NARSEE MONJEE INSTITUTE OF MANAGEMENT & HIGHER STUDIES

(DEEMED UNIVERSITY)

COURSE: ADITM DATE: 10.11.2006

SUBJECT: International Business Environment and TIME: 3 p.m.- 6 p.m.

International Marketing MAX MARKS: 100

 

 

 

• The question paper consists of two parts; Section I and Section II.
• Section I consists of three questions. You have to attempt any two. Both questions carry 25 marks each.
• Section II consists of a case study and carries 50 marks

 

 

Section I

 

Question 1. Describe the following:

a.       Countervailing duties

b.      Dumping

c.       GSTP

d.      Specific Tariff

e.       Tariff Escalation

OR

 

Describe the Government of Indias reforms for trade growth.

 

 

 

Question 2. Describe Indias Trade Policy in relation to

a.       Agriculture Products

b.      Mining and Petroleum

c.       Manufacturing

d.      Services and

e.       Textiles

 

OR

 

What are Regional Trade Agreements? Are they compatible with WTO principles?

Elucidate your answer logically.

 

 

 

 

Question 3. What are the issues for India in World Trade? Describe briefly.

 

 

OR

 

How does Euro represent the biggest change in the international monetary system?

 

 

 

 

Section II

Case Study

Please go through the following case study and answer the questions given at the end.

 

Think like an MNC and Manage like an Indian

I have begun my travels for a long journey. It all started with a spark of ambition and the dream to grow beyond the set boundaries, and the past year has been arduous and exciting.

Our international business changed from managing a group of 350 people in a few countries to being responsible for the careers of over 1,350 across the globe. Earlier, we did $15 million (about Rs75 crore) worth of business outside India, which was trivial, but after buying Berger International Ltd, Singapore (BIL), our global sales jumped to nearly Rs 500 crore.

Our Indian business is about Rs1, 600 crore. Overnight we became much larger, more successful, leaders in ten countries. And managing this is far more complex.

Cleaning the books

By the time we completed the acquisition (a 50.1% stake in BIL), it was November 2002. We were the first Indian company to be listed on the Singapore Stock Exchange, the first Indian company to successfully complete a partial public offer there.

On completing the transaction, our first priority was the issue of compliance. Did we have any skeletons in the closet? The fear was there and it had to be allayed. So consolidation of accounts, finalisation of accounts, announcements of the first results, digging up books, working day and night with bankers, lawyers and auditors went on.

We visited BIL units in other countries, BIL subsidiaries, and carried out whatever due diligence we could. We had set our standards and had decided that if there was something to clean up, it would be done before the next year. That was the focus during the first few weeks.

Quick early wins

Only after settling technical matters did we get into management issues. Suddenly the scale and scope of our organization struck us. We were now present in all five continents of the world, in 13 out of 24 time zones, in 22 countries with 23 manufacturing facilities, i.e. an Indian multinational.

We now had to deal with new brands, new people and new customers, and most importantly, bring in complete integration. People came from different backgrounds, different cultures and different languages. How does one tackle the people issues? This would be an ongoing process. But first the target was operational efficiencies.

The hallmark of Asian Paints has always been operational efficiency. We have stringent parameters and high standards for every operational activity: be it distribution, sourcing, marketing, manufacturing, or improving the service level.

We are also meticulous about balance sheet management, which comes very naturally to us. The problem is, you can't acquire a company and impose your processes immediately.

We had to tread sensitively and protect the identity of Berger in terms of brands, units, people and so on. But subtly we brought in the underlying theme that operating plans (OPLs) are everything.

Let's face it: creation of shareholder wealth is paramount, and delivering OPLs is the way ahead. For the first three months, P N Khanna, one of our most seasoned operating heads that is now BIL's CEO, travelled to all the units spreading this message.

Then Jalaj, my son, would go in and talk about values and other corporate issues because somewhere, people also need to connect and belong. By January 2003, the OPLs were approved. By then we were beginning to understand BIL's strengths and weaknesses.

BIL had seen four chief executive officers over the last five to six years. Critical data on how many brands BIL had all round the world was not available. Managing intellectual property became a key priority after the acquisition.

Benchmarking best practices

We started collecting data about the brands in every region and began systematically registering all intellectual property: logos, trademarks, designs, etc. The Berger brand is well recognized across the world but we realized its power when we signed a licensing agreement in Indonesia.

At the same time we began benchmarking best practices within member countries and companies. For example, ISO documentation in Jamaica is excellent. Berger has a fabulous reporting system: all sales reports are in on the first of each month and the P&L (profit and loss statement) is ready by day eight.

Management was an issue, results may be bad but reporting processes were in place: BIL made a loss of S$11 million in 2001, which came down to S$1 million in 2002 and hopefully we should make a profit in 2003. On the marketing side, there are some gaps in the product range, some lapses in positioning in the market place, but we are working on this. Place Chart Hear

Emotional integration

You can't go into a company and be seen as only emphasizing marketing because along with products and brands, there are also customers and employees. After an acquisition, you have to address the emotional issues, reach out to people and convince them that you are committed to growing the business, and servicing the customers. And that you need their commitment.

To address these issues, we held a Global Managers' Conference in February 2003 attended by senior managers and unit heads from 23 countries. When individuals realize they face the same problems as others, they start exchanging ideas.

Out of this forum emerged a spirit of sharing problems and solutions, a feeling of belonging to a group that is present in various markets and the collective benefits such a group can bring.

Everyone had a lot of questions about what is Asian Paints, what does Asian Paints stand for? What is expected of me now that I am a part of Asian Paints? Suddenly we realized we are a multinational and responsible for managing the careers of our people.

Earlier Asian Paints was not a multinational in that sense. Can an Indian company become a multinational? There are so few role models, except maybe a Ranbaxy.

People need a sense of belonging and we have initiated various processes to ensure that it happens smoothly. During the conference, we defined four guiding principles for business and success: Responsibility, Entrepreneurship, Continuous improvement, and Trust. These four values determine our actions in all markets: those in which we are leaders and others in which we have aspirations to grow. All these four values are sacrosanct and the true representation of what we would like to stand for.

Trusting people

Local expertise is critical in the paints business. BIL had good human resources and post acquisition, we had to ask only about 35-40 people to leave. I want people at BIL to feel that we are adding value, but at the same time we will not compromise on growth.

Topline has to grow, costs have to come down, balance sheet has to improve, and for us inventory management is absolutely critical.

At the same time, we are not sending Asian Paints people all over. Not one Asian Paints person has been sent where there was no position, and we have not created any new position. The chief executive of China had to be replaced because BIL had earlier closed the factory due to some dispute.

We resolved it and restarted the factory. Asian Paints deputed one senior manager from India to head its operations in China. The remaining employees are all locals. At Singapore, we sent an Indian manager as the unit was operating without a CEO.

Similar was the case with our operations in Myanmar. These are the only employees being seconded from our Indian operations. I feel that local talent is good and it must be disturbed only if they do not produce results.

Paying the price

At present, the HR cost is a little high and actual growth is low. But the trade-off is clear. To grow we need people. It is better to carry these people as they are good. They are the people who will be there for 20-30 years and will make us successful in their local market.

We can give them direction. In every unit I want five to six local champions with ownership: one each for marketing, back office, finance and accounts, production (manufacturing), supply chain and sales.

We have to invest in locals -- fly them into India or any other place where we are market leaders to help them understand why we are good. Though this exercise of identifying local champions will take some time, we have already begun the process.

Honestly, cost is an issue. HR cost to sales is about 15% to 18% and material cost is about 55% to 60%. So I am still attacking material cost, and giving people more time. I feel there are substantial savings to be gained from material costs.

We make about 220,000 tonnes of paint in India but now we will make 60,000 tonnes of paint outside India. So we can really exploit scale for the overseas units. We can send formulations from one place to another. We can bring down costs and manufacturing losses by introducing initiatives that we have implemented in India.

I strongly believe that it is better to be tolerant on people issues because we can be aggressive in cutting other costs. I know that if I get rid of 100 people, I can make a straight $1 million profit, but then this will paralyse operations, make people feel insecure and no other discussion will happen except who lost his job and who is next.

I don't want to be seen as a predator. Also, to operate in foreign markets, we need people who speak the local language, understand the culture. India provides only back office support.

Think regional, act local

The supply chain is critical and that is Asian Paints' biggest strength. We want to leverage our supply chain capabilities across BIL subsidiaries. Our operating model is 'think regional but act local.'

Whether it's brands, people or purchase, it makes sense for us to operate businesses regionally. We operate in five regions of the world ie South Pacific, Caribbean Islands, South East Asia, South Asia (SAARC) and the Middle East.

The South Pacific in spite of its size and irrelevance as a global player, taught us how to manage island economies. We have taken this model, and are now mapping it so that we can implement it across other island economies.

In the Middle East, we operate factories in the United Arab Emirates, Oman, Bahrain and Egypt, and are among the top five players. Here the model is different because the growth potential is much higher.

Also, though the management is local and follows local labor laws etc, human resources are mostly from India. South East Asia has been run locally from the very beginning. They have depth of talent and our market share is minimal.

Three years from now I am very sure we will have to start bringing it together but right now if we want to even double in each of these markets we require a lot of local decisions to be taken.

In Thailand the local resource pool is good but there is no marketing at any level so we are going to have two to three people devoted to developing marketing strategies. I want to do that in Malaysia and Singapore also.

In Singapore, the first thing Jalaj was told was to send a sales manager from India. It took him two months to convince our unit head in Singapore that Chinese dealers need a local who understands their language, who eats their food, celebrates their festivals.

Airmiles galore

Training people, sharing expertise requires a lot of traveling and we spend a lot on travel. Actually it will hit the bottom line in the current year but anybody who wants to travel,

I will not stop them. You want to see anything of Asian Paints, Berger anywhere in the world, go. Even people in the core business here, in Decorative India, are considering taking technology from Berger units.

At present, I am not putting too much emphasis on processes because if a particular market needs reactivity, then it is necessary to take quick action. However, in the long run, it is not advisable and common processes are being instituted across units of BIL.

Intellectual integration

With growth being the focus, we need a system of information and knowledge sharing. This means transferring expertise from an Asian Paints overseas unit to a BIL overseas unit and vice versa.

Our focus currently is on understanding how the knowledge transfer will happen on the technology side. We want to create free flow of information across companies and that is when the benefits of integration will be seen.

We have formed lead technology centers and regional technology centers. There are five or six individuals in these centers, one each who drives regional technology, local sourcing, manufacturing equipment, and most importantly, can react immediately.

We would like to operate closer to our consumer rather than from the corporate headquarters. The lead technology centers, started out of the same concept as centers of excellence and will provide technology expertise in one specific segment.

For example, Dubai is doing good work on wood finishes so that is the lead technology center on wood finishes outside of India. We also needed to improve our communication channels.

So if someone in Caribbean wants to introduce wood finishes, he has to get in touch with the regional technical managers who will then get in touch with the lead technology center manager in Dubai and the communication will happen with free exchange of knowledge.

We plan to create a new position of Central Technical Head, someone who will be responsible for all these lead and regional technology centers. Then it will be centrally coordinated but competent centers will still prosper. Decisions will be taken regionally.

We are trying to build a knowledge structure borrowing from organization such as Trans Ocean. This is an association of independent paint companies around the world who share marine and protective coating technology to all their partner companies.

Since we have subsidiaries all across the world, we can also exchange technology and all can access each other's strengths. Then in that sense we are multinational and still have our own independent identity.

Overcoming Indianness

While internal communication has to improve, so does communication with consumers. Frugal, value-for-money are virtues that we at Asian Paints understand very well and so do our customers. But in other markets, it is not a virtue and just doesn't work.

For example, in countries like Sri Lanka, they want aspirational, best of breed, and are willing to spend money for that.

We have access to the Berger brand in more than 70 countries, and the fact is that Berger has the potential to be much bigger and stronger than Asian Paints. Naturally we will leverage the Berger brand equity and -- combined with Asian Paints expertise in technology and marketing -- that's very strong.

But brand-building is critical and my problem is that after a few years I can't take Asian Paints everywhere, neither can I take Berger everywhere, so I may have to have a third brand. For that I have to focus on understanding how to build another brand.

We have to spruce up the marketing side. We are considering hiring an agency to understand each of the important markets and understand its growth potential because every market is so different in terms of consumer preferences, distribution channels, product choices, etc.

We need to fully understand how the retail channel functions, how wholesalers work, which channels work, what are the expectations of contractors, retailers, architects, and final consumers. How each brand -- corporate, premium, value for money, entry level or up gradation -- is received.

In the current phase, we are launching new products, so brand names become important. Take Apcolite, for example. It is the largest paint brand in India but can I build a brand like Apcolite in overseas countries?

On products, take for example, our operations in Thailand and the Caribbean: I find there is nothing similar in terms of brands. The can designs in both countries are so different. In the Caribbean we have brand names like 303, 404, 505, while in the Thailand we have a brand 'Jumbo', and this is just within Berger. Asian Paints have many others.

Brands that sell in Singapore don't sell in Thailand, and China has totally different brands. We also have to take a call about which are our key brands at a global level.

We are beginning to understand what are our corporate colors, what they stand for, whether yellow and red are acceptable in every market, blue in another market. That is going to cost a lot of money again. We are going to spend the next twelve to eighteen months understanding branding. At the same time, we have to keep pushing sales.

Fast forward

For the future, the direction is clear: technology, supply chain, marketing groups and HR. We have one group working on people issues: putting in place common group policies and practices, defining productivity benchmarks and improving performance across units.

The group will decide on issues like how many people are required: in branches, for dealer servicing, for sales, for distribution, administration, finance, IT, etc. On the financial side, we had assumed that a significant induction of capital would be needed but so far we have been able to generated finance from the business.

The first year was all about back-end efficiency. The next year will be about topline growth. In India we are growing at 10% and 12% and if whatever we have acquired is also going to grow at that rate, then what is the fun?

(As narrated by Mr. Ashvin Dani, Vice Chairman and managing Director, Asian paints Limited and appeared in electronic media.)

Answer the following questions:

Question no 1. When Asian Paints bought Berger International Ltd, Singapore, it acquired a presence in eleven countries and then faced every shopper's dilemma. How to fit the new buy into the old cupboard?

Question no 2.But integration is not the only management challenge facing this Mumbai-based homegrown company. As it morphs into a multinational, can Asian Paints export its award winning culture? Or should the question be, should it?

 

XXXX

 

 

NARSEE MONJEE INSTITUTE OF MANAGEMENT & HIGHER STUDIES

 

(DEEMED UNIVERSITY)

 

 

COURSE: PGDBM-II / PGDMM-II DATE: 14.11.2006

SUBJECT: International Marketing TIME: 11 a.m.- 2 p.m.

MAX MARKS: 100

 

 

 

• The question paper consists of two parts; Section I and Section II.
• Section I consists of three questions. You have to attempt any two. Both questions carry 25 marks each.
• Section II consists of a case study and carries 50 marks.

 

Section I

 

Question 1. Discuss in detail the social factors in international marketing

environment.

 

OR

 

Discuss how marketing of Darjeeling tea will be undertaken in overseas market?

 

 

Question 2. How do non-tariff barriers affect international trade ? Discuss in

detail.

 

OR

 

Explain the requirements for effective market segmentation?

 

 

 

Question 3. What is Market Research? Explain in detail the functions of Market

Research.

 

OR

 

What are the factors that decide the choice for distribution channel?

 

 

 

 

 

Section II

Case Study

Kindly go through the following case and answer the questions given at the end.

 

 

A is still carried through today in Australia. However, due to tobacco advertising restrictions, the brands means of communication is very limited. The industry in Australia is indeed an ever-increasing darkening market, which follows the trend in the US. However, the industry is still able to communicate at point of sale (POS) and through trade within some Australian states.

 

The situation in Europe is a little brighter with tobacco brands being able to legally advertise via POS, outdoor mediums as well as press advertising. This opens an opportunity for the Winfield brand to push for a greater share of the market before the European market follows the trend to ban cigarette advertising. Therefore, the advertising and communication strategy for these markets has been localised to suit different consumer needs, different competitor market and industry practices. The target market for Winfield in Europe is similar to that in Australia with down to earth men and women, aged 25- 45 who admire simple, honest values and respect a tell it how it is attitude being the target of the key European markets.

 

One of the trends for tobacco companies and brands such as Winfield is to move into markets where the restrictions on promoting and advertising their product are less strict. International markets, such as Europe, allow the legal use of outdoor advertising mediums as well as press to target smokers, which obviously allows for a greater reach and frequency of the brands communication message. In addition, Asia and less developed nations, such as those in the Pacific islands, have even looser restrictions on advertising, promotion and the distribution of tobacco products. This means that the Winfield brand can penetrate these markets through extensive advertising and communication campaigns.

 

However, for a large multinational firm such as BATA that manages a myriad of tobacco brands, there are ethical concerns it faces when promoting Winfield and other like brands through international markets. To begin with, in the country of origin (Australia), BATA does not want to be seen as a firm that practises unethical promotional activities in international markets. This would tarnish their image in their home market as well as the overall image of the company on a worldwide scale, especially if the European and Asian market places follow the trend of the Australian market place, and in the years to come tighten tobacco advertising legislation.

 

This gives rise to the issue of to what degree should a standardised policy on cigarette advertising and promotion be implemented across borders by BATA for their Winfield brand? There needs to be a balance between ensuring ethical marketing activities whilst still benefiting from maximum exposure of the freedom of communication in some of these international market places.

 

Considerations that the Winfield brand may have to work through are:

         It may be legal to promote and advertise Winfield to consumers under 18 in some markets. Therefore, should Winfield take advantage of this freedom by implementing campaigns that are attractive to the younger demographic group?

         Trialling and sampling of the product may be legal in some international markets. Should Winfield partake in these practises, being aware of the risks associated with smoking?

         Should health warnings be put on the pack in markets that do not legally require health warnings?

         Should Winfield launch promotional competitions that encourage more people to buy (and presumably smoke) more product so as to improve their chances of winning?

 

For more than 30 years, the tobacco industry has been following a strategy of agreeing to compromise laws in order to avoid more stringent regulations. For example, in the USA and Australia the tobacco industry agreed to put warning labels on their products. These are seen as ethical practises and initiatives from the tobacco companies in an attempt to generate more positive PR for an industry that is shunned by many. However, some would argue that some of these initiatives actually protect the tobacco companies more than the consumers, especially in situations when warnings have become a powerful defence for tobacco companies when hit with lawsuits. They are then able to argue that they have clearly publicised the risks of smoking. Furthermore, there is the argument that the familiar health warnings have actually begun to be a positive related attribute to the packaging, especially in Australia.

 

The issue of ethical advertising and promotion of tobacco products is a tricky topic with many conflicting points of view, from comments such asChildren are bombarded daily by marketing campaigns that play on their vulnerabilities Joe Camel promises that smoking will make you cool. Virginia Slims models whisper that smoking will help you stay slim2. to theories such as the consumer socialisation process.

 

The consumer socialisation process3 is a theory that states that when too many restrictions are imposed on free speech, there is a risk of negative effects on the process that is needed if developing individual humans are to acquire the skills sufficient to be able to make informed and rational decisions in the marketplace. Therefore, this theory states that humans should develop their own information filters based on their own trial and error as well as the information provided to them, not by the filters placed on information by other people.

 

In the tobacco industry, which is so controversial, an international brand such as Winfield will need to think ethically when designing and implementing all areas of their integrated marketing communication, keeping in mind a balance between effective communication and ethical practises based on knowledge in markets that have already darkened. There are many approaches to marketing ethics based on either descriptive or normative approaches. The evaluation of decisions as ethical or unethical may be better informed by sound theories of normative marketing ethics. The social contracts theory is suitable in that it allows for a framework to resolve ethical issues that arise when marketing across borders.

 

Donaldson (1982) has constructed a social contract for business that provides corporate legitimacy based on the consent of those affected by the business, as corporations only exist through the co-operation and commitment of society. That is, the firm offers advantages to society for the right to exist and prosper. Therefore, they use the exchange model of ethics to understand the ethical issues associated with, and to provide ethical guidance for, the domain of economic exchange[1].

 

The Social Contract Theory1 (SCT) allows the for the following to be put in place to allow for a workable framework for solving ethical issues:

 

1.      Sets core principals relevant to the firm in question

2.      Recommends different principals for different communities

3.      Determines the appropriateness of marketing practises

4.      Allows for a theoretical foundation of norms and values

 

The next extension of this theory is described by Donaldson1 as the Integrative Social Contracts Theory, which captures two different types of social contracts- hypothetical and actual contracts used in living communities. It is grounded in the idea that social norms are the foundation of rules within communities. The term of the contract are based on the rational response to two assumptions:

1.      Individuals entering into the contract are assumed to be aware of, and concerned about, morals and values and the rationalisation of these components.

2.      It can be assumed that global members would respond to bounded moral rationality, through the recognition of the need for community based moral infrastructure as a necessary component to the generation of wealth and the maintenance of an environment that will result in good and productive life.

 

Donaldson hypothesises that a global contractor would agree to the creation of a binding macro social contract as it is the only rational solution for the need for a moral fabric in the face of bounded moral rationality.

 

The macro social contract follows the following rules:

 

1.      Local economic communities may specify ethical norms for their members through macro social contracts.

2.      Norm- generating micro social contracts must be enforced through informed consent- the protected informed consent.

3.      To be obligatory, a macro social contract must be compatible with the norms of the community.

4.      In the case of conflicts among norms that satisfy terms 1-3, priority must be established through the application of rules consistent with the spirit of the overall macro social contract.

 

Following on from the macro social contract, there are six guidelines relating to the ISCT1:

1.      Transactions solely within a single community, which do not affect other communities, should be governed by the host communitys norms. For Winfield, this means there is freedom to utilise the advertising legislation of individual markets, although it may be illegal in another market or community.

2.      Community norms for resolving priority should be applied. Therefore, in the case of Winfield, if there are concerns with underage smoking, than this should be given priority over other issues.

3.      Greater priority should be given to the norm of the more extensive community. This can relate to cultural sensitivities and the like which Winfield may need to take into consideration. If there are conflicting norms, greater priority needs to be given to the majority without alienating the minority.

4.      Norms essential to the maintenance of the economic environment should be prioritised over norms potentially damaging to the environment. It could be argued that the brands existence in international markets creates jobs and profit through taxes for the country selling the product, which may need to take priority over the potential risks of cigarette smoking.

5.      When norms conflict, patterns of consistency among the alternative norms provide a basis for prioritisation. In the case of conflict, Winfield needs to look for patterns of consistency amongst the norms for guidance.

6.      Well- defined norms should be prioritised over more generic norms.

 

The community needs to be the focus of the macro social contract and in relation to the ISCT, is defined by Donaldson and Dunfee4 as a self defined, self circumscribed group of people that interact in the context of shared tasks, values or goals and who are capable of establishing norms of ethical behaviour for themselves. This means that corporations and the like can be partners to ethical decision making in the context of communities of ISCT. ISCT recognises that a community governed by norms is a critical component to economic success, which is an important consideration for the Winfield brand.

 

Implications of ISCT for marketing ethics

 

ISCT is especially applicable when marketers activities span multiple communities that may have conflicting norms; ISCT is therefore useful for the following reasons when implementing ethical decision-making:

 

         ISCT will be subject to the norms of many communities

         It provides a framework for examining exchange relationships

         It allows for the potential to integrate descriptive and normative streams of research in marketing ethics literature

         ISCT is more relevant given developments in relationship marketing

         The theory is considered common sense and relevant by marketing practitioners who can easily put the theory to work within their company or brand. The theory is complementary and strengthening to the existing marketing ethics frameworks, allowing for greater clarity regarding judgments of some of the more difficult issues in marketing ethics.

 

Questions

 

1.      How can the SCT and ISCT address the controversial nature of advertising and promoting cigarettes across international borders?

 

2.      In what ways has the marketing of Winfield been influenced by SCT?

 

 

 

XXXX

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NARSEE MONJEE INSTITUTE OF MANAGEMENT & HIGHER STUDIES

(DEEMED UNIVERSITY)

COURSE: DITM, DATE: 10.11.2006

SUBJECT: International Business Environment TIME: 3 p.m.- 6 p.m.

MAX MARKS: 100

 

 

 

• The question paper consists of two parts; Section I and Section II.
• Section I consists of three questions. You have to attempt any two. Both questions carry 25 marks each.
• Section II consists of a case study and carries 50 marks

 

 

Section I

 

Question 1. What are Indias WTO commitments? Discuss in detail.

 

OR

 

How do the policy reforms in India provide a conducive business environment to an international businessman in India?

 

 

Question 2. What are the arguments For and Against the WTO?

 

OR

 

Healthy growth in Indias exports and foreign investment are due to her increased openness and integration with world economy Explain.

 

 

 

 

Question 3. Describe in detail Reforms in the Foreign Exchange Markets in

India.

 

OR

 

 

How do Trade Related Investment Measures reduce trade distortions?

 

 

 

 

Section II

Case Study

Kindly go through the case study and answer the question posed in the title.

Do we have a new growth model?

The manufacturing component of India's GDP grew by 10.4 per cent in the third quarter (October-December 2004) of 2004-05. This was incidentally the first time that manufacturing saw double-digit growth since the government started reporting quarterly GDP statistics in 1997-98.

Coming to think of it, it is a little hard to explain why the growth momentum has not only sustained over the last few quarters but has actually accelerated.

One would have expected some deceleration -- purely cyclical sectors like commercial vehicles should be cooling off after a prolonged boom, growth in housing construction should be lower because of the base effect and sheer consumption fatigue should push growth rates down in categories like passenger vehicles that have driven growth over the last two years. All this should have added up to slower, not faster, growth.

My take on this apparent anomaly is that sustained export growth has been the key factor in keeping the business cycle ticking. Here are some back-of-the-envelope calculations that I made to support my case.

The share of exports (the ratio of increase in exports to increase in GDP) in the current boom, which started towards the end of 2002, was roughly 28 per cent.

The comparable number for the last upswing in the mid-nineties business cycle was just 11 per cent. All quarters since 2003 have seen average export growth of at least 15 per cent. In a number of quarters, growth rates were significantly higher.

Thus, in our own gradual, laid-back sort of way, we seem to be moving closer to the export-led growth model that our East and North Asian neighbors have exploited so well.

The share of exports in our GDP, at about 11 per cent, is way lower than, say, Thailand's 40 per cent or China's 23 per cent but there seems to be a marked shift in the model and pattern of growth. Over time, the share of exports is likely to grow further.

There are a couple of things about this export boom that deserve attention. For one, this has come at a time when our exchange rate has been appreciating not just against the US dollar but against a basket of major global currencies.

The real effective exchange rate (that makes appropriate adjustments for relative inflation rates) against a trade-weighted basket of five currencies went up by about 6.7 per cent between January 2003 and January 2005.

In short, the average effective price of our products in the global market climbed up by about 7 per cent. Exports, however, continued to grow.

 

Demand for "commodities" like agricultural products or basic metals usually depends almost entirely on the price that's on offer. There are no significant differences in the quality or other attributes of these goods -- the exporter who offers the lowest price in the global market-place gets the custom.

The fact that our exports have grown despite dwindling price advantage suggests that we are exporting things whose demand does not depend on short-term price factors alone.

For those who like jargon, Indian exports seem to have become "de-commodities" to a significant extent.

What does this de-commoditisation mean in more concrete terms? It means that we are exporting products where our manufacturers add "value" in terms of things like design capability or engineering skills.

This creates a niche for these products in international markets and makes exports relatively immune to short-run exchange rate variations.

A clear example of this would be that of engineering goods. It is heartening to see that these constitute the single-biggest category (about 19 per cent) in India's export portfolio in 2003-04 and in the first seven months of 2004-05.

The rise in engineering goods exports has been driven by a change in product mix. The share of traditional low-end machine tools (almost like commodities) has dwindled, making way for higher-end industrial equipment, components, and automobiles.

Pharmaceuticals are another category where Indian manufacturers have successfully combined engineering expertise and aggressive marketing in international markets.

The case of automobiles and auto-components deserves special attention. Not only is the quantum of exports high but it also represents the nascent trend of transnational companies producing in India to sell to third markets (export-plat forming).

Hyundai, for instance, is apparently producing cars in India to sell in its home market (as a related story, see "India to contribute 80% of Hyundai's global sales." If India is to figure, as it aspires, in the global big league, the "export-platform" has to be extended to other sectors as well.

What is important about both these categories and similar ones is that they are in the middle of what I would call a "penetration" phase, i.e. Indian exporters are not just riding the growth cycle for these products in buyer economies but are steadily gaining market share.

Thus, even if the business cycles in the buyer economies were to turn down, the market share gains would insulate Indian exporters to a degree.

The other, perhaps more important, development has been the rise of "regionalism" in our trade patterns. We are selling much more to our Asian neighbors now than we did in the past.

In the first seven months of 2004-05, 30 per cent of our exports went to other Asian markets (excluding the Middle East). China alone absorbed 5 per cent of our exports.

Thus, the rest of Asia was our biggest trading partner in this period. Empirical trade researchers have, for long, pointed out that sheer physical proximity rather than more abstruse things like comparative advantage is the key driver of trade between countries. India's export patterns seem to be finally reflecting this.

I see two specific benefits of enhancing trade with Asia. There is reason to believe that the income growth (and hence demand for imports) of Asian economies is likely to be far less volatile than Western markets.

So trade diversification towards Asia is likely to make export growth more stable. Besides, regional trade arrangements have proliferated across the world (at the last count there were about 250) and these effectively restrict our access to these markets.

Thus, there is really no alternative to aligning ourselves with our neighbours, both informally and formally, through regional trade agreements.

India has signed a regional trading arrangement with Thailand and is negotiating one with Singapore and ASEAN.

My feeling is that India's approach to regional trading agreements has been somewhat piece-meal -- we need to get a little more aggressive. This is for reasons other than just enhancing our exports.

Given the polarization within the WTO on issues such as non-tariff barriers, India might find it useful to push the case for a comprehensive pan-Asian trading agreement that includes China and South Korea.

The idea would be to present an alternative template to the US and the EU, one that serves Asia's interests. A good structure would be one that focuses on only trade-related issues and keeps "non-trade" issues out of the picture.

Over the longer term, an export-oriented growth strategy will help align our resource mix with our production structure. This would help undo one of the critical imbalances that currently plague the labor market -- the growing supply of labour but diminishing employment in organized manufacturing.

It might, however, be unfair to expect exports to thrive just on cheap skilled labour. Things like better infrastructure, friendlier labor laws, and cheaper capital are certainly important for domestic producers but they are a tad more important for exporters who have to stay on top of the global competition.

An effective trade policy is one that goes beyond small changes in duty drawbacks and EOU norms but takes a holistic view towards retaining our comparative advantage.

 

 

XXXX