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GNDU Question Paper-2023
Bachelor of Commerce
(B.Com) 3
rd
Semester
INTERNATIONAL BUSINESS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section and the
Fifth question may be attempted from any of the Four sections. All questions carry equal marks
SECTION-A
1. Discuss the concept of International Business and complexities of International Business
in detail.
2. Define the International Business Environment and their components in detail.
SECTION-B
3. Briefly explain the various theories of International trade in detail.
4. Write a detailed note on World Bank and IMF.
SECTION-C
5. What do you understand by Regional Economic Co-operation and explain the forms of
regional groupings.
6. Define foreign exchange markets and risk management in detail.
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SECTION-D
7. Write a detailed note on Special Economic Zones (SEZs) and Export Oriented Units
(EOUS).
8. Discuss the various measures for promoting foreign Investments in detail.
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GNDU Answer Paper-2023
Bachelor of Commerce
(B.Com) 3
rd
Semester
INTERNATIONAL BUSINESS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section and the
Fifth question may be attempted from any of the Four sections. All questions carry equal marks
SECTION-A
1. Discuss the concept of International Business and complexities of International Business
in detail.
Ans: It’s a crisp morning in Mumbai. A container ship is being loaded at the port — boxes of
Indian spices, textiles, and software servers are bound for Singapore, London, and New
York. At the same time, a cargo plane lands carrying Swiss watches, Korean electronics, and
Brazilian coffee.
This daily dance of goods, services, technology, and capital moving across borders is the
heartbeat of International Business. It’s not just about buying and selling — it’s about
connecting people, cultures, and economies across the globe.
Concept of International Business
In simple terms:
International Business refers to all commercial transactions — private or governmental —
that involve two or more countries.
These transactions can include:
• Trade in Goods and Services – Exporting and importing products or services.
• Foreign Direct Investment (FDI) – Setting up factories, offices, or subsidiaries
abroad.
• Licensing and Franchising – Allowing foreign firms to use your brand, patents, or
processes.
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• Technology Transfer – Sharing or selling technology to foreign entities.
• Joint Ventures and Strategic Alliances – Partnering with foreign companies for
mutual benefit.
Why it exists:
• To access larger markets.
• To source cheaper or better-quality inputs.
• To spread business risks across regions.
• To take advantage of global efficiencies.
How It Differs from Domestic Business
While domestic business happens within one country’s borders, international business
crosses them — and that changes everything:
• Different currencies and exchange rates.
• Different laws and regulations.
• Different languages and cultures.
• Longer supply chains and more complex logistics.
Complexities of International Business
If international business were a movie, the “concept” would be the opening scene —
exciting and full of promise. The “complexities” are the plot twists and challenges the
characters must navigate to reach a happy ending.
Here are the major complexities, told as if we’re following a company’s journey abroad:
1. Increased Costs
Our Mumbai spice exporter decides to open a distribution centre in Germany. Suddenly,
costs pile up:
• Setting up facilities abroad.
• Hiring local staff.
• Training employees to handle new systems.
• Travelling between countries.
• Specialised transport and storage.
Why it’s complex: Operating in multiple countries means higher fixed and variable costs —
and the need for careful financial planning.
2. Foreign Regulations and Standards
In India, the spice packaging was fine. In Germany, strict EU food safety laws require new
labelling, different packaging materials, and additional quality checks.
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Why it’s complex: Every country has its own rules for product safety, environmental impact,
labour laws, and taxation. Compliance takes time and money.
3. Delays in Payments
The German distributor loves the spices but pays 60 days after delivery. Currency conversion
delays and banking procedures stretch it further.
Why it’s complex: International transactions often involve longer payment cycles, affecting
cash flow.
4. Complex Organisational Structure
Managing operations in India and Germany means different time zones, languages, and
work cultures. The company needs new managers, reporting systems, and communication
tools.
Why it’s complex: International business often requires restructuring and retraining to
coordinate across borders.
5. Exhaustion of Natural Resources
If the spice exporter over-commits to foreign orders, it might pressure local farmers to
overproduce, risking soil health and sustainability.
Why it’s complex: Export-driven demand can strain a country’s natural resources if not
managed responsibly.
6. Cultural Differences
In India, business meetings start with small talk. In Germany, they get straight to the point.
Misunderstandings can arise if cultural norms aren’t respected.
Why it’s complex: Culture affects negotiation styles, marketing messages, and even product
design.
7. Market Competition in the Host Country
Once in Germany, the Indian company faces competition from established local spice brands
and other global players.
Why it’s complex: Entering a foreign market often means competing with companies that
already understand local tastes and have strong brand loyalty.
8. National Controls and Trade Barriers
If Germany raises import duties on spices or imposes quotas, the Indian exporter’s costs rise
and profits shrink.
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Why it’s complex: Governments can change trade policies, tariffs, and quotas at any time,
affecting market access.
9. Currency Fluctuations
If the Euro weakens against the Rupee, the exporter earns less in Rupee terms for the same
shipment.
Why it’s complex: Exchange rate volatility can turn profitable deals into losses overnight.
10. Political and Economic Risks
A change in government, new trade sanctions, or an economic slowdown in the host
country can disrupt business plans.
Why it’s complex: International business is exposed to risks beyond the company’s control.
Why Companies Still Go Global Despite Complexities
Because the rewards can be huge:
• Access to millions of new customers.
• Diversification of markets and revenue streams.
• Opportunities to learn and innovate from global best practices.
• Economies of scale in production and sourcing.
Quick Recap Table
Complexity
Example
Impact
Increased Costs
Setting up abroad
Higher expenses
Foreign Regulations
EU packaging laws
Compliance costs
Payment Delays
60-day payment terms
Cash flow strain
Organisational Complexity
Time zones, languages
Need for new systems
Resource Strain
Over-farming for exports
Sustainability risk
Cultural Differences
Meeting styles
Miscommunication
Competition
Local brands
Market share challenge
Trade Barriers
Import duties
Reduced profits
Currency Fluctuations
Euro-Rupee changes
Profit volatility
Political/Economic Risks
Policy changes
Market disruption
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Closing the Story
Our Mumbai spice exporter’s journey to Germany is full of learning curves — from
navigating EU laws to understanding German consumer tastes. Some days are tough, with
delayed payments or sudden currency swings. But on others, the company sees its spices on
supermarket shelves in Berlin and knows the effort was worth it.
That’s the essence of international business: a thrilling voyage across oceans and cultures,
powered by opportunity but steered carefully through the storms of complexity.
2. Define the International Business Environment and their components in detail.
Ans: A Different Beginning…
Picture this: You’re sitting in a bustling airport lounge. Around you, a Japanese executive is
on a video call with her team in Tokyo, an American tourist is sipping Ethiopian coffee, and a
group of Indian engineers are boarding a flight to Germany for a project.
It feels like the whole world is in one room — yet each person is connected to a much bigger
web of trade, culture, politics, and technology. That invisible web is what we call the
International Business Environment.
Definition — In Simple Words
The International Business Environment (IBE) is the sum of all external forces — economic,
political, legal, cultural, technological, and more — that influence how companies operate
when they cross national borders.
Think of it as the “weather” in which global businesses sail their ships. Some days it’s sunny
(favourable trade policies, stable economies), other days it’s stormy (political unrest,
currency crashes). Businesses can’t control the weather — but they must understand it to
survive and thrive.
Why It Matters
If a company wants to sell smartphones in Brazil, open a factory in Vietnam, or source raw
materials from Africa, it must understand:
• The rules of the game in that country.
• The culture of the people it will work with.
• The economic health of the market.
• The technology available to operate efficiently.
Without this understanding, even the best product can fail abroad.
The Components of the International Business Environment
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Let’s imagine we’re the CEO of a company planning to expand from India into three new
countries. As we prepare, we must study six major components — each like a chapter in our
“Global Business Survival Guide.”
1. Economic Environment
This is the financial heartbeat of a country. It includes:
• GDP growth rate – Is the economy expanding or shrinking?
• Inflation and interest rates – Will costs rise quickly?
• Exchange rates – How will currency changes affect profits?
• Income levels – Can people afford our product?
Story angle: If we sell luxury watches, a booming economy with high disposable income is
our friend. But in a recession-hit country, we might need to offer affordable models.
2. Political Environment
This is the “mood” of the government and its stability. It covers:
• Political stability – Will sudden changes disrupt business?
• Government policies – Are they pro-business or protectionist?
• Trade agreements – Do they make imports/exports easier?
Story angle: Imagine setting up in a country where the government changes overnight and
imposes heavy import taxes. Our costs could double instantly.
3. Legal Environment
Every country has its own “rulebook” for business. It includes:
• Labour laws – How we hire, pay, and treat employees.
• Taxation – Corporate tax rates, VAT, customs duties.
• Intellectual property laws – Protecting our brand and patents.
• Consumer protection laws – Ensuring product safety and fair marketing.
Story angle: A food company might have to change its recipe to meet a country’s health
regulations — even if that recipe is a bestseller elsewhere.
4. Cultural Environment
This is the soul of the market — the beliefs, values, and habits of its people. It includes:
• Language – Communication and marketing.
• Customs and traditions – What’s acceptable and what’s taboo.
• Consumer behaviour – Buying habits, brand loyalty.
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Story angle: When McDonald’s entered India, it replaced beef burgers with chicken and
vegetarian options to respect cultural and religious sentiments.
5. Technological Environment
This is the toolkit available in the country. It includes:
• Infrastructure – Internet speed, transport, energy supply.
• Innovation level – Are people open to new tech?
• Automation and production capabilities – Can we manufacture efficiently?
Story angle: An e-commerce company might thrive in South Korea (fast internet, high
smartphone use) but struggle in a country with poor connectivity.
6. Competitive Environment
This is the battlefield. It includes:
• Number and strength of competitors – Local and global.
• Market share distribution – Who dominates?
• Barriers to entry – High costs, brand loyalty, regulations.
Story angle: A new cola brand entering the US must face giants like Coca-Cola and Pepsi —
meaning it needs a unique selling point to survive.
How These Components Interact
The real challenge? These components don’t exist in isolation.
• A political crisis can trigger an economic downturn.
• Cultural preferences can influence legal regulations.
• Technological advances can disrupt competitive landscapes overnight.
It’s like a chessboard where every move changes the whole game.
Quick Recap Table
Component
Key Factors
Example Impact
Economic
GDP, inflation, exchange rates
Pricing strategy
Political
Stability, policies, trade pacts
Market entry decision
Legal
Labour, tax, IP laws
Product compliance
Cultural
Language, customs, behaviour
Marketing approach
Technological
Infrastructure, innovation
Distribution method
Competitive
Rival strength, barriers
Differentiation strategy
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Closing the Story
Back in our airport lounge, you now see the scene differently. That Japanese executive?
She’s navigating political changes in Europe. The American tourist’s coffee? It’s priced based
on currency exchange rates. The Indian engineers? They’re working in a country whose tech
infrastructure makes their project possible.
The International Business Environment is the invisible stage on which all these stories play
out. Understanding it isn’t just smart — it’s survival. And for an examiner reading your
answer, this isn’t just theory; it’s a living, breathing reality of how the world does business.
SECTION-B
3. Briefly explain the various theories of International trade in detail.
Ans: A New Beginning…
Imagine a grand marketplace, not in one city, but stretched across the entire planet. Here,
Portuguese spices sit beside Japanese electronics, Indian textiles next to Swiss chocolates.
Merchants from every corner of the world are bargaining, exchanging, and smiling — but
behind this colourful chaos lies centuries of thought, debate, and theory about why
countries trade and how they benefit.
These explanations are what we call the Theories of International Trade — the “storylines”
economists have written to make sense of this global bazaar.
Why Theories Exist
Before we dive in, remember: trade theories are like maps.
• Some are old maps drawn when ships were the fastest way to travel.
• Others are modern GPS systems built for a world of instant communication and
global supply chains. Both try to answer the same question: What should a country
produce, and what should it buy from others?
The Main Theories — Told as a Journey Through Time
Let’s walk through them in the order they appeared, as if we’re travelling through history.
1. Mercantilism (16th–18th Century)
The Scene: Europe’s age of exploration. Ships return from colonies loaded with gold, silver,
and exotic goods. Core Idea: A nation’s wealth is measured by how much gold and silver it
has. To get richer, export more than you import. Policy Result: Heavy government control,
high tariffs on imports, and encouragement of exports. Story Angle: Think of it like a family
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that insists on selling more than it buys, hoarding cash under the mattress. It works for a
while, but it can make neighbours resentful and limit variety at home.
2. Absolute Advantage – Adam Smith (1776)
The Scene: Adam Smith, in The Wealth of Nations, challenges mercantilism. Core Idea:
Countries should produce what they can make more efficiently than others and trade for
the rest. Example: If India can produce 1,000 kg of tea with the same resources that the UK
uses to produce 500 kg, India has an absolute advantage in tea. Story Angle: Imagine two
friends — one bakes better bread, the other brews better coffee. Instead of both trying to
do everything, they specialise and swap. Both end up happier (and better fed).
3. Comparative Advantage – David Ricardo (1817)
The Scene: Ricardo takes Smith’s idea further. Core Idea: Even if a country is better at
producing everything, it should still specialise in what it’s relatively best at — where it has
the lowest opportunity cost. Example: If the UK is better at making both cloth and wine, but
its advantage in cloth is much greater, it should focus on cloth and trade for wine. Story
Angle: Think of a brilliant surgeon who is also a fast typist. Even though she types faster
than her assistant, it’s better for her to perform surgeries while the assistant types reports
— because her time is more valuable in the operating room.
4. Heckscher–Ohlin Theory (Early 20th Century)
The Scene: Swedish economists Eli Heckscher and Bertil Ohlin bring in the idea of factor
endowments. Core Idea: Countries export goods that use their abundant resources and
import goods that use their scarce resources. Example: Oil-rich countries export petroleum;
labour-rich countries export textiles. Story Angle: It’s like a village where one family has lots
of cows (milk products) and another has fertile orchards (fruits). Naturally, they trade milk
for apples.
5. Leontief Paradox (1950s)
The Scene: Economist Wassily Leontief tests the Heckscher–Ohlin theory on the US
economy — and finds a surprise. Core Idea: The US, rich in capital, was exporting labour-
intensive goods and importing capital-intensive goods — the opposite of what the theory
predicted. Story Angle: It’s like discovering that the best baker in town is selling sandwiches
while buying bread from others. It made economists rethink assumptions.
6. Product Life Cycle Theory – Raymond Vernon (1960s)
The Scene: Post-war America, booming with innovation. Core Idea: New products are
developed in advanced countries, exported when demand grows, and eventually produced
in developing countries as they mature. Stages:
1. Introduction – Produced and consumed domestically.
2. Growth – Exported to other developed nations.
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3. Maturity – Production shifts to lower-cost countries.
4. Decline – Original country may become an importer. Story Angle: Think of the
smartphone — first designed and made in advanced economies, now manufactured
worldwide.
7. New Trade Theory (1970s–80s)
The Scene: Economists like Paul Krugman notice that trade isn’t just about resources — it’s
also about economies of scale and market dominance. Core Idea: Some industries can
support only a few large players. Countries that get an early start can dominate global
markets. Example: Boeing and Airbus in aircraft manufacturing. Story Angle: Like a small
town that can only support one bakery — whoever opens first and builds a loyal customer
base tends to keep the market.
8. Porter’s Diamond Theory of National Competitive Advantage (1990)
The Scene: Michael Porter studies why certain countries excel in specific industries. Core
Idea: Four factors shape national advantage:
1. Factor Conditions – Skilled labour, infrastructure.
2. Demand Conditions – Sophisticated local customers.
3. Related and Supporting Industries – Strong supplier networks.
4. Firm Strategy, Structure, and Rivalry – Competitive domestic markets that push
innovation. Story Angle: It’s like a sports team — talent, tough competition,
supportive fans, and good facilities all combine to create champions.
Quick Recap Table
Theory
Example
Mercantilism
17th-century Europe
Absolute Advantage
India in tea
Comparative
Advantage
UK in cloth
Heckscher–Ohlin
Oil-rich nations
Leontief Paradox
US exports labour-intensive
goods
Product Life Cycle
Smartphones
New Trade Theory
Boeing, Airbus
Porter’s Diamond
Silicon Valley tech
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Closing the Story
From gold-hoarding kings to data-driven economists, the theories of international trade are
really just different ways of answering one timeless question: How can we all get more from
what we have?
And just like in our global marketplace at the start of this story, the answer keeps evolving
— shaped by ships, steam engines, satellites, and now, AI.
4. Write a detailed note on World Bank and IMF.
Ans: A New Beginning…
It’s July 1944. The Second World War is still raging, but in a quiet resort town called Bretton
Woods in New Hampshire, USA, 44 nations have sent their brightest economists and
diplomats to a grand hotel.
The mood is tense but hopeful. They know that when the war ends, the world will need
rebuilding — not just cities and roads, but trust, trade, and stability. Over coffee and late-
night negotiations, two new institutions are born: The World Bank and The International
Monetary Fund (IMF).
They are like twin siblings — born at the same time, raised in the same house, but with very
different personalities and jobs.
The World Bank — The Builder
Definition: The World Bank is an international financial institution that provides long-term
loans, grants, and technical expertise to developing countries to help them reduce poverty
and promote sustainable development.
Main Goal: To help countries build — literally and figuratively. Roads, schools, hospitals,
clean water systems, renewable energy projects — anything that can improve lives and
boost economic growth.
Structure: The World Bank is actually a family of five organisations, but the two main ones
are:
1. IBRD – International Bank for Reconstruction and Development (lends to middle-
income and creditworthy low-income countries).
2. IDA – International Development Association (offers concessional loans and grants
to the poorest countries).
How It Works:
• A country applies for funding for a development project.
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• The World Bank studies its feasibility, environmental impact, and social benefits.
• If approved, the Bank provides financing and technical advice.
• The country repays over a long period, often at low interest rates.
Example Story: Imagine a rural village in Africa where children walk 10 km to the nearest
school. The World Bank might fund the construction of a local school, train teachers, and
provide solar panels for electricity. Over time, education levels rise, leading to better jobs
and incomes.
The IMF — The Doctor
Definition: The International Monetary Fund is an international organisation that works to
ensure the stability of the global monetary system — the system of exchange rates and
international payments that enables countries to trade with each other.
Main Goal: To act like a financial doctor — diagnosing economic problems, prescribing
policy advice, and providing short-term financial assistance to countries in crisis.
Core Functions:
1. Surveillance – Monitoring the global economy and advising countries on policies to
maintain stability.
2. Financial Assistance – Lending money to countries facing balance of payments
problems (when they can’t pay for imports or service their debts).
3. Capacity Development – Training government officials and providing technical
expertise.
How It Works:
• A country facing a currency crisis or debt problem approaches the IMF.
• The IMF analyses the situation and offers a loan — but with conditions (policy
reforms) to fix the underlying issues.
• The country implements reforms, stabilises its economy, and repays the IMF.
Example Story: Think of a country whose currency is collapsing, inflation is skyrocketing, and
foreign investors are fleeing. The IMF steps in with emergency funds to restore confidence
— but also insists on reforms like reducing budget deficits or improving tax collection.
Key Differences — The Siblings Compared
Aspect
World Bank
IMF
Main Role
Long-term development and
poverty reduction
Short-term financial stability and
crisis management
Type of
Assistance
Project-based loans and grants
Balance of payments support
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Focus
Infrastructure, social services,
economic development
Monetary policy, exchange rates,
fiscal discipline
Repayment
Period
Long-term (often decades)
Short to medium-term
Conditionality
Project-specific requirements
Broad economic policy reforms
Why They Matter Today
Even in 2025, these institutions remain central to global economic health:
• The World Bank is funding climate change adaptation projects, renewable energy,
and digital infrastructure in developing nations.
• The IMF is helping countries recover from shocks like pandemics, wars, and global
recessions, while advising on inflation control and debt sustainability.
Criticism and Challenges
Like any powerful institution, both face criticism:
• World Bank: Sometimes accused of funding projects that harm the environment or
displace communities.
• IMF: Often criticised for imposing harsh austerity measures that hurt the poor.
Yet, both have evolved — now placing more emphasis on sustainability, social protection,
and inclusive growth.
Closing the Story
Back in that Bretton Woods hotel in 1944, no one could have predicted the exact shape of
the modern global economy — but they knew one thing: the world needed builders and
doctors.
The World Bank became the builder, laying the bricks of development. The IMF became the
doctor, keeping economies healthy enough to trade and grow.
And just like in any good story, their roles continue to adapt with each new chapter of global
history — from post-war reconstruction to climate change, digital economies, and beyond.
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SECTION-C
5. What do you understand by Regional Economic Co-operation and explain the forms of
regional groupings.
Ans: A New Beginning…
It’s a warm afternoon in a busy border town. On one side of the river is Country A, famous
for its coffee beans; on the other side is Country B, known for its fine chocolates. For years,
traders have crossed the old wooden bridge between them, but every time they do, they
face long queues, heavy taxes, and endless paperwork.
One day, the leaders of both countries meet under a banyan tree and make a pact: “Let’s
make it easier for our people to trade, travel, and grow together.”
That simple handshake is the seed of Regional Economic Co-operation — and when more
countries join in, it grows into what we call regional groupings.
What is Regional Economic Co-operation?
In simple terms:
Regional Economic Co-operation is when countries in the same geographical region agree
to work together to improve trade, investment, and economic growth by reducing barriers
and harmonising policies.
It’s like neighbours deciding to open their backyard fences so they can share tools, swap
produce, and build a community garden together — instead of each struggling alone.
Why countries do it:
• To access bigger markets.
• To reduce costs through shared resources.
• To strengthen bargaining power in global trade.
• To promote peace and stability through economic ties.
The Logic Behind It
When countries co-operate regionally, they can:
• Trade more freely (fewer tariffs, faster customs).
• Specialise in what they do best and import the rest.
• Share infrastructure like roads, ports, and energy grids.
• Attract investment by offering a larger, unified market.
Forms of Regional Groupings — The Ladder of Integration
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Think of regional groupings as steps on a ladder. The higher you climb, the more integrated
the economies become — but also, the more national independence you give up.
Let’s climb this ladder step by step.
1. Preferential Trade Area (PTA) — The First Step
What it is: Countries agree to reduce tariffs on certain goods from member nations, but not
on all products.
Example: The South Asian Preferential Trading Arrangement (SAPTA) among SAARC
countries.
Story Angle: It’s like two shopkeepers agreeing to give each other a discount on a few items,
but charging normal prices for the rest.
2. Free Trade Area (FTA) — Opening the Gates
What it is: Member countries remove tariffs and trade barriers on most (or all) goods traded
between them, but each country keeps its own trade policy with non-members.
Example: The North American Free Trade Agreement (NAFTA), now replaced by USMCA.
Story Angle: Imagine a group of friends who agree to share snacks freely among themselves,
but each still decides individually what to buy from outsiders.
3. Customs Union — One Gate for All
What it is: Like an FTA, but with a common external tariff for non-members. This means all
members charge the same import duties to outsiders.
Example: The Southern Common Market (MERCOSUR) in South America.
Story Angle: It’s like a group of shops that not only share goods freely among themselves
but also agree on the same entry fee for any outsider who wants to sell to them.
4. Common Market — Free Movement Beyond Goods
What it is: A customs union that also allows free movement of labour and capital between
member countries.
Example: The European Economic Area (EEA).
Story Angle: Now the friends not only share snacks but also allow each other to work in
their shops, invest in each other’s businesses, and move money freely.
5. Economic Union — One Economy, Many Flags
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What it is: A common market with harmonised economic policies — sometimes even a
shared currency.
Example: The European Union (EU) with the Euro for many of its members.
Story Angle: It’s like the friends deciding to run all their shops as one big chain, with the
same prices, rules, and even a shared cash register.
6. Political Union — The Final Step
What it is: Full integration — countries merge their political systems and operate as a single
nation in many respects.
Example: The United States of America began as separate states but formed a political
union.
Story Angle: The friends not only merge their shops but also elect one manager, share one
brand name, and make all decisions together.
Why Regional Groupings Matter
• Economic Growth: Larger markets attract more investment.
• Efficiency: Specialisation reduces costs.
• Stability: Economic ties reduce the risk of conflict.
• Global Influence: A united bloc has more bargaining power in trade negotiations.
Challenges Along the Way
• Unequal Benefits: Some members may gain more than others.
• Loss of Sovereignty: Higher integration means giving up some national control.
• Adjustment Costs: Industries may struggle to compete with imports from partner
countries.
• Political Tensions: Disagreements over policies can strain relationships.
Closing the Story
Back in our border town, the coffee and chocolate traders are thriving. The bridge is now a
modern highway, customs checks are quick, and people cross freely to work, shop, and visit
friends.
What started as a handshake between two leaders has grown into a regional alliance that
benefits everyone — proving that when neighbours co-operate, fences turn into gateways,
and local markets become part of a much bigger, shared story.
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6. Define foreign exchange markets and risk management in detail.
Ans: A New Beginning…
It’s 2:37 a.m. in London. The city sleeps, but in a brightly lit trading room, giant screens glow
with numbers that never stop moving. Tokyo’s market is winding down, Sydney’s is quiet,
but New York’s is still buzzing — and somewhere in between, a trader in a crisp shirt yells,
“Buy 5 million euros, sell 6 million dollars — now!”
Welcome to the Foreign Exchange Market — the world’s largest, most liquid, and most
relentless financial marketplace. It never sleeps, because somewhere on the planet,
someone is always trading currency.
What is the Foreign Exchange Market?
In simple words:
The Foreign Exchange Market (or Forex/FX) is where currencies are bought and sold.
It’s the global network — not a single physical place — where banks, corporations,
governments, investors, and even travellers exchange one currency for another.
Key features:
• 24-hour operation (Monday to Friday) — because it spans all time zones.
• Decentralised — no single exchange; trades happen electronically over-the-counter
(OTC).
• Massive scale — daily turnover exceeds $7 trillion globally.
• Participants — central banks, commercial banks, multinational companies, hedge
funds, brokers, and individuals.
Why It Exists
Currencies are the lifeblood of international trade and investment.
• An Indian importer buying machinery from Germany must pay in euros.
• A Japanese tourist visiting Paris needs euros for spending.
• A US investor buying shares in a UK company must convert dollars to pounds.
Without the FX market, these exchanges would be slow, costly, and inefficient.
Functions of the Foreign Exchange Market
1. Currency Conversion – Turning one currency into another for trade, travel, or
investment.
2. Facilitating International Trade & Investment – Making cross-border transactions
smooth.
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3. Hedging – Protecting against currency risk.
4. Speculation – Traders trying to profit from currency movements.
5. Price Discovery – Determining the relative value of currencies.
The Flip Side — Currency Risk
Here’s where the story gets tense. Imagine you’re an Indian exporter who has just sold
goods worth $1 million to a US buyer. Payment will arrive in 3 months. Today, $1 = ₹83, so
you expect ₹8.3 crore.
But if, in 3 months, the rupee strengthens to ₹80 per dollar, you’ll only get ₹8 crore — a loss
of ₹30 lakh without doing anything wrong.
This is foreign exchange risk — the danger that currency fluctuations will hurt your profits,
cash flow, or asset values.
Types of Foreign Exchange Risks
Let’s meet the “three troublemakers” in our story:
1. Transaction Risk – The risk that exchange rates will change between the time a deal
is made and when payment is received or made. Example: Exporter signs a contract
today, but by the time payment arrives, the currency has moved against them.
2. Translation Risk – The risk that a company’s financial statements will change in value
when foreign assets or liabilities are converted into the home currency. Example: An
Indian company with a UK subsidiary must translate its pound earnings into rupees
for reporting — if the pound falls, reported profits shrink.
3. Economic Risk – The long-term risk that currency movements will affect a company’s
market value or competitive position. Example: If the rupee stays strong for years,
Indian exports may become less competitive globally.
Risk Management — The Shield in the Battle
Managing FX risk is like sailing in unpredictable seas — you can’t control the wind, but you
can adjust your sails.
1. Forward Contracts
An agreement to buy or sell a currency at a fixed rate on a future date.
• Benefit: Locks in the exchange rate, removing uncertainty.
• Example: Our exporter can fix today’s ₹83 rate for the $1 million payment due in 3
months.
2. Futures Contracts
Similar to forwards but standardised and traded on exchanges.
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• Benefit: Transparent and regulated.
• Limitation: Less flexible than forwards.
3. Options
Gives the right (but not the obligation) to buy or sell currency at a set rate before a certain
date.
• Benefit: Protection with the possibility to benefit from favourable moves.
• Example: Buy an option to sell dollars at ₹83 — if the rate falls, you use it; if it rises,
you ignore it.
4. Swaps
Two parties exchange currencies for a period and then swap back later.
• Benefit: Useful for managing long-term exposures and funding needs.
5. Natural Hedging
Structuring operations so that currency inflows and outflows match.
• Example: An Indian exporter who also imports raw materials in dollars — dollar
earnings pay for dollar expenses.
The Human Side of Risk Management
In the trading room, risk management isn’t just about numbers — it’s about discipline. A
careless trader can wipe out months of profit with one bad bet. A cautious CFO can save a
company millions by locking in rates at the right time.
It’s a mix of:
• Market awareness (watching economic indicators, central bank policies, geopolitical
events).
• Clear policies (deciding how much risk the company is willing to take).
• Right tools (forwards, options, swaps).
• Regular review (because markets change fast).
Closing the Story
Back in that London trading room, the trader leans back, watching the numbers flicker.
Somewhere in Mumbai, a CFO sleeps peacefully, knowing that no matter how the rupee
dances tonight, the company’s profits are safe — because the risk has been managed.
That’s the essence of the foreign exchange market and risk management: A stage where
trillions move silently across borders every day, and where the smartest players aren’t just
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chasing gains — they’re protecting themselves from the storms that can come without
warning.
SECTION-D
7. Write a detailed note on Special Economic Zones (SEZs) and Export Oriented Units
(EOUS).
Ans: A New Beginning… A Walk Through Two Worlds
I still remember the first time I stepped into an SEZ. It was like crossing an invisible border —
one moment I was on a dusty city road with honking rickshaws, the next I was in a clean,
landscaped campus buzzing with glass-fronted offices, humming factories, and trucks lined
up for export.
A week later, I visited an Export Oriented Unit (EOU) tucked away in an industrial estate. It
didn’t have the sprawling “mini-city” feel of the SEZ, but inside, the machines were running
at full tilt, producing goods destined entirely for foreign markets.
That’s when it clicked for me: SEZs and EOUs are two different doors to the same
destination — boosting exports, attracting investment, and creating jobs.
Let’s walk through them together.
Special Economic Zones (SEZs) — The Mini-Countries Within a Country
Definition (in plain words): An SEZ is a specially designated area within a country that
operates under different economic laws than the rest of the nation, designed to attract
investment, promote exports, and create jobs.
Think of it as a “country within a country” for business purposes — with its own set of rules,
tax benefits, and infrastructure.
Why they exist:
• To overcome red tape and slow approvals.
• To provide world-class infrastructure for industries.
• To make India more competitive in global trade.
Key Features:
• Treated as foreign territory for trade operations and duties.
• Businesses enjoy tax holidays, duty-free imports, and simplified customs.
• World-class infrastructure — ports, warehouses, IT parks, power supply.
• Single-window clearance for approvals.
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A Quick Story: Imagine a tech company in Bengaluru that wants to serve clients in the US
and Europe. Inside an SEZ, it can import high-end servers without paying customs duty, hire
talent easily, and export software without the usual paperwork delays. The result? Faster
growth, more jobs, and higher exports.
Real-world scale: India’s SEZ journey began in 1965 with Asia’s first Export Processing Zone
in Kandla, Gujarat. Today, there are hundreds of operational SEZs across the country,
contributing over a third of India’s total merchandise exports.
Export Oriented Units (EOUs) — The Focused Export Factories
Definition (in plain words): An EOU is a unit (factory or service provider) set up anywhere in
the country — not necessarily inside an SEZ — that commits to exporting 100% of its
production (with some permitted exceptions).
Why they exist:
• To allow export-focused businesses to operate outside SEZs but still enjoy similar
benefits.
• To promote exports from all regions, not just SEZ hubs.
Key Features:
• Can be located anywhere in India (subject to approval).
• Must export almost all production.
• Enjoy duty-free import of raw materials, capital goods, and consumables.
• Exemptions from certain taxes and levies.
• Can sell a limited percentage of goods in the Domestic Tariff Area (DTA) by paying
applicable duties.
A Quick Story: Picture a small textile manufacturer in Ludhiana. They don’t have the scale to
move into an SEZ, but by registering as an EOU, they can import specialised Italian knitting
machines without duty and export sweaters to Europe at competitive prices.
SEZ vs EOU — Same Goal, Different Paths
Aspect
SEZ
EOU
Location
Inside a notified SEZ area
Anywhere in India
Infrastructure
World-class, planned industrial hubs
Varies — depends on location
Export
Requirement
Primarily export-oriented
100% export obligation (with
small DTA allowance)
Benefits
Tax holidays, duty-free imports,
single-window clearance
Duty-free imports, tax
exemptions, flexible location
Scale
Often large, multi-industry zones
Can be small or large, single-unit
focus
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Benefits of SEZs and EOUs
• Boost to Exports: Both schemes aim to make Indian goods and services more
competitive globally.
• Job Creation: From factory workers to IT professionals, millions find employment.
• Foreign Investment: Attractive incentives draw global companies to set up
operations.
• Technology Transfer: Exposure to global markets brings in advanced technology and
practices.
• Regional Development: SEZs often transform underdeveloped areas into industrial
hubs; EOUs spread export activity to smaller towns.
Challenges They Face
• Global Competition: Other countries also offer attractive zones.
• Policy Changes: Sudden changes in tax laws can affect investor confidence.
• Infrastructure Gaps: Not all SEZs have truly world-class facilities.
• Compliance Burden: EOUs must maintain strict export records to retain benefits.
The Human Side — Why They Matter
When you walk through an SEZ, you see more than just factories — you see cafeterias full of
young engineers, trucks loading goods for Dubai, and training centres teaching new skills.
When you visit an EOU, you see family-run businesses that have gone global without leaving
their hometowns.
Both are part of the same bigger picture: India’s push to integrate more deeply into the
global economy while creating opportunities at home.
Closing the Story
As we leave the SEZ gates and step back into the regular city streets, the contrast is striking
— but so is the connection. SEZs are like giant, planned gateways to the world; EOUs are
nimble, focused bridges from local factories to global markets.
Both tell the same story in different voices: that with the right environment, Indian
businesses can compete — and win — on the world stage.
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8. Discuss the various measures for promoting foreign Investments in detail.
Ans: A New Beginning… The Courtship of Capital
Imagine a country as a host at a grand banquet. The guests are global investors — sovereign
wealth funds, multinational corporations, venture capitalists — each holding a cheque book
and scanning the room for the most promising partner.
Some countries sit quietly in the corner, hoping to be noticed. Others step forward
confidently, offering a warm handshake, a clear pitch, and a promise:
“If you invest in me, I’ll give you stability, returns, and a future.”
That’s what promoting foreign investment is all about — creating the right environment,
incentives, and trust so that global capital chooses you over the dozens of other suitors.
Why Foreign Investment Matters
Before we get into the “how,” let’s remember the “why”:
• Capital infusion for infrastructure, industry, and innovation.
• Technology transfer from advanced economies.
• Job creation and skill development.
• Integration into global value chains.
• Boost to exports and competitiveness.
In short, foreign investment is not just money — it’s a package of resources, expertise, and
connections.
Measures to Promote Foreign Investment — The Playbook
Here’s the “courtship strategy” that countries use to attract and retain foreign investors.
1. Liberalising FDI Policies — Opening the Door Wider
• What it means: Allowing higher foreign ownership in more sectors, reducing
restrictions, and simplifying approval routes.
• Example: India’s automatic route for 100% FDI in sectors like renewable energy and
e-commerce.
• Story angle: It’s like telling your guest, “You don’t need to knock three times and
wait for permission — the door is open, come in.”
2. Simplifying Regulations — Removing the Red Tape
• What it means: Streamlining business registration, licensing, and compliance
through single-window clearance systems and digital portals.
• Example: India’s “Make in India” initiative with online approvals and reduced
compliance burden.
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• Story angle: Imagine inviting someone to dinner but making them fill out 20 forms
before they can sit down — they’ll leave. Simplification keeps them at the table.
3. Offering Tax Incentives — Sweetening the Deal
• What it means: Corporate tax cuts, tax holidays, accelerated depreciation, and
exemptions for specific sectors or regions.
• Example: Tax-free infrastructure bonds for sovereign and pension funds until 2030.
• Story angle: It’s like offering your guest a welcome drink and dessert on the house —
a gesture that makes them feel valued.
4. Developing World-Class Infrastructure — Setting the Stage
• What it means: Building industrial corridors, ports, airports, logistics hubs, and
reliable power and internet.
• Example: India’s push for industrial corridors like Delhi–Mumbai Industrial Corridor
(DMIC) and modern SEZs.
• Story angle: No matter how charming the host, if the banquet hall is leaky and the
chairs are broken, guests won’t stay.
5. Ensuring Political and Economic Stability — Building Trust
• What it means: Stable governance, predictable policies, low inflation, and sound
fiscal management.
• Example: Countries with consistent economic reforms attract more long-term FDI.
• Story angle: Investors want a partner who won’t change the rules halfway through
the dance.
6. Strengthening Legal and Dispute Resolution Systems — Offering Security
• What it means: Clear property rights, enforceable contracts, and fast dispute
resolution mechanisms.
• Example: Setting up dedicated commercial courts or arbitration centres.
• Story angle: It’s like assuring your guest, “If there’s a disagreement, we’ll resolve it
fairly and quickly.”
7. Sector-Specific Incentives — Speaking Their Language
• What it means: Tailored benefits for high-potential sectors like renewable energy,
EV manufacturing, fintech, or biotech.
• Example: Production Linked Incentive (PLI) schemes for electronics, pharma, and
green energy.
• Story angle: If your guest loves jazz, you don’t play heavy metal — you cater to their
taste.
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8. Promoting Public–Private Partnerships (PPPs) — Sharing the Load
• What it means: Collaborating with private investors on infrastructure and service
projects, reducing risk for both sides.
• Example: PPP models in highways, airports, and metro rail projects.
• Story angle: It’s like saying, “Let’s co-host this party — we’ll both benefit.”
9. Branding and Investment Promotion Campaigns — Telling Your Story
• What it means: Global roadshows, investment summits, and targeted marketing to
showcase opportunities.
• Example: Vibrant Gujarat Summit, Dubai Expo pavilions.
• Story angle: Even the best host needs to send out attractive invitations.
10. Special Economic Zones (SEZs) and Industrial Parks — Creating VIP Lounges
• What it means: Designated areas with tax breaks, duty-free imports, and world-class
facilities.
• Example: International Financial Services Centre (IFSC) at GIFT City.
• Story angle: A VIP lounge makes guests feel special and encourages them to stay
longer.
11. Encouraging Sovereign and Pension Fund Investments — Long-Term Partners
• What it means: Offering special incentives for large, patient capital sources.
• Example: Extending tax-free status for such funds investing in infrastructure until
2030.
• Story angle: These are the guests who don’t just visit once — they become family
friends.
12. Digital Transformation — Making Everything Faster
• What it means: E-governance, online approvals, blockchain-based land records, and
AI-driven compliance checks.
• Example: India’s National Single Window System for investors.
• Story angle: No one likes waiting in a long buffet line — speed and efficiency win
hearts.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”