it borrows heavily from another country, while the lending country will tend to have
a favourable balance and the receiving country will have a deficit balance of payments.

6. Inflation:

Owing to rapid economic development, the resulting income and price effects will
adversely affect the balance of payments position of a developing country. With an income,
the marginal propensity to import being high in these countries, their demand for imported
articles will rise.

Since marginal propensity to consume is also high in these countries, people’s demand for
domestic goods also will rise, and hence less may be spared for export. Moreover, a huge
investment in heavy industries in the developing countries may have an inflationary impact,

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as the output of these industries will not be forthcoming immediately, whereas money
income will have been already expanded.

Thus, there will be an excess of monetary demand for goods and services in general which
will push up the price levels. A rise in the comparative price level certainly encourages
imports and discourages exports, resulting in a deficit balance of payments.

7. Demonstration Effect:

The demonstration effect is another most important factor causing deficit in the balance of
payments of a country — especially of an underdeveloped country. When people of
underdeveloped nations come into contact with those of advanced countries through
economic, political or social relations, there will be a demonstration effect on the
consumption pattern of these people and they will desire to have western style goods and
pattern of consumption so that their propensity to import increases, whereas their export
quantum may remain the same or may even decline with the increase i in income, thus
causing an adverse balance of payments for the country.

8. Reciprocal Demands:

Since intensity of reciprocal demand for products of different countries differs, terms of
trade of a country may be set differently with different countries under multi-trade
transactions which may lead to disequilibrium in a way.

Foreign Exchange Market

The foreign exchange market (forex, FX, or currency market) is a global decentralized
market for the trading of currencies. This includes all aspects of buying, selling and
exchanging currencies at current or determined prices. In terms of volume of trading, it is
by far the largest market in the world. The main participants in this market are the larger
international banks, financial institutions around the world function as anchors of trading
between a wide range of multiple types of buyers and sellers around the clock, except for
weekends. The foreign exchange market does not determine the relative values of different
currencies but sets the current market price of the value of one currency as demanded
against another. The foreign exchange market works through financial institutions, and it

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 operates on several levels. Behind the scenes banks turn to a smaller number of financial
firms known as "dealers," who are actively involved in large quantities of foreign exchange
trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is
sometimes called the "interbank market", although a few insurance companies and other
kinds of financial firms are involved. Trade between foreign exchange dealers can be very
large, involving hundreds of millions of dollars.

Players and components in foreign exchange market

1. Travellers and tourists

2. Importers and exporters

3. Investment banks

4. Foreign currency brokers

5. Commercial banks

6. Non-banking financial corporations

7. Central banks

Segments of foreign exchange market

Retail market: This is the market in which travellers and tourists exchange one currency
for another in the form of currency notes or traveller’s cheques.

Wholesale market: It is also known as the inter-bank market. The major categories of
participants in this market are commercial banks, investment banks, non-banking financial
corporations and central banks.

Functions of Foreign Exchange Market:

Foreign exchange market performs the following three functions:

1. Transfer Function:
It transfers purchasing power between the countries involved in the transaction. This
function is performed through credit instruments like bills of foreign exchange, bank drafts
and telephonic transfers.

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2. Credit Function:

It provides credit for foreign trade. Bills of exchange, with a maturity period of three
months, are generally used for international payments. Credit is required for this period in
order to enable the importer to take possession of goods, sell them and obtain money to
pay off the bill.

3. Hedging Function:

When exporters and importers enter into an agreement to sell and buy goods on some future
date at the current prices and exchange rate, it is called hedging. The purpose of hedging
is to avoid losses that might be caused due to exchange rate variations in the future.

Kinds of Foreign Exchange Markets:

Foreign exchange markets are classified based on whether the foreign exchange
transactions are spot or forward accordingly, there are two kinds of foreign exchange
markets:

(i) Spot Market,

(ii) Forward Market.

(i) Spot Market:

Spot market refers to the market in which the receipts and payments are made immediately.
Generally, a time of two business days is permitted to settle the transaction. Spot market is
of daily nature and deals only in spot transactions of foreign exchange (not in future
transactions). The rate of exchange, which prevails in the spot market, is termed as spot
exchange rate or current rate of exchange.

The term ‘spot transaction’ is a bit misleading. In fact, spot transaction should mean a
transaction, which is carried out ‘on the spot’ (i.e., immediately). However, a two-day
margin is allowed as it takes two days for payments made by cheques to be cleared.

(ii) Forward Market:

Forward market refers to the market in which the sale and purchase of foreign currency is
settled on a specified future date at a rate agreed upon today. The exchange rate quoted in
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 forward transactions is known as the forward exchange rate. Generally, most of the
international transactions are signed on one date and completed on a later date. The forward
exchange rate becomes useful for both the parties involved in the transaction.

Forward Contract is made for two reasons:

(a) To minimize the risk of loss due to adverse changes in the exchange rate (through
hedging);

(b) To make profit (through speculation).

Cross rates: India traded with America, if the transaction settled with third country
currency, it is known as cross rate.

Characteristics of foreign exchange market

1. Over the counter market

All the transactions in the foreign exchange market are executed online. There is no
physical delivery.
2. Dealing room
The foreign exchange market is an intermediary between the buyer of foreign currency and
seller of foreign currency.
3. Round the clock market
Foreign exchange market functions 24 hours. If foreign exchange market closes in India,
it opens in another country.
4. Volume of transactions
The volume of transactions is bulk, and they are in millions and billions
5. High volatility
The foreign exchange market is very risky. The foreign currency fluctuates at a rapid rate.

Import substitution

Import substitution is a strategy under trade policy that abolishes the import of foreign
products and encourages production in the domestic market. The purpose of this policy is
to change the economic structure of the country by replacing foreign goods with domestic
goods.

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Post-independence India adopted the policy of import substitution by imposing heavy
tariffs on import duty. The industrial policy that the country endorsed was linked to the
trade policy. In the first seven Five-Year plans, trade in India was distinguished by the
inward-looking trade strategy. This strategy is known as import substitution, which aims
to boost domestic production and shield domestic products from international competition.

Export promotion

Export promotion has been defined as “those public policy measures which actually or
potentially enhance exporting activity at the company, industry, or national level”.
Although many forces determine the international flow of goods and services, export
promotion is one of the principal opportunities that governments must influence the volume
and types of goods and services exported from their areas of jurisdiction.

Government of India, like in almost all other nations, has been endeavouring to develop
exports. Export development is important to the firm and to the economy. Government
measures aim, normally, at an overall improvement of the export performance of the nation
for the general benefit of the economy. Such measures help export firms in several ways.

International liquidity

International liquidity is part of the concept of international finance. International liquidity

is foreign currency or gold in the reserve of any country. It is very useful to pay the amount
of imported goods and reduce the balance of payment deficit. Every country should
increase exports to reduce international liquidity shortage. At micro level, you can
understand international liquidity as cash in your pocket for operation of business. If you
have a building, furniture, plant, equipment’s and stock but no cash in pocket, you cannot
survive long term in your business. Just like this, any nation may have lots of natural
resources in the form of land, mines and forest but for dealing with foreign country, that
nation should have foreign currency in hand.

It comprises of all reserves that are available to the monetary authorities of different
countries for meeting their international disbursement.

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Under the present international monetary order, among the member countries of the IMF,
the chief components of international liquidity structure are taken to be:-

1. Gold reserves with the national monetary authorities - central banks and with the IMF.

2. Dollar reserves of countries other than the U.S.A.

3. £-Sterling reserves of countries other than U.K.

More recently Swiss francs and German marks also have been regarded as 'key
currencies.

4. IMF tranche position which represents the 'drawing potential' of the IMF members; and

5. Credit arrangements (bilateral and multilateral credit) between countries such as 'swap
agreements' and the 'Ten' of the Paris Club.

International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organization headquartered in
Washington, D.C., of "189 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." Formed in 1944 at
the Bretton Woods Conference, it came into formal existence in 1945 with 29 member
countries and the goal of reconstructing the international payment system. Countries
contribute funds to a pool through a quota system from which countries experiencing
balance of payments difficulties can borrow money. As of 2010, the fund had SDR476.8
billion, about US$755.7 billion at then exchange rates.
Through the fund, and other activities such as statistics-keeping and analysis, surveillance
of its members' economies and the demand for particular policies, the IMF works to
improve the economies of its member countries. The organization's objectives stated in
the Articles of Agreement are: to promote international monetary cooperation,
international trade, high employment, exchange-rate stability, sustainable economic
growth, and making resources available to member countries in financial difficulty.

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Functions/ Role
1. Exchange Stability:
The first important function of IMF is to maintain exchange stability and thereby to
discourage any fluctuations in the rate of exchange. The Found ensures such stability by
making necessary arrangements like—enforcing declaration of par value of currency of
all members in terms of gold or US dollar, enforcing devaluation criteria, up to 10 per
cent or more by more information or by taking permission from IMF respectively,
forbidding members to go in for multiple exchange rates and to buy or sell gold at prices
other than declared par value.
2. Eliminating BOP Disequilibrium:
The Fund is helping the member countries in eliminating or minimizing the short-period
equilibrium of balance of payments either by selling or lending foreign currencies to the
members. The Fund also helps its members to remove the long period disequilibrium in
their balance of payments. In case of fundamental changes in the economies of its
members, the Fund can advise its members to change the par values of its currencies.
3. Determination of Par Value:
IMF enforces the system of determination of par values of the currencies of the members
countries. As per the Original Articles of Agreement of the IMF every member country
must declare the par value of its currency in terms of gold or US dollars. Under the revised
Articles, the members are given autonomy to float or change exchange rates as per
demand supply conditions in the exchange market and at par with internal price levels.
As per this article, IMF is exercising surveillance to ensure proper working and balance
in the international monetary system, i.e., by avoiding manipulation in the exchange rates
and by adopting intervention policy to counter short-term movements in the exchange
value of the currency.
4. Stabilize Economies:
The IMF has an important function to advise the member countries on various economic
and monetary matters and thereby to help stabilize their economies.
5. Credit Facilities:
IMF is maintaining various borrowing and credit facilities to help the member countries
in correcting disequilibrium in their balance of payments. These credit facilities include-

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basic credit facility, extended fund facility for a period of 3 years, compensatory financing
facility,stock facility for helping the primary producing countries, supplementary
financing facility, special oil facility, trust fund, structural adjustment facility etc. The
Fund also charges interest from the borrowing countries on their credit.
6. Maintaining Balance Between Demand and Supply of Currencies:
IMF is also entrusted with an important function to maintain a balance between demand
and supply of various currencies. Accordingly, the fund can declare a currency as scarce
currency which is in great demand and can increase its supply by borrowing it from the
country concerned or by purchasing the same currency in exchange of gold.
7. Maintenance of Liquidity:
Maintaining liquidity of its resources is another important function of IMF. Accordingly,
there is a provision for the member countries to borrow from IMF by surrendering their
own currencies in exchange. Again, for according to accumulation of less demand
currencies with the Fund, the borrowing countries are directed to repurchase their own
currencies by repaying its loans in convertible currencies.
8. Technical Assistance:
The IMF is also performing a useful function to provide technical assistance to the
member countries. Such technical assistance is given in two ways, i.e., firstly by granting
the members countries the services of their specialists and experts and secondly by
sending the outside experts.
Moreover, the Fund has also set up two specialized new departments:
(a) Central Banking Services Department and
(b) Fiscal Affairs Department for sending specialists to member countries to manage its
central banks and also on fiscal management.
9. Reducing Tariffs:
The Fund also aims at reducing tariffs and other restrictions imposed on international
trade by the member countries to cease restrictions of remittance of funds or to avoid
discriminating practices.
10. General Watch:
The IMF is also keeping a general watch on the monetary and fiscal policies followed by
the member countries to ensure no flouting of the provisions of the charter.

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 UNIT-IV-Market selection and Entry Strategies

Country risk
Country risk is a risk that denotes the probability of a foreign government (country)
defaulting on its financial obligations as a result of economic slowdown or political unrest.
Even a small rumor or revelation can make a state less attractive to investors who want to
park their hard-earned income in a place that is reliable and significantly less likely to
default.
Different types of country risk
Country risk assessments are generally segregated into different categories, which take a
closer look at some of the factors we mentioned prior. Let's discuss some of the most
common and what they mean, so you can determine how they might impact on your
clients' transactions.
1. Political risk
Political risk determines a country's political stability, either internally or externally. For
instance, a recent military coup would increase a nation's internal political risk for
businesses as rules and regulations suddenly shift. Other risks in this category could
include war, terrorism, corruption and excessive bureaucracy (i.e. host government red
tape is preventing certain fund transfers or other transactions).
Political risk can affect a country's attitude to meeting its debt obligations and may cause
sudden changes in the foreign exchange market.
2. Sovereign risk
There is some crossover between political and sovereign risk, although the latter – also
known as sovereign default risk – primarily examines debt. Specifically, this risk category
measures the buildup of debt that is the obligation of a government or its agencies (or that
is guaranteed by the government), and how much said government is anticipated to fulfil
these obligations.
For example, if a government agency refuses to carry out debt refunding, this could impact
local lenders and lead to losses. This would of course have roll-on effects to local
businesses and anyone undertaking trade with them.

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3. Neighbourhood risk
Neighbourhood risk, also known as location risk, may not be the direct fault of the country
with which your clients are dealing, but instead is caused by trouble elsewhere. This can
have spillover effects on other sovereign nations, creating turmoil in the foreign market
or putting pressure on local lenders and businesses.
Neighbourhood risk can be caused by:
Geographic neighbours.
Trading partners.
Co-members of certain institutions or organizations.
Strategic allies.
Nations with similar perceived characteristics.
4. Subjective risk
Subjective risk is not a term that is used everywhere, but it measures factors that are
common to most risk assessments – and could greatly impact foreign business owners
trading with a host nation. Subjective risk is about attitudes and can include social
pressures and consumer opinions – whether to certain types of goods or certain types of
enterprise.
5. Economic risk
Economic risk encompasses a wide range of potential issues that could lead a country to
renege on its external debts or that may cause other types of currency crisis (i.e. recession).
A major factor here is economic growth – the health of a nation's GDP and the outlook
for its future. For instance, if a country relies on a few key exports and the prices for these
are dropping, this creates a negative outlook and may increase the economic risk for
foreign trading partners.
Acts of government may also impact economic risk, such as intervention in the money
market or policy changes that cause tax instability. One other factor is issues with foreign
currency exchange, for instance a shortage in certain currencies or a devaluation of the
exchange rate.
Predicted losses created by sudden changes in exchange rate are generally covered under
the exchange risk factor.

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6. Exchange risk
Any predicted loss created by sudden changes in the exchange rate are generally covered
under the exchange risk factor. This is another all-encompassing term as fluctuations in
foreign exchange can be caused by a wide variety of factors. Economic and political
factors such as those mentioned above can be significant drivers of exchange risk,
although currency reserves, interest rates and inflation are also potential factors.
One example of political change that can harm economic risk is a change in currency
regime, for example from fixed regime to floating.
7. Transfer risk
The final country risk assessment factor we'll discuss today is transfer risk. This is where
the host government becomes unwilling or unable to permit foreign currency transfers out
of the nation. Sweeping controls such as these may be a side effect of a nation in crisis
attempting to prevent creditor panic turning into significant capital outflow. A major
example of this occurring is the Malaysia credit controls after the 1997-98 Asian currency
crisis.
Regardless of cause, capital control can prevent foreign traders from retrieving profits or
dividends from the host country.

International Rating Agencies

A rating agency is a company that assesses the financial strength of companies and
government entities, especially their ability to meet principal and interest payments on
their debts. The rating assigned to a given debt shows an agency’s level of confidence that
the borrower will honor its debt obligations as agreed.

FITCH Rating
American economist John Knowles Fitch founded Fitch Ratings in 1914. In the 1920s,
Fitch introduced the AAA through D rating system, which is now the most used rating
system in the credit rating industry. In 1975, Fitch Ratings was recognized as a nationally
recognized statistical rating organization (NRSRO) by the Securities Exchange
Commission.
In 1997, to increase its global presence, Fitch Ratings merged with IBCA Limited, an

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NRSRO that was headquartered in London. In 2000, it acquired Duff & Phelps Credit
Rating Co., an NRSRO headquartered in Chicago, and Thomson BankWatch, one of the
world’s largest bank rating agencies at that time.
Today, Fitch Ratings employs over 2,000 individuals and runs 38 global offices, and is
one of the largest credit rating agencies in the world. Recently, in July 2020, the company
was recognized as the most transparent credit rating agency in Environmental Finance’s
Sustainable Investment Awards

AA: Very High Credit Quality

‘AA’ ratings denote expectations of very low default risk. They indicate very strong
capacity for payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A: High Credit Quality
‘A’ ratings denote expectations of low default risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more vulnerable
to adverse business or economic conditions than is the case for higher ratings.
BBB: Good Credit Quality
‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity
for payment of financial commitments is considered adequate, but adverse business or
economic conditions are more likely to impair this capacity.
BB: Speculative
‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of
adverse changes in business or economic conditions over time; however, business or
financial flexibility exists that supports the servicing of financial commitments.
B: Highly Speculative
‘B’ ratings indicate that material default risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for continued
payment is vulnerable to deterioration in the business and economic environment.
CCC: Substantial Credit Risk
Very low margin for safety. Default is a real possibility.
CC: Very High Levels of Credit Risk

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Default of some kind appears probable.
C: Near Default
A default or default-like process has begun, or the issuer is in standstill, or for a closed
funding vehicle, payment capacity is irrevocably impaired. Conditions that are indicative
of a ‘C’ category rating for an issuer include:

Mood’S Rating
Moody's was founded by John Moody in 1909 to produce manuals of statistics related to
stocks and bonds and bond ratings. Moody's was acquired by Dun & Bradstreet in 1962.
In 2000, Dun & Bradstreet spun off Moody's Corporation as a separate company that was
listed on the NYSE under MCO

Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal risk
Aa
Obligations rated Aa are judged to be of high quality and are subject to very low credit
risk
A
Obligations rated A are considered upper medium-grade and are subject to low credit risk
Baa
Obligations rated Baa are subject to moderate credit risk. They are considered medium-
grade and as such may possess speculative characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are subject to substantial
credit risk
B
Obligations rated B are considered speculative and are subject to high credit risk
Caa
Obligations rated Caa are judged to be of poor standing and are subject to very high credit
risk
Ca

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 Obligations rated Ca are highly speculative and are likely in, or very near, default, with
some prospect of recovery in principal and interest
C
Obligations rated C are the lowest-rated class of bonds and are typically in default, with
little prospect for recovery of principal and interest
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. Themodifier 1 indicates that the obligation ranks in
the higher end of its generic rating category; the modifier 2 indicates amid-range ranking;
and the modifier 3 indicates a ranking in the lower end of that generic rating category.
GLOBAL SHORT-TERM RATING SCALE
Moody's short-term ratings, unlike our long-term ratings, apply to an individual issuer's
capacity to repay all short-term obligations rather than to specific short-term borrowing
programs.
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-
term debt obligations
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term
debt obligations
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-
term obligations
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories
S & P Global Ratings
S&P Global Ratings is an American credit rating agency (CRA) and a division of S&P
Global that publishes financial research and analysis on stocks, bonds. It was founded in
1860.S&P Global Ratings credit rating symbols provide a simple, efficient way t communicate
creditworthiness and credit quality.It’s global rating scale provides benchmark for evaluating the
relative credit risk of issuers and issues worldwide.

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General Summary of the Opinions Reflected by Our Ratings
Investment Grade
AAA Extremely strong capacity to meet financial commitments.
Highest rating.
AA Very strong capacity to meet financial commitments.

A Strong capacity to meet financial commitments, but somewhat susceptible to

adverse economic conditions and changes in circumstances.
BBB Adequate capacity to meet financial commitments, but more subject to adverse
economic conditions.

BBB- Considered lowest investment-grade by market participants.

Speculative Grade
BB+ Considered highest speculative-grade by market participants.

BB Less vulnerable in the near-term but faces major ongoing uncertainties to adverse
business, financial and economic conditions.
B More vulnerable to adverse business, financial and economic conditions but
currently has the capacity to meet financial commitments.

CCC Currently vulnerable and dependent on favorable business, financial and economic
conditions to meet financial commitments.
CC Highly vulnerable; default has not yet occurred, but is expected to be a virtual
certainty.

C Currently highly vulnerable to non-payment, and ultimate recovery is expected to

be lower than that of higher rated obligations.
D Payment default on a financial commitment or breach of an imputed promise; also
used when a bankruptcy petition has been filed or similar action taken.

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Sovereign and Credit Rating and their influence on FDI (Foreign Direct Investment)
FIIs( Foreign institutional investors)
A sovereign credit rating is an assessment of a country’s creditworthiness. It shows the
level of risk associated with lending to a particular country since it is applied to all bonds
issued by the government.
Sovereign credit ratings are important for countries that want to access funds in the
international bond market. Usually, a credit rating agency will evaluate a country’s
economic and political environment at the request of the government and assign a rating
stretching from AAA grade to grade D.
The factors include:
1. Per capita income
Per capita income estimates the income earned per person in a specific area. It is
calculated by taking the total income earned by individuals in each area divided by the
number of people residing in that area. A high per capita income increases the potential
tax base of the government, which subsequently increases the government’s ability to
repay its debts.
2. GDP growth
The GDP growth rate of a country refers to the percentage growth in the GDP of a country
from one quarter to another as the economy navigates a business cycle. Strong GDP
growth means that a country will be able to meet its debt obligations since the growth in
GDP results in higher tax revenues for the government.
However, if the growth rate is negative, it means that the economy is experiencing a
contraction, and the country may fail to honor its debt obligation if the situation continues.
3. Rate of inflation
Sovereign debts are susceptible to changes in the rate of inflation, and an increase in
inflation will affect a country’s ability to finance its debt. A high inflation rate points to
structural problems in a country’s finances, and it is likely to cause political instability as
the public becomes dissatisfied with the increasing inflation.
4. External debt
Some countries rely heavily on external debts to finance their development and
infrastructure projects. Increasing debt levels translate to a higher risk of default, which

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may affect its ability to access funding from international lenders. This burden increases
if the foreign currency debt exceeds the foreign currency income earned by a country in
the form of exports.
5. Economic development
Credit rating agencies consider the level of development when determining the sovereign
credit rating of a country. Usually, once a country has reached a certain level of
development or per capita income, it is considered less likely to default on its debt
obligations. For example, economically developed nations are considered less likely to
default compared to developing countries.
6. History of defaults
A country that defaulted on its debt obligations in the past is considered to have a high
sovereign credit risk by rating agencies. It means that countries with a record of defaults
receive low ratings, making them less attractive to investors looking for low-risk
investments.
What is Foreign Direct Investment?
Foreign Direct Investment, often abbreviated as FDI is defined as an investment made by
an individual or an organization in one country into a business located in another. Apart
from money, FDI brings with it knowledge, technology, skills and employment.
Advantages of FDI
The following are the key advantages of foreign direct investment in India.
1. FDI stimulates economic development
It is the primary source of external capital as well as increased revenues for a country. It
often results in the opening of factories in the country of investment, in which some local
equipment – be it materials or labour force, is utilized. This process is repeated based on
the skill levels of the employees.
2. FDI results in increased employment opportunities
As FDI increases in a nation, especially a developing one, its service and manufacturing
sectors receive a boost, which in turn results in the creation of jobs. Employment, in turn,
results in the creation of income sources for many. People then spend their income,
thereby enhancing a nation’s purchasing power.

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 3. FDI results in the development of human resources
FDI aids with the development of human resources, especially if there is transfer of
training, technology and best practices. The employees, also known as the human capital,
are provided adequate training and skills, which help boost their knowledge on a broad
scale. But if you consider the overall impact on the economy, human resource
development increases a country’s human capital quotient. As more and more resources
acquire skills, they can train others and create a ripple effect on the economy.
4. FDI enhances a country’s finance and technology sectors
The process of FDI is robust. It provides the country in which the investment is occurring
with several tools, which they can leverage to their advantage. For instance, when FDI
occurs, the recipient businesses are provided with access to the latest tools in finance,
technology and operational practices. As time goes by, this introduction of enhanced
technologies and processes get assimilated in the local economy, which makes the fin-
tech industry more efficient and effective.
5. Second order advantages
Apart from the above points, there are a few more we cannot ignore. For instance, FDI
helps develop a country’s backward areas and helps it transform into an industrial centre.
Goods produced through FDI may be marketed domestically and exported abroad,
creating another essential revenue stream. FDI also improves a country’s exchange rate
stability, capital inflow and creates a competitive market. Finally, it helps smoothen
international relations.
Disadvantages of FDI
Like any other investment stream, there are merits and demerits of FDI as well, which are
mostly geo-political. For instance, FDI can:
• hinder domestic investments and transfer control of domestic firms to foreign ones.
• risk political changes, exposing countries to foreign political influence.
• influence exchange rates.
• Influence interest rates
• Overtake domestic industry if they cannot compete.
• Unchecked FDI can make a country vulnerable to foreign elements like digital crime (e.g.
issue of Huawei)

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 UNIT-V Organizing for International Business

Strategies in International Human Resource Management

As a result of the scarcity of qualified managers which can lead to constraints on global
office expansion for businesses, an effective global human resource strategy can be vital
in building and securing a sustainable advantage over their competition. Good HR
management requires an integrated approach, which begins to merge into career
management. A cohesive network will ensure that the right people are in the right jobs,
and that all costs are attributed appropriately. This can ultimately allow the business to
identify good ideas on a global scale. Ultimately, the building of this network comes down
to an effective global human resources strategy, and here, we’re looking at the ten steps
businesses can take to ensure this is in place.
1.Ending favouritism
One of the fundamental steps towards building a global human resources strategy should
be to end favouritism towards managers that are nationals of the country in which they
are based. Whilst many companies consider nationals of their headquarters country as
potential expatriates and refer to everyone else as ‘local nationals’, this should be
reconsidered for numerous reasons. Ethnocentric companies put the most confidence in
nationals of their headquarters’ country, and thus this is the reason why these nationals
receive the better assignments and climb the ladder much faster. Most surprisingly, big
contrasts can be found between expatriate and local national pay, including the bonuses
and benefits they receive. In order to create an effective global human resources strategy,
businesses must weigh up the advantages and disadvantages of using expatriates and local
nationals to determine the best solution according to the desired outcome.
2.Identify activities that achieve success
The next step towards an effective global human resources strategy is identifying
activities that best achieve success across the globe and identifying the positions that held
responsibility for ensuring their success. The positions that hold the responsibility for

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performing these good acts represent the ‘lifeline’ of a company. Once the activities that
achieve success have been identified, businesses can then revisit the lifeline and role
descriptions on a regular basis to ensure they accurately represent the business strategy.
3.Finding who & where your talent is
Once a company has identified the activities that achieve success, they can find who and
where their talent is via a global database, focusing on more than just the top of the
organization and considering middle managers in the country markets and potential stars
leaping through the ranks. Organizations seeking to build a useful global human resources
database must start with an array of personal-profile templates that ask questions that go
beyond each manager’s experience to determine cultural ties, language skills, hobbies and
interests. For overseas assignments, especially, Human Resources Directors must
consider these skills and adaptability to be as important as functional skills – if not more
so!
4.The mobility pyramid
Another way for businesses to build an effective global human resources strategy is by
constructing a mobility pyramid to easily evaluate managers regarding their willingness
to move to a new location to gain experience. Whilst many human resources departments
refuse to look at mobility beyond ‘movable’ and ‘not movable’, it is paramount that there
is more behind the decision to transfer an employee abroad should they need to relocate,
and even more so because managers can move up or down the mobility pyramid at various
stages during their career. By constructing a mobility pyramid, businesses can find
different ways to effectively use available in-house talent and encourage an increased
number of managers to consider saying yes to an overseas assignment.
5.Leadership capital
The next step businesses need to take to create an effective global human resources
strategy is to identify their leadership capital. One of the best ways for businesses to
identify their leadership capital is by building a database of their company’s mix of
managerial skills by requiring people to provide more information on their CV’s regarding
their experience in management and skills they possess. This way, HR departments can
kick-start the process by holding senior meetings and those in lifeline posts to complete
the form first, prior to adding others from across the globe with the potential to progress

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in their career.
6.Bench strength & skills gap
The following step businesses must take towards an effective global human resources
strategy is to assess their bench strength and skills gap. To do this, businesses must ask
each executive to compare their skills and characteristics against the requirements
identified for the executive’s current position. Not only is this an effective way to compare
skills with ease, but it can also help close personal skills gaps through in-house training
or by participating in outside courses to heighten global success.
7.Regular recruitment
In order to construct an effective global human resources strategy, businesses must search
for new recruits on a regular basis in the local market, as well as in the headquarters’
country. Whilst this can be challenging from time to time, one of the best ways to attract
national recruits is by demonstrating how far they can climb within the organization, as
this is one of the most appealing aspects job seekers look for. Recruitment and selection
not only help to ensure that the business has the necessary knowledge and skills required
to fulfil objectives.
8.Advertising internally
As mentioned previously, regular recruitment is a great way to attract new talent, but when
a business advertises their posts internally, it allows a competitive internal job market to
work across nationalities and genders alike and proves to employees that they can in fact
broaden their horizon and make a future in the company. Moreover, advertising internally
helps attract those that may be in the process of finding an alternative job, and thus reduces
employee retention and creates a positive work environment.
9.Succession planning
Regarding regular recruitment in order to construct an effective global human resources
strategy, managers in a lifeline role should nominate at least three candidates who could
take over that position in the upcoming week, three months down the line or within the
next year. Whilst this will not resolve all succession questions, it will certainly go a long
way and significantly help everyone involved to identify potential future leaders with
ease. Moreover, succession planning provides businesses with the bigger picture and is
paramount to sustain income and support expenses should a disaster occur.

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10.Challenging & retaining talent
Lastly, another step to an effective global human resources strategy is to challenge
employees in order to retain talent. The need to retain talented employees is increasing
every day, and for good reason. Retention of Talent is crucial for the continued growth
and success of any business, which is why is it paramount that colleagues are provided
with consistent and regular communication about what needs to be done, and feedback to
ensure the business moves with the market. One of the most effective ways to retain talent
is by being open to employees about their potential and future within the future, paying
well and not pondering over promoting people who have shown rock-solid ability.
Businesses often struggle to construct an effective global human resources strategy
because they are unaware of what an effective global human resources strategy should
include, but with these ten steps, businesses can create a beneficial global human
resources strategy with ease and confidence.

Issues in International Human Resource Management and Development

When growing and attracting new talent into your company internationally, make sure
your HR department is aware of the many international human resource issues that may
arise concerning performance management and employee development. Differences in
time and culture can bring about many international HR challenges, such as breaking
local employment laws, creating a healthy work environment, administering ethical HR
policies, managing people globally, and training international talent.

1. Breaking Local Employment Laws

One international human resource management challenge that your human resource
department needs to be prepared for is global employment laws. When hiring outside of
your organization’s typical area of operation, ensure that your HR department has read up
on local labour laws in that country. Failure to maintain legal compliance may impact
your organization’s image and work-force branding. Labor laws are different from
country to country, so stay up to date on new HR developments around the globe.
2. Creating a Healthy Work Environment

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Forming a healthy work environment remotely is one of the most important international
challenges for HR professionals to conquer. It may be difficult to motivate teams to
reach business goals and build genuine connections amongst different departments. If
the work environment is not addressed before building teams across the globe, your
organization’s efficiency and retention rates will suffer significantly.
3. Administering Fair and Ethical Policies
When your organization’s workplace expands globally, your HR department will need to
understand the ethics of different cultures around the globe. As labor laws change from
country to country, so will ethics.
Some key international ethical issues to look out for may surround the topics of data,
privacy, and compensation. These potential international HR problems can be easily
addressed through training. Lack of awareness can damage your organization’s reputation
and relations overseas, so it is imperative to train all employees on international business
ethics.
Another policy that is mandatory is regarding equal employment around the world. Any
human resources personnel should consider this their mission to keep recruiting and
dealing with any HR services. Have a handbook of employment laws and policies you
want to encourage more into the company and what are the main ones in that specific
country. Make sure to let employees know that any employee assistance is there at their
disposition.
4. Training and Development of Talent
Since your organization is expanding to international territory, your company’s workforce
will expand too and will need organizational leadership. Make sure that your HR
department is ready to manage a larger pool of talent virtually. When human resource
departments get swamped with all the HR systems, skill gaps and training can easily be
missed or mismanaged. Stay on top of training and development with a unified HR
platform that brings all your learning management systems together.
When recruiting and trying to acquire international talent, ensure that your recruiters
know how to find international candidates and the cultural awareness needed to recruit
new hires with the right qualifications for years to come. This talent management will
ensure that new candidates aren’t discouraged and have a good onboarding process.

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 5. Managing People All Over the World
As companies expand overseas, new employees will most likely be in a time zone far
from yours and may communicate in another language. Both matters can lead to the
largest HR international challenge, communication problems. Communication problems
arise due to language barriers.

Designing Global Organization Structure

Global Organization Design (GO) is the only management system that links all aspects of a
business to ensure:

• The right organization structure

• The right people

• The right accountabilities

• The right leadership practices

• The right processes and procedures

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The International Organization Structure

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 Developing Global Competitiveness

10 Cs of Global Competitiveness
A brief synopsis of each C is as follows:
1. Competitive Products and Services
Price, quality, commercial and delivery terms, customer service support—the list goes
on—are all component parts of a buying decision. Whether a company is selling goods or
services domestically, or to clients abroad, it must have a clearly defined value
position that meets or exceeds a customer’s requirements.
2. Critical Mass
Canada is a nation of small and medium-sized enterprises. Of the approximately 1.1
million employee businesses in this country, over 99 per cent of small medium enterprises
(SMEs defined by Innovation Science and Economic Development Canada are companies
having fewer than 500 employees). To compete effectively over the long term means
having sufficient human and financial resources, and operational capacity to do so.
3. Commitment
In this case, it refers to the demonstrated commitment by management and employees in
planning and implementing commercial activities. If the director of business development
in Company X, for example, is spending more time selling the benefits of Market Y to
his/her superiors versus selling the company's products or services to prospective clients
in the Market Y, the chances of Company X succeeding in Market Y are limited.
4. Capital
The availability of capital, and access to it, is a critical element in building a healthy and
viable enterprise. Not surprisingly, one of the main areas that is always cited by SMEs as
being a particular challenge in their operating environment is access to financing. This
challenge will impede business growth—domestically and internationally.
5. Connected
Connected in this case has two component parts:
• Business connection/ networks
• IT readiness or "connectedness"
Building a globally competitive enterprise requires both.

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6. Country Acumen
As an exporter, importer or direct investor, it is important to have more than a superficial
understanding of the country that your company is doing business with or in. Successful
management of business risks and the ability to effective penetration in particular
market requires in-depth knowledge and appreciation of the country's history, culture,
political and economic structure and direction, industrial profile etc.
7. Company Plan
Building a globally competitive enterprise does not happen by chance. The plan is the
foundation upon which the company will successfully grow. It will also vary, depending
on what the specific commercial objectives and goals are of a particular enterprise.
For each new market that a company is planning to enter, in Canada or abroad, a market-
specific plan should be developed.
8. Continuous Innovation
Innovation is a key driver in creating productivity. In the case of the 10 Cs of Global
Competitiveness, this translates into sustained and profitable sales. In the global economy,
the speed at which business takes place is accelerating, so Canadian companies must keep
the wheels of innovation rolling if they hope to remain competitive.
9. Competence
Competitive advantage in the global economy is driven by knowledge, but knowledge
that goes well beyond the acquisition of information to include tacit knowledge or know-
how. In this case, the issue of competence starts at the managerial level and flows
downward. If a company's leadership does not have the necessary skill and acumen to
compete at a world-class level, the company will not be positioned to realize sustainable
and profitable sales.
10. Confidence
In building a globally competitive enterprise, the management and employees of the
company must have an unwavering belief in the company's ability to compete at a world-
class level. This belief is not based on blind faith. It is confidence that is created as a result
of the nine other Cs coming together. While a particular enterprise may have limited or
no experience in competing internationally, it can create the winning conditions for
commercial success.

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