International Business Environment - Term Paper Example

International business environment Presentation type- Macro issues Topic 5 - Pick any two countries and an industry where trade between these two countries exists (Chosen: cotton trade between the US and India). Analyze the patterns of trade (imports, exports, regulations) within this industry between your chosen countries over the last decade. On the basis of this analysis, what recommendations would you make to firms wanting to enter this trade? (Suitable for presentation type I) 1. Introduction The realms of international trade in the twenty first century have encountered mammoth intensification coupled with enhancement of globalization and liberalization regime (Free, 2010, p.431). This intensification has provided immense opportunities to the organizations all over the globe in expanding their business operations on a global basis neglecting geographical constrictions and providing them platform from where they can augment their profit portfolio at a sky rocketed rate (Hill, 2001, p.25). International trade between countries incorporates the international business environment in a rigid manner and they are subject to rigorous discussion as they impart significant implications in the trade relations between countries across various industries along with their associated products being traded (Jain et al, n.d., p. 132). Within the textile industry, cotton is regarded as the most important fibers in the world (Paterson, 2009, p. 284). Although a developing country, India was the most important producers of textiles in the world before industrial revolution (Dale, 2009, p. 79). USA is a developed nation and the portfolio of US cotton industry (Sklar, 1992, p. 86) accounts for around more than $ 25 billion in diversified products and services on an annual basis with generation of more than 2 million jobs in the industry sectors ranging from farm to that of textile mills (Cotton & Wool, overview, 2012). India is a developing country with a very promising economy and cotton industry is one of the booming sectors of the country (Kiplingers Personal Finance, 2005, p.69). The paper will center on the notion of trade between India and USA. The details of discussion that will be included incorporated in the paper will be discussed in the subsequent section. 2. Areas of discussion in the paper The paper develops a discussion associated with the trade patterns between USA (Country A, say) and India (Country B, say) over the last decade. The paper will include a detailed analysis of the national institutional systems as well as the cultural conditions in country India along with the assessment of how the process that will affect a firm in country A i.e. USA. Discussion will also involve assessment of the investment pattern between the countries in the cotton industry along with the type and level of protection measurement against imports and foreign investment in India in correspondence with cotton industry. The exchange regimes governing countries A and country B with the assessment of risks for the firm in Country A will be also discussed. Assessments of implications of different international institutions like WTO, EU, and NAFTA for the firm in Country A’s proposed business links with country B. Analysis will be also made on different types of political risks that a particular firm in country A may encounter in country B and will be highlighting on the implication on the firm and will also seek various ways in reducing risks. Problems of establishing as well as operating a CSR (corporate social responsibility) policy covering business in country with respect to cotton industry in country B. So let us begin the discussion with trade between USA and India. 3. Trade between USA and India (cotton industry) 3.1 An arena of political strengthening In the global political and economic domain, trade between India and the United States of America play a significant role (Goswami, 2012, p. 326). United States of America is the largest export destination and is also one of the important hubs of foreign investment in India (Information Economy Report 2007-2008: Science and Technology for Development, 2008, p. 127). From the reports of audit firm PricewaterhouseCoopers in 2008 revealed that the economy of India is anticipated to be growing to around 90 percentage as compared to the US economy by the year 2050 (India and US, 2010). In India, the government followed an inward business policy without opening much to the global trade (Saraf, 2008, p. 52). In 1991, the economic reforms with the incorporation of liberalization regime has boosted the economy of the country and has radically transformed its course leading to better growth rates, increased investment as well as trade flows along with a wide spread decline in rates of poverty (Allaoua, 1996, p. xxii). The effects of the reforms on trade and investment relations with the United States are also immense (Mackerras, 1996, p. 86). Although the volume of trade between these two countries are relatively smaller but the trend is reversed in the recent years and in the current years this has taken jet packed speed. As the major trading partner USA continues in taking the lead position when it comes for questions related to trade (Congressional Record, V. 149, Pt. 19, October 24, 2003 to November 4 2003, p.26346). Despite that share of India’s trade with USA ranks 24th in US exports and ranks eighteenth in the US imports. In the political domain, there are continuous efforts towards strengthening institutional structure of bilateral economic relations. There has been signing of “India-US Economic Dialogue” by the prime minister of India A. B. Vajpayee and US president Bill Clinton in the year 2003 for strengthening of the Indo-American trading relationship through regular dialogue as well as engagement. A sizeable portion of the India’s population as well as growing middle and higher income class (Waldrop & Anne, 2012). In the cotton trade domain, country of India is the second largest producer as well as the exporter of cotton. Analysts reveal that in the export market, the country will be dominating in the next few years till a time comes when the domestic consumption catches surge in production. The country of India is the second largest producer as well as the exporter of cotton. However it is also expected that India will be continuing to import the variety of extra long staple (ELS) and quality long staple cotton (28-34 mm) with occasional imports of medium staple cotton at times when the international prices are favorable. In the past few years the United States of America has been pioneering in the field of leading suppliers. 3.2 Cultural conditions and institutional systems Cultural dimension is a very crucial parameter in the trade relations between countries in any industries. Successful trade requires a thorough scrutiny of the market in the concerned and requires a lot of patience. The Indian subcontinent has provided a myriad of marketing efforts those targets at addressing various regional opportunities, cultural differences as well as level of economic development. In the developed countries, the consumers are seen to consume more cotton products and in the developing countries the textile mills are found to be consuming more cotton fiber. In India the economy has been encountered to be infested with a huge boom in consumption. The rapidly growing economy of the country has led to the generation of over 300-350 million middle income families escalating the demand for consumption. It has been also seen that contribution to the increased consumption includes change in lifestyles of the urban young elite, penetration of the satellite TV increase in appetite for the Western goods along with greater product choice as well as availability. The liberalization of the industrial and the trade policies in the early 1990s increased competitiveness of much of India’s service sectors providing solid growth in output as well as increasing consumer demand. In the last decade the agricultural exports have escalated by around 15 percent as a result of higher percentage of exports of rice, cotton, soya bean as well as other commodities. Although the exports rose, simultaneously the total imports have also escalated from 1.7 percentage in the year 2000 to around 2.6 percent in 2009 and a large part of this imports have been from the United States leading to enhancement of in the trade surplus balance in the United States. In India before the liberalization regime, cotton was a traditionally export item but in the last decade it has been found that the contribution to exports have fallen down from a level of 5.7 percent in the year 1990 to under 1 percentage in the year 2009 (Mukherjee & Mukehrjee, 2012, pp. 21-22). The Multi Fiber Agreement (MFA) of 1973-74 directed the developed countries in bilaterally negotiating quotas with supplier countries keeping in mind the competitiveness as well as the perceived threat to the domestic market of the importing countries. In the Uruguay Round of Trade negotiations in the period 1986-93, there was an urge by the international community towards integrating the MFA into a new Agreement on Textiles (ATC). The ATC included a time table for phasing out the quota system within a span of 10 year period and that was integrated within the GATT provision by the year 2005. The purpose of the ATC was towards providing the developing market more access to the markets of the developed nations. But in India this can be regarded as a disadvantage as the country possessed the capacity in producing and exporting more but were basically restricted by solid quota restrictions. After the elimination of MFA, the country of India recovered at a marginal rate but again in the year 2006, the currency of the country appreciated against the US dollars making the Indian exports less competitive. Since the year 2007, the share of the country in cotton exports increased in a marginal rate. As in comparison it was seen that in China the exports of cotton remained in a competitive state even in the period of quota. A vertically integrated structure in China’s textile industry simultaneously executing all stages at the same time can be regarded as the critical success factors (Mukherjee & Mukehrjee, 2012, pp. 21-22). 3.3 Investment patterns between India and USA in the cotton industry and protection measures United States is one of the India’s largest investment and trade partners (Baru, 2006, p. 302). The bilateral trade in goods and services has almost increased four times and half over the last decade to more than around $ 86 billion in the year 2011 (India’s exports grows by 10.1% January 2012). The bilateral trade between the two countries has increased by around 40 percent since the launch of Strategic Dialogue. The stock of Indian Foreign direct investment has risen from a level of $ 227 million in the year 2002 to around $ 4.9 billion in 2011 which supported largely the employment sector of United States of America. The bilateral investment treaty acts as a tool towards strengthening the economic relationship, improvement in the confidence of the investor as well as support the growth of economy in both the countries. Foreign Direct Investment (FDI) up to a level of 100 percent has been permitted in the Indian textile industry (Acevedo & Robertson, 2012, p.319). There has been also establishment of FDI cell for the provision of assistance as well as advisory support for clearing operational constraints. In the year 2000, the textile policy of the country was targeted at the elimination of the bias in the policy towards small and medium sized firms as well as promotes modernization. In the year 2000, the government of India introduced the National textile Policy of 2000 which substituted the Textile Policy of 1985 (Sharma, 2006, p. 50). One of the major objectives of the new policy was to enable the textile industry in attaining as well as sustain a robust global standing. It recommended for the development of the cotton sector for the increase in cotton productivity as well as also in the update the quality of the international standards. It also targeted at the reduction of the ratio between the cotton as well as the non cotton fibers keeping in compliance with the international trends as well as also encourages full fiber flexibility among the cotton and man-made fibers. The Union budget of India in the time span of 2004-2005 also made certain changes in scheme where every manufacturers in the textile industry possessed the option of choosing between the exemption route in cases where there will be zero imposition of excise duty or follow the CENVAT route where the credit could be extracted for all the excise duties at earlier stages (Mukherjee & Mukehrjee, 2012, pp. 38-39). 3.4 Exchange rate regime governing both the countries in cotton trade Over the past decades, the textile and apparel imports into the United States of America has almost tripled (Kenton, 2005, p. 36) and the cotton products forming around 60% of the market for all the textiles and apparels sold at retail in the United States have encountered around three fold increase in imports over the period. With the dissolution of the Bretton Woods Agreement in the early 1970s, a large number of countries all over the world stopped in fixing their currencies to the US dollar and started to operate in a managed float regime wherein, the currencies are subject to fluctuations as compared to one another depending on the available supply and demand and also in areas where the Central may intervene in order to stabilize the volatile fluctuations in the exchange rates (Raines, 2002, p. 1). The government of India in the last decade has added to subsidies and various other measures that have drove the cotton production of India being doubled over the last decade and the resultant factor is that the production has exceeded that of the United States and now India is the world’s second largest producer of cotton. India in the recent period has increased its minimum support prices for cotton up to around 48 percent. The minimum support price is around approximately $0.72 per pound for most of the commonly produced qualities of cotton as compared to the international prices that range from $ 0.55 to around $ 0.58 per pound. The Indian government owing to this discrepancy between the global prices as well as world prices has authorized purchase of around 11.7 million bales of cotton from India’s 2008 cotton crop productions. Thus it can be stated that the cotton subsidy policy of the government has hindered cotton trade of India as well as the stock market in India which once got dominated by cotton and jute trade (Uttam & Jitendra, 2005). The unemployment in the country is very high but there has been around a 15% hike in the minimum wages in India to around US $ 130 per month for the unskilled workers and to around US $ 160 per month for the skilled workers. This salary rise have directed towards high turnover. On the other hand, the consumer market expanding at slower rate the foreign suppliers have also appeared to have shifted their highlight for selling their goods in the United States. This has resulted even more shifting of pressure to raise the cotton textiles imports above the level that have occurred if there were stronger economic growth in the major consumer market other than the United States of America (Raines, 2002, p. 1) . This can be said to be imparting an upward pressure on the firm in USA. 3.5 Assessment of implications of international institutions India is a member of the World Trade Organization and is obliged to abide by the mandate set by the WTO. Last year the United States of America has accused India of providing subsidies to the indigenous manufacturers of cotton textile. The USA put forth a complaint to the WTO on the ground that India has recently issued fresh subsidies to the manufacturers of the country’s own textile industry which is against the mandate of the “World Trade Organization” (Chakrabarti, 2009, p. 980). India has also been held responsible for ignoring the USA’s requests for attending a bilateral discussion on this subject. According to the “subsidies and countervailing measures agreement” of the Organization, any country with a per capita income of less than $1000 can provide subsidies to its indigenous manufacturers in various ways s at to encourage them to sale more of the exportable in the world market. This is done as long the country’s exports are below the threshold limit of 3.25 percent of the total volume of international trade “in that particular commodity” (Sen, 2012). There are four countries in the world that are the largest producers as well as consumers of cotton; “China, the United States, India, and Pakistan” (Kutting, 2004, p.91). In the year of 2007, India has crossed this limit and currently its exports account for 4 percent of the world trade in cotton. These countries are given eight years to remove the export subsidies and on this ground India has three more years to phase out the entire amount of subsidy. The complaint wedged by the USA is that India has issued fresh subsidies instead of phasing out the subsidies that had been imposed earlier. India has declared its willingness to the WTO on attending ay bilateral meeting in this issue, but has not given any clarifications regarding the steps it would take to reduce the subsidies on its exportable. India has reasoned that although it would have to dismantle the export subsidies by the year of 2015, it would not be able to bring down the subsidies immediately since the textile industry employs millions of the Indians. A reduction of the subsidy would lead to closing down of their industries and lead to a drastic rise in its unemployment. The United States is a developed nation and consumes more cotton products, while India is a developing country thereby consuming more of the raw fiber for the production of the textiles. India imports raw cotton form the US. US, being one of the competitors of India in the market for cotton textiles, faces problem due to the subsidization of the Indian textiles. The impacts of recession stills loom large upon the States and the purchasing power of the people of US has not yet risen to their previous standards. Hence the US is faced by difficulties in the world market for cotton products in the presence of cheaper Indian products. The Indian products are flooding the international market due to subsidization by the Indian government. The USA has passed the Byrd Amendment in 2000 through which the antidumping duties would be redistributed annually and offset any subsidies found under the original “Antidumping Act of 1921” (Foreign retaliation, 2011). Some of the WTO members including India challenged the enactment of this law and they have been granted the authorization from WTO to suspend existing tariff concessions for the US. The European Union has retaliated against the US exports and additional duties are imposed on the US products. 4. Recommendations In the beginning of the twenty first century US’s exports of “cotton yarn and fabric” (Equitable Tourism Options (EQUATIONS), n.d., p. 50) to India increased by about 40 percent. Production of raw cotton in India increased from 29.5 million bales in 2009-10 to 31.5 million bales in 2010-11 (Chaudhary & Dhar, 2010). US recognized India to be “a key to strategic U.S. interests” (India Space Programs and Exploration Handbook, 2007, p. 29) and has taken steps to strengthen the relationship between these two countries. However there are some risks involved in this process. For the selling of US goods in India it has to create a local presence or choose representatives in the country form its local citizens. Since India is a diverse country with different regional languages it might be a challenging task to appoint the appropriate agents. While selecting a particular agent, his industry expertise, marketing strength and credit worthiness would have to be evaluated. While establishing an office the US firms would have to ensure the support of the state government in which state it is going to set up the office. The situation of law and order is one of the serious concerns since the firm might face political risks while building up a set up or after it starts to operate. In order to reduce the chances of such difficulties, the firm must make a detailed verification of the location, payment modes for bills and the environmental issues. The American firms operating in the Indian subcontinent work in various ways to help the Indian farmers improve their productivity. For example, the Monsanto Holdings Pvt. Ltd. works in partnership with different NGOs and makes social investment in the country. They work towards promoting sustainable agriculture by increasing crop productivity and incomes of the farmers by providing them with quality seeds, opportunities to get educated and proper market linkages to sell the raw materials (Malik, Wadhwani & Kaur, 2009, p.38). The new firms wanting to enter this trade should be looking to involve in an ‘organic fair trade’ in cotton while they develop policies to maintain corporate social responsibility (Organic cotton: an opportunity for trade, 2007, p.7). 5. Conclusion The above discussion presented a brief analysis of trade of cotton between India and USA with respect to last decade which highlighted on the trade patterns, export import patterns, investment patterns, intervention of national governments and various international institutions giving us an idea of how beneficial an US firm would if it invests or start a new business within the framework of cotton trade. Potential of investment in the cotton industry is quite impressive. In recommendations highlight is given on the cultural issues, legal issues as well as policies to run business in an ethical manner. References 1. Allaoua, Z, (1996), India: Five Years of Stabilization and Reform and the Challenges Ahead, World Bank Publications 2. Acevedo, L & Robertson, R (2012), Sewing Success?: Employment, Wages, and Poverty following the End of the Multi-Fibre Arrangement, World Bank Publications 3. 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