Q1.Explain the concept of Franchising with an example.

List out the advantages and disadvantages of franchising

This is another method of technology transfer. It is a form of licensing whereby the franchisee adopts the parent companys entire business format: its name, trademarks, business methods , layout of premises etc. the franchiser provider (in return for a royalty and lumpsum fee) a variety of supplementary management services training, technical advice etc. Hence it retains complete control over how the product is marketed but the franchisee carries the risks of failure and the franchisors capital commitment is typically low. Accordingly, international franchising allows companies to expand rapidly from a limited capital base. Franchising began when investors of new machines, processes or business methods were forced by lack of finance or inadequate knowledge of the business world into allowing other parties the right to manufacture or otherwise adopt new inventions in exchange for a license fee. Initially business enterprise was provided by franchisees. As the system developed franchisors assumed responsibilities for business organization, trade markets, advertising and sales promotions. Today, franchisers impose levies on franchisees to cover national advertising and servicing cost. The cost of local advertising is borne by franchisees. Successful franchising requires that the product or service involved has a distinct and unique image which is conceptually dissimilar to competing lines.

Example
Some of the well-known brands in this sector that have received an overwhelming response in India include Baskin Robbins, Subway, McDonald's, TGI Friday's, Taco Bell, Pizza Hut, Dominos Pizza, Ruby Tuesdays, Barista, Costa, Wetzel Pretzel, Papa John's and KFC. A study has revealed that more than one third of new food outlets are operated through the franchise system. The rapid development of mall culture has also encouraged the growth of food and beverage franchises. Fine dining restaurants, quick service restaurants, cafes and juice bars are among the leading franchised food segments in India.

Advantages of Franchising
1. As franchises are self-employed they will be highly motivated to succeed in their own business. There are no strikes, go-slows, work-to-rules or other industrial problems. 2. While franchisors retain control of distribution systems, new and unfamiliar market segments can be entered using the skills, experiences and local background knowledge of neighborhood based franchisees. 3. Since large distribution networks are tied to supplies form single companies there exists opportunities for bulk buying of raw materials at big discounts. 4. As a franchise operation grows, trademarks, brand names and products styles become more widely dispersed and familiar to the public. The franchisors name becomes internationally recognized.

5. The nucleus of the franchisors organization remains small and overheads are low. Large profits can result from a limited capital base, yet risks are shared with franchisees. Moreover, routine administration problems are dealt with by outlets not central office. Similar benefits accrue to the franchisees. A franchise can be purchased for less than usually had to be paid for an existing business. Outlets receive advice on book keeping tax liability, training on staff, stock control, layout of premises and related matters. Advertising is dealt with by franchisors leaving outlets free to concentrate on day to day operations technical advice and training will be also available. Another advantage is the product and marketing research activities undertaken by franchisors that small firms could not afford. Also the competition faced by an outlet within a specific locality is restricted by the fact that franchisors will not permit more than one franchisees to operate there.

Disadvantages of Franchising
1. Franchisees working methods are controlled. 2. Product specification, quality layout of premises and so on are predetermined. Little discretion is allowed. 3. Royalty payment could be high making profitable an otherwise successful business. 4. High raw material prices might be charged by franchisors and interruptions in supplies can ruin an individual outlet. 5. Franchised outlets cannot be sold without the franchisors permission. 6. The brand image of the franchised product may deteriorate for reasons beyond the franchisees control, including policy mistakes made by the parent organization. 7. Franchise contracts cover relatively short periods normally five years. Franchisors may also face disadvantages. They control only the overall format of outlets not day to day operations. Badly managed outlets offering poor quality and inadequate presentation of product can ruin a carefully nurtured public image. Sometimes franchisors insist on inspecting franchisees premises but this can arouse resentment and cause disagreements over how that outlet should be run. Franchisees are not employees they cannot be dismissed and termination of a contract might be difficult. A common problem is that franchises can learn a business from top to bottom while contract expires. Franchisors must rely on outlets to declare honestly their monthly receipts to promote their product vigorously and to employ suitable staff. Aggregate returns to a franchisor are less than would be available were all outlets directly owned and controlled.

Q2. Write a short note on transfer pricing and multinational corporations.

Concept of Transfer Pricing
Transfer pricing may be defined as the pricing of transactions both of commodities and intangibles such as technological services and brand names between different branches of a multinational corporation. It can therefore be termed as clearing price entered in the books for transactions within a firm. The firm in this means the entire business enterprise considered as a unit. The transfer pricing may be symbolically expressed as PC-PWX 100 where PC is price actually paid in a country under study where PW is comparable world market price. Thus transfer pricing refers not only to (a) (b) (c) Transfer of goods from one part of the firm to another but also to Transfer of patents or rights to use patent processes against payment of royalties Supply of technical services by one part of the from to another part compensated by services fee or managerial fee.

Determination of prices in intra-firm trade takes place according to considerations different from those in inter-firm trade. More so, the intra-firm trade is not an insignificant production of trade by the multinational corporation and it gives rise to so many serious issues relating to the effects on trade, welfare and national control. Certain policy implications also are not ruled out. The fact that a transaction involving a transfer or sale of goods takes place within a firm, regardless of whether or not the firms spans different countries and the firm is free within broad limits to assign whatever price it likes to those goods means that the traditional theory of pricing does not apply to the process of transfer pricing. The essential difference is simply that in transactions of the open market or unrelated parties, the buyers and sellers are trying to maximize their profits at each others expense while in an intra-firm transaction the price is merely an accounting devide and the two parties are trying to maximize joint profits. It is possible that the accounting price may approximate the arms length price of the goods but certainly there is no presumption that this should be so any other price is equally plausible. Any discussion of transfer pricing problem has to assume that there exists yardstick by which the effects of the price can be measured there must in other words be an arms length price and the goods may be overpriced is transfer price is higher and under priced if transfer pricing is lower than this price. It is not necessary for there to be an open market price form the firms point of view all that is required is that it should know at what price it would be prepared to sell to unrelated concerns. When a good is overpriced the firm transfer funds via the pricing channel, form the buying to the selling firms declared profits are thus understated and overstated respectively in comparison with the situation where no intra-firm transactions take place. The reverse happens with under pricing.

Underlying considerations of transfer Pricing

Various considerations are made for opting the transfer pricing mechanism by the multinational corporations. These may be-

a) b) c) d)

To save tax To get round any ceiling on profit remittances To reduce the corporations liability in the country where currency is weakening To beat down the union demand for higher wages and so on

But the objectives of transfer pricing may be grouped under two broad headings those which maximize the present value of MNCs profits and those which minimize present and future risk about the value of profits a) Maximizing Present profits Bearing in mind that the MNCs are concerned to maximize the value of profits of all their operations taken together, a number of conditions can be postulated in which transfer pricing will be used Loss in one Centre of Operations Taxes, Tariffs and Subsidies Multiple Exchange Rates Quantitative Restrictions Existence of Local Shareholders Exchange Rate Speculation

b) Minimizing Risk and Uncertainty The long term profitability of MNCs is subject to various pressures in the different areas it operates in and the judicious use of transfer pricing to show low levels of profits may well contribute to insure its future existence and stability. The important factors here are Balance of Payments and Exchange Rate Pressures Political and Social Pressures Direct Threats to profits

Q3. Explain the importance of Foreign Capital in India and list out the various government agencies which are entrusted with the responsibility of controlling the activities of MNCs in the country.
Importance of Foreign Capital
1. Increase in resources The most important aspect of the availability of foreign capital is that it adds to the quantum of resources domestically available. This increase in resources helps the country in several ways. In the first place, it makes possible construction of many projects which otherwise would never have seen the light of the day. Secondly, the availability of foreign capital increases the domestically available resources. The establishment of bigger projects and projects with a high import-content often increase opportunities of profitable investments in so many other lines. In the absence of such investments, these possibilities would remain dormant. 2. Import of Development Goods Economic development at least in the initial stages, requires the use of certain capital goods and technical know-how which are available only in the developed countries and have therefore to be imported. Of course, the import of such capita goods and technical knowledge is not to be continued forever. 3. Overcoming limitations of exports An alternative to foreign capital is to increase our export earnings so as to make available a greater amount of foreign exchange. But our exports suffer from certain inherent defects which are the result of underdevelopment. For want of manufacturing industries. For a long time, we had to depend on primary products for exports. But the price elasticity and income elasticity of primary goods are very small. A fall in prices of these goods does not bring about a significant increase in the developed countries mean a proportionate rise in the demand for the primary commodities. Further, developed countries themselves have started producing these goods and their production has increased tremendously so that they are now exporting these goods. Besides in the developed countries synthetic substitutes of many commodities based on primary resources have been developed. As a result of all these factors the exports of our country are facing many hurdles. All these hurdles could be overcome by seeking foreign capital and investment. 4. Meeting prices and payments difficulties The importance of foreign capital and multinational corporations lies in that they help to meet process and balance of payments problems. Development involves diversion of resources to the expansion of the capital goods sector must come from domestic sources. This means that less domestic resources are available for the production of consumer goods, they get incomes which they wish to spend the purchases of consumer goods which are in short supply. The development process thus gives rise to a situation characterized by a rising demand

for consumer goods on the one hand and falling supplies of such goods on the other. This leads to a rise in process of these goods.

Government Agencies
a) b) c) d) The Reserve Bank of Company Affairs The Ministry of Company Affairs The Ministry of Industrial Development The Ministry of Finance

But due to lack of coordination of these agencies, there is no systematic control over the operations of MNCs. Such cases are considered by these agencies on its own merit without having any coordinated approach. These agencies are not having any objective criteria for approving applications and the different ministries are adopting mostly lengthy and cumbersome procedure. In India it was felt that the imports of foreign technology was inappropriate and overpriced and it would enhance the dependence on foreign countries. This belief was strengthen more particularly after of the publication of the study report of Michael Kidron entitled Foreign Investment in India (1965) and the report of the Industrial Licensing Policy Inquiry Committee (1968). As a result, the policy of the Government of MNCs and their operations was progressively tightened in the following ways(i) (ii) (iii) (iv) (v) (vi) (vii) Restricting the import of foreign technology totally in respect of the production of inessential article and also in those areas where domestic technology is considered adequate enough. The maximum rate of royalty on permissible foreign technology was laid down. In respect of some designated industries, foreign investments were allowed in principle only after getting sanction from the administrative body on a case by case basis. The normal permissible period of agreement was reduced from ten to five years. Restrictions on exports and other marketing matters were not allowed generally and it was insisted upon to have obligation to export a certain proportion of the output. Inserting a clause in the agreements for granting permission to the importer to sub-license the technology. In order to consider the applications for approval of technology imports, the CSIR was allowed to look into it and such technology import may be withheld or delayed it if so desires.

Q4. Write a brief note on MNC relations with trade unions.

An MNCs ability to shift production between countries gives it an important advantage in negotiations with local trade unions in host nations. Further problems union that have to deal with MNCs include the difficulties of obtaining information of interpreting financial data and of identifying key decision makers within the parent firm. Now how transfer pricing can be used to make a subsidiarys profits appear very low for the purpose of collective bargaining with employee representatives. And there seems to be little enthusiasm on the part of workers in MNC subsidiaries in one country for taking strike action in support of workers in dispute with the same MNCs in other parts of the world. Nevertheless trade unions are themselves increasingly internationally-minded and willing to co-operate across national frontiers. Also unions in one country may look precedents relating to pay and working conditions set in other nations when formulating demands, forcing an MNC to co-ordinate its employee relations strategies centrally in order to present a consistent front. Little transactional employer/union collective bargaining has occurred. However mainly because trade unions are quintessentially national organizations with minimal experience of international affairs. In 1975 the Organization for Economic Co-operation and Development (OCED) issued a set of guidelines for the conduct of industrial relations with MNCs. This is a purely voluntary code which recommends- That the right of employees to join and be represented by trade unions be respected and that MNCs engage in collective bargaining with employees representatives. - The provision of facilities to employees representatives to help them conduct collective negotiations. - The MNCs gives employees representatives meaningful information for the purpose of collective bargaining including relevant financial information. - Observe standards of employment not les favourable than local norms in the host country. -The training and wherever possible promotion of local workers. - That MNCs give adequate notice of intended closures and relocations of production and discuss with employee representatives measures for mitigating the adverse effects of closures. - Equality of treatment of all groups of employees in relation to recruitment, dismissal, pay, promotion and training. - That MNCs not use the threat of transfer of an operating unit to another country as a bargaining weapon when negotiating with unions.

Q5. Write a short note on designing a global remittance policy.

Q6. Give the structure of balance of payments and explain the causes and correction of balance of payments disequilibrium
Structure of Balance of Payment
Balance of payment is usually composed of two sections The current account The capital account

This classification is based on the classification of economic transactions into real transactions and financial transactions. Real transactions are those which are in the real sense of actual transfer of goods and services to foreigners, it creates income for them similarly when they purchase goods and services from foreigners. Thus real transactions are income creating transactions. On other hand financial transactions are those transactions which only involve transfer of money or foreign exchange or claims of money or titles to investment. Financial transactions are called capital transactions. These transactions do not directly influence the level of income of the countries concerned as they are effected only through transfer of claims between the countries. Real transactions are entered into current account while financial transactions are entered into current account. Current account Current account transaction consist of two sub groups1) Merchandize or the trade account 2) Invisible account In trade or merchandized account only the transactions relating to goods are entered, all goods exported and imported are recorded in the trade account, trade in goods is called visible trade because goods are visible items. The difference between the value of commodity exports and commodity imports is called the balance of Trade. If the value of commodity exports is more than the value of commodity imports, balance of trade is said to be favourable. But if the value of commodity imports is more than the value of commodity exports, balance of trade is said to be adverse or unfavorable. The invisible account usually consists of services account and the gifts or charities account. The services account records all the services exported and imported by residents of the nation. Trade in services is called invisible trade. It consists of such items as banking and insurance charges, interest of loans, tourist expenditure, transport charges etc. Similarly, the gifts or charities account consists of all these received in given away free by residents of the nation. It may be in kind or cash. Capital account The capital account consists of short-term and long-term capital transactions. Capital outflow represents debit and capital inflow represents credit.

Capital account consists of the following types of account1) 2) 3) 4) Private capital account International institutional capital account Specie account Government capital account

Under private capital account, all the private balance held by corporate bodies or commercial banks are recorded. Private capital account usually consists or short and long term adjustments. International institutional capital account consists of assistance from international monetary institutions like the IMF, World Bank, International Finance Corporation etc. Specie account records the movements of gold button. The balance on government capital account consists of all governmental capital transactions in the form of grants or loans, short term as well long term.

Causes for Balance of Payment Disequilibrium

1. Natural factors-natural calamities like floods, earthquakes, drought etc. which reduce supply and increase imports. 2. Economic factors like inflation, business cycles, changes in the growth of population, changes in consumer tastes and preferences, development of alternative sources of supply, development of better substitutes, large scale capital movements etc. 3. Political factors like political instability, war etc.

Correction for Balance of Payment Disequilibrium

There are a no. of measures available for a country to correct the balance of payments disequilibrium. These measures are classified into automatic measures and deliberate measures. The automatic correction worked well under the gold standard. But now there is no country on gold standard and hence it is irrelevant to discuss the mechanism here. The balance of payments disequilibrium may however be automatically corrected under the paper currency standard also. The theory of automatic correction here is that if the market forces of demand and supply are allowed to have free play, in course of time, equilibrium will be automatically restored. For example, when there is a deficit, the demand for foreign exchange is more than its supply and this results in an increase in the exchange rate and a fall in the external value of the domestic currency. This makes the exports of the country cheaper and imports dearer than before consequently, the increase in exports and fall in imports restore the balance of payments equilibrium. Due to the various problem associated with the policy of automatic correction deliberate measures are widely made use of today. The various deliberate measures are classifies into three kinds-

a) Monetary measures b) Trade measures c) Miscellaneous measures Monetary measures consist mainly of monetary contraction, devaluation and exchange control. Trade measures consist of Export Promotion and Import Control measures. Exports may be promoted by reducing or abolishing export duties, providing export subsidy, encouraging export production etc. imports may be controlled by imposing or increasing import tariff, restricting imports through import quotas, licensing etc. Miscellaneous measures include obtaining foreign loans, encouraging foreign investment in the home country, development of tourism etc.