Individual Case Study

Course Name: International Business

Course Code: BUS 606
Summer 2020

Submitted to:
Piana Monsur Mindia

Submitted by:
Iqbal Parvez 112 191 032

Date of Submission: 8th August 2020

 1. What is the International Monetary Fund? What is the World Bank? What is their
relationship, if any, with each other? Mention the role of WTO and IMF in the
international business and world economy?

What is the International Monetary Fund?

The International Monetary Fund (IMF) is a well renowned international organization,

headquartered in Washington, D.C., comprising of 189 countries working relentlessly to foster
global monetary cooperation, secure financial stability, facilitate international trade, endorse high
employment and sustainable economic growth, and reduce poverty around the world altogether
intermittently depending on the World Bank for its all kinds of resources. It was formed in 1944
at the Bretton Woods Conference mainly by the ideas of Harry Dexter White and John Maynard
Keynes, however, the formal existence or journey of IMF began in 1945 with initially only 29
member countries with the goal of reconstructing the international payment system. However, it
now plays a central role in managing the balance of payments difficulties and international
financial emergencies. Countries contribute a substantial amount of funds to a pool through a
quota system from which countries experiencing balance of payments problems can borrow
money. As of 2016, the fund had XDR 477 billion (about US$667 billion). The IMF's prime
purpose is to ensure that the international monetary system remains stable—the system of
exchange rates and international payments which enables countries and their citizens to transact
with each other with ease. The Fund's mandate was updated in 2012 and included all
macroeconomic and financial sector issues that bear on global stability.

Through the fund and other activities such as the gathering of statistics and analysis, surveillance
of its members' economies, and the demand for particular policies, the IMF is relentlessly
working to improve the economic condition of its member countries. As per the Articles of
Agreement, The organization's objectives stated are: to promote international monetary co-
operation, international trade, high employment, exchange-rate stability, sustainable economic
growth, and making resources available to member countries in and during financial difficulty.
IMF funds mostly come from two major sources which are quotas and loans. Quotas, which are
collective funds of member nations of IMF, generate most of the IMF funds. Regarding the size
of a member's quota that will be decided entirely depends on its economic and financial
importance in the world. Nations with larger economic importance have larger quotas and vice
versa. The quotas are increased periodically to boost the IMF's resources in the form of special
drawing rights.

What is the World Bank?

The World Bank is an international financial institution which provides loans and grants to the
governments of poorer countries to pursue capital projects. It is comprised of two institutions:
The International Bank for Reconstruction and Development (IBRD), and the International
Development Association (IDA). The World Bank is a element of the World Bank Group and
consists of five organizations:

The International Bank for Reconstruction and Development

The International Bank for Reconstruction and Development (IBRD) lends to governments of
countries with middle-income and creditworthy low-income.
The International Development Association

The International Development Association stands for (IDA) and offers interest-free loans —
called credits — and contributes to governments of the poorest countries.

Altogether, IBRD and IDA established the framework of World Bank.

The International Finance Corporation

The International Finance Corporation (IFC) is the largest global development institution solely
focusing on the private sector. They help developing countries to achieve sustainable growth and
invests financially, mobilizes capital in international financial markets, and provides advisory
services to both businesses and governments of the respective country.

The Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 keeping in mind to
promote foreign direct investment into developing countries in order to support the country’s
economic growth, reduce poverty, and improve people’s standard of living. MIGA accomplishes
this mandate by offering political risk insurance (guarantees) to investors as well as lenders.

The International Centre for Settlement of Investment Disputes

The International Centre for Settlement of Investment Disputes (ICSID) provides international
facilities for both reconciliation and negotiation of investment disputes.

The World Bank's most recent stated goal is the reduction of poverty.
What is their relationship, if any, with each other?

The Article of Agreement of the International Monetary Fund and of The International Bank for
Reconstruction and Development (IBRD) or World Bank emerged from the international
negotiations that culminated in the Bretton Woods Conference of July 1 to 22, 1944. The two
treaties, which became effective on December 27, 1945, were conceived as elements in an
ambitious plan for an international economic order that would be established after the Second
World War.

Resolution VII of the Final Act of the Conference recognized that it would not be possible to
achieve all the purposes of the Fund and certain broader objectives of economic policy without
further measures. Among these measures were the reduction of obstacles to international trade
and promotion of beneficial commercial relations. It was assumed, therefore, that an
international trade organization would be created. Discussions on post war commercial policy
resulted in strenuous efforts to create the third of a trinity of comparable institutions, the
International Trade Organization (ITO), but post war it was dissolved and more limited, although
still important, General Agreement on Tariffs and Trade (GATT) was created.

However, in the aspects of modern times the relations between the World Bank and International
Monetary Fund seemed straightforward. The International Monetary Fund was responsible for
short term stabilization programs that on monetary variables and demand management, while the
World Bank took a longer-term perspective, analyzed “real” variables, and was oriented towards
increasing supply-side efficiency and stimulating productive investment. While there was always
some interdependence among these various factors, the IMF’s focus on providing balance-of-
payments lending to support macroeconomic reform and the World Bank’s concentration on
slowly maturing, discrete projects allowed them to carry out their work with occasional
interaction. The World Bank and the International Monetary Fund have been divided since their
common creation over how to define their areas of specialized competence and how to interact in
areas of overlapping jurisdiction. The Fund's traditional focus on short-term stabilization,
correcting external account imbalances, and fighting inflation, contrasted with the World Bank's
provision of long-term funds for investment in capital-intensive projects. But more recently, with
the establishment of the IMF's Extended Fund Facility and the Bank's structural adjustment
lending, both institutions share the objective of adjustment with growth, and each claims some
responsibility for an extremely wide range of policy instruments. The new Structural Adjustment
Facility, in particular, has the potential to link more tightly decision-making on Fund stand-by
arrangements and Bank structural adjustment lending, increasing the probability of new forms of
cross-conditionality--termed here consultative cross-conditionality, interdependent cross-
conditionality, and indirect financial linkage. Despite these similarities there are some
differences between them on the basis of their Purposes, Size and Structure, Source of Funding,
Recipients of Funding, Operations.

Mention the role of WTO and IMF in the international business and world economy?

World Trade Organization (WTO)

World Trade Organization (WTO) has a crucial role to play in international trade, global
economics, political and legal issues arising in international business because of globalization.
WTO has emerged as the world’s most powerful organizations in order to reduce trade-related
barriers between both the countries and opening new markets. World Trade Organization is the
only international governing body that replaces the General Agreement on Tariffs and Trade
(GATT) which was created in the year 1948. The goal or mission of WTO is to provide a fair
platform for its member countries in order to help in services concerning exports, imports and
conduct their business in a diplomatic manner.

The advantage of the countries being members of the WTO is that they lower trade-related
barriers among themselves. Opposing to this the countries that are not part of WTO essentially
need to negotiate trade-related agreements autonomously with their trading partners.

Almost all the industrial and agriculture sectors have been affected by trade barriers between the
countries. The USA considered being a free-trade country because of a smaller number of trade
barriers for importing, but still, it has got many.
Role of WTO in international business

WTO facilitates the implementation, administration, and smooth operations of trade agreements
between the countries.

It also provides a platform for smooth and peaceful trade negotiations between its member
countries.

It also performs settlements of different disputes between the member countries through the
established rules and regulations.

Additionally, it cooperates with the IMF (International Monitory Fund) and the World Bank to
make cohesive relations various in making global economic policies.

Overall WTO was set up to play a very important role in world economics though settling trade-
related disputes through rules, regulations, and consensus-based agreement mechanisms that
would prevent trade-related wars between powerful countries.

By determining trade-related disputed WTO has got the potential to preserve world peace and
mutual relations between its member countries through following negotiations, consultations,
and mediations.

The International Monetary Fund (IMF)

The International Monetary Fund is a global organization that is originally founded in 1944. J.M.
Keynes and Harry Dexter White both played an important role in its development.

Its primary aim role is to help in stabilizing exchange rates and providing loans to countries in
need. Mostly all members of the United Nations are members of the IMF with a few exceptions
such as Cuba, Lichtenstein, and Andorra.

In spite of both being United Nations agencies, The IMF is independent of the World Bank
though both are aiming to increase the living standards of the people of respective countries.
Functions of IMF

International monetary cooperation.

Promote exchange rate steadiness.

Help in dealing with the balance of payments adjustment

Help deal with the economic crisis by providing international coordination – loans, plus advice.

Role of IMF

1. Economic surveillance and monitoring: IMF produces reports on its member countries’
economies and recommends areas of weakness / possible danger primarily regarding unbalanced
economies with large current account deficit/excess debt levels. The focus is to work to prevent a
crisis by highlighting areas of economic imbalance.

2. Loans to countries with a financial crisis: The IMF has $300 billion of loanable funds. This
huge fund generally is collected from member countries that they need to deposit a certain
amount while joining. During the period of the financial/economic crisis, the IMF usually
provides loans as part of a financial readjustment.

The IMF has accumulated more than $180 billion in bailout packages since 1997.

In 1976, the IMF gave a loan to the United Kingdom since the Pound Sterling was coming under
pressure. The loan was given with conditions to reduce the budget deficit and raise interest rates
to maintain the value of the Pound.

In 2010/11 the IMF played a major role to bail out the Greek economy, which involved a total
loan of up to $110 billion.

3. Conditional loans/structural adjustment: While giving loans, the IMF usually insists that
certain criteria are being met. These generally include policies to reduce inflation.

Reduce inflation (tightening of monetary policy)

Deficit-reducing policies (higher tax)

Supply-side policies, such as privatization, deregulation, and improved tax collection.

Removing price controls

Free trade – removing tariff barriers

Devaluation of currency to reduce current account deficit.

4. Technical assistance and economic training: The IMF produces many reports and
publications. They can also offer support for local economies. More on technical assistance of
IM.

2. Identify three compelling economic reasons to invest in China. Then identify three
compelling political reasons to avoid doing so. Recommend a criterion one could use to
trade off the opportunities of operating in China versus the risks of doing so.

Foreign direct investment (FDI) signifies capital invested in a country that provides
manufacturing and service capabilities for the native consumers as well as world markets. It not
only improves capital signal investor confidence in a specific business and geopolitical climate
of the host country, but it also links national economies, which results in benefit for both the
region that supplies capital and the host regions. Now a days this is the common phenomenon
that has been observed in China comparing with other countries. FDI in China in 2019 was $137
billion, which increased by 5.8% in comparison with the previous year. If we consider Foreign
Direct Investment China is the second-largest recipient of in the world.

Many factors contribute to foreign investment in China, either positively or negatively. Here are
some of the biggest influences:

1. Local Chinese Market and Business Climate

The sheer size of China’s population makes it an attractive nation for investors to commit capital
to higher-end industries like healthcare, information technology, engineering, and luxury goods.
Furthermore, economic growth and FDI can start a "success domino effect." In essence, the more
FDI a region attracts, the more it grows, which in turn stimulates more FDI, to create overall
sustained growth.

2. Competitiveness

China has outperformed India and many other emerging countries if we consider nurturing the
elements that are necessary for sustainable business growth. The development of infrastructure is
one of the key driver in this area. After all, roads, highways, and bridges are essential for both
employee commutes and the transportation of goods. China also boasts a strong workforce, if we
consider numbers and aptitudes. In actual sense developments in these areas dramatically lowers
transaction costs in one hand and increase profits, letting investors earn robust returns in the
other.

3. Regulatory Environment

Government policies of any country can act as a double-edged sword, especially in those country
that favour state entities at the expense of privately-held firms, as is the tradition in China. This
has historically made China a less positive investment destination, where investors necessarily
have to set up manufacturing facilities and encounter high start-up costs, heavy legal exposure,
and other compliance predicaments. However, on the bright side of the picture, the Chinese
government encourages investment in commercial and entrepreneurial activities and the
government also provides attractive financial incentives such as tax breaks, grants, low-cost
government loans, and subsidies. Such government-sponsored inducements can ultimately boost
profitability, and help businesses succeed quicker. Political and economic stability can facilitate
an influx of FDI. Therefore, to encourage FDI, citizens, workers, and entrepreneurs ought to
strive to respect Chinese law, but necessarily Chinese justice system should employ active
mechanisms for reducing crime and corruption

Three compelling political reasons to avoid investing in China.

1. Political Instability

Political and economic stability can facilitate an influx of FDI and restrain foreign investors to
invest in any particular country. Acts of uncertainty, such as blackmail, kidnapping, rioting,
rebellion, and social unrest can be considered detrimental for business and can result into
hyperinflation, rendering a country’s currency virtually obsolete.

2. State Capitalism

China practices state Capitalism whereby the government manipulates market activities to
achieve political goals. Consequently, the organizations doing business in China often find
themselves at a disadvantage.

3. Political risk

Political risk is the likelihood that political decisions, events, or conditions will affect a country’s
business environment in ways that it will discourage the investors to invest. Additionally, the
investors may face few risks which are:

a. Cost investors some or all of the value of their investments,

b. Force them to accept lower than projected rates of return,
c. Threaten the sustainability of local activities.

Recommend a criterion one could use to trade off the opportunities of operating in China
versus the risks of doing so.

Smart companies prepare for and minimize their exposure to risks while investing in China. In a
shallow overview of the Chinese market, China appears to be one vast market with a strong
central government. But when detailed inspection is done, China is a conglomerate of
incongruent markets that vary in their levels of economic and social development. Though the
central government has been taking necessary steps to improve overall business operating
environment by instituting a more modern financial system, and creating a more transparent
business environment—especially since China joined the World Trade Organization (WTO) in
2001—development and implementation remain uneven across the country. As a result of this
inconsistent investment environment and China’s rapid economic growth, the country provides
foreign companies with enormous business opportunities but also enormous risks. Companies
seeking to make their first investment in the country or expand their existing presence must be
fully aware of the risks of doing business in China and be prepared to take appropriate actions to
mitigate those risks. So, in order to reduce or mitigate risk associated with doing business few
steps are needs to be taken. They are described below-

Intellectual property protection

Similar to other international markets, an intellectual property (IP) strategy is an important

consideration for companies that wants to do business with and in China. Though China is a
signatory to most major international IP agreements and has a judicial context broadly in line
with international norms, foreign companies should be aware of potential risks around IP
infringement. Since one of the most common intellectual property risks is ‘trademark squatting’.
Therefore, it is strongly recommended that companies consider registering their trademarks in
China in both English and Chinese at an early time.

Seek professional legal advice

The reality is that China’s legal system is complex and is composed of a countless national laws
and local guidelines, supplemented by court interpretations, departmental notices and
importantly, local practice. For contracts of any significant size or complexity you should obtain
specific legal advice on the terms, nature and content of the contract. The legal advice should be
taken into consideration and be coherent with the legal structures of China, be designed for a fair
result that protects your interests and avoid any unwanted issues.

Undertake due diligence checks

The most effective way of avoiding commercial disputes is choosing the right business partner.
This often includes fully understanding the company, its antiquity, structure and background.
The most common regret expressed by various businesspeople who have encountered disputes
and worse, is that they didn’t put sufficient effort into this selection.

Be aware of local business practices and be sensitive towards them

If you are doing business in China or considering to expand your business in china it is
imperative that you should be aware of the local business culture and practices – mostly in
regards to dispute resolution. For example, negotiation is central to dispute resolution in China.
A failure to sufficiently recognize this cultural prospect may be taken as a lack of courtesy,
goodwill or cultural sensitivity. This has the probability to exacerbate, rather than help to
resolve, a commercial dispute.

Be aware of local laws relating to business activity

If you are doing business in China, it is very essential be aware of local laws. Criminal charges
have been laid against numerous businesspeople for activities that do not constitute crimes in the
country that expanding its business in China – for example, misstating registered capital or
having undocumented loans. These charges often result in lengthy prison sentences. If you are
not sure about the legitimacy of certain business actions under Chinese law, you should first seek
professional legal advice.

3. Assume someone has a fast food business from North America or Europe and
considering the establishment of his business in Bangladesh. What advice should you give them
to help assure that cultural problems do not impede their success in this task? Consider all four
determinants (Social structure, Religion, Language, Education) to explain your suggestions.

Social Structure

Usually a society’s social structure refers to its basic social organization. In essence, we are
talking about how a society is organized in terms of its values, norms, and the relationships that
are part of the society’s fabric. How society operates and treats each other as people, groups,
companies, and so on, is both emergent from and a determinant of the behaviors of individuals in
the specific society. Although the social structure consists of many different aspects, two
dimensions are particularly important when explaining differences among cultures. The first is
the degree to which the basic unit of a social organization is the individual, as opposed to the
group. The second dimension is the degree to which a society is stratified into classes or castes.
The emphasis on individual performance has both advantages and disadvantages. Similarly,
Group strategy also comes with certain advantages and disadvantages like Strong identification
with the group is argued to create pressures for mutual self-help and collective action unlike
Individualism. So, while considering to open a new restaurant it is very important to keep in
mind where the business will be focusing. Because in Individual Strategy people perceive
themselves and relate to each other in social and business settings differently than Group
strategy.

Religion

Religion may be defined as a system of shared beliefs and rituals that are concerned with guiding
and shaping behaviors. The relationship among religion, ethics, and society is subtle and
complex and therefore substantially affects business. It is often argued to what extent the
religious ethics affects the costs of doing business in a country. However, doing business in a
Bangladesh requires understanding of the religious guidelines of all the religion. In addition to
this for running a successful business venture without facing any problem it detrimental that all
the guidelines of various religions are followed.

Language

One obvious way in which many countries differ is language. By language, we mean both the
spoken and the unspoken means of communication. Language is also one of the defining
characteristics of a culture. Oftentimes, learning a language entails learning a culture and vice
versa. Some would even argue that a person cannot get entrenched in a culture without knowing
its dominant language. So, to run a successful business ventures it is imperative that one
understand and can communicate in the respective country’s language. It may be Spoken
language or Unspoken language.

Education

Formal education plays an important role in a society, and it is generally the medium through
which individuals learn many of the languages and other skills that are indispensable in a modern
society. Formal education also increases the family’s role in socializing the young into the values
and norms of a society. Values and norms are imparted both directly and indirectly. Looking
from an international business perspective, one vital aspect of education is its role as an element
of competitive advantage. The availability of a pool of expert and well-informed workers is a
major determining factor of the likely economic success of a business venture. Good education is
not only a determinant of competitive advantage, but it is also an important factor supervising the
location choices of international businesses. General education level of a country is also a good
index of the kind of products that might sell in a country and of the type of advertising strategy
that should be used.
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