Unit 1 Business Environment and IB PYQ’s 7th Dec 2023 Shift 1

The correct answer is E, A, C, B, D.

Key Points

E. Issue a notice for show-cause to the parties of the combination: The process begins with the CCI issuing a show-cause notice to the parties involved in a proposed combination. This initial step suggests that the CCI has preliminary concerns or questions about the combination's potential impact on competition. The parties are asked to explain why their proposal should not be subject to a detailed investigation.

A. Call for a report from the Director General: After receiving the parties' response to the show-cause notice, the CCI may still have concerns and decide to investigate further. It calls for a detailed investigation report from the Director General (DG), the investigative arm of the CCI. This report helps the CCI understand the nuances of the combination and its potential effects on the market.

C. Direct the parties of the combination to publish details of the combination: Once the investigation is underway, the CCI may require the parties to publish details of the proposed combination. This step is designed to inform and involve the public and relevant stakeholders, allowing them to assess the combination's potential impacts themselves and possibly bring additional concerns to the CCI's attention.

B. Invite any person, affected parties to file written objections: Following the publication of details concerning the combination, the CCI invites objections or comments from the public, including any affected persons or parties. This inclusive approach allows the CCI to gather a wide array of perspectives and information that could influence its assessment of the combination's competitive impact.

D. Call for additional information from the parties of the combination: Based on the responses from the public and further investigation, the CCI might find it necessary to obtain additional information directly from the parties involved in the combination. This step enables the CCI to clarify any remaining concerns and ensure a thorough evaluation of the combination's implications for market competition.

The correct answer is Ten percent of the average turnover/income of firm of the three preceding financial years.

Key Points

• According to the Competition Act, 2002, of India, under Section 27, the Competition Commission of India (CCI) is empowered to penalize firms engaging in anti-competitive practices.
• As per the Act, should the CCI find a company to be in violation of the norms, it has the discretionary power to impose a penalty of up to 10% of the average of the firm’s turnover for the last three financial years.
• Therefore, the correct answer to your question would be: Ten percent of the average turnover/income of the firm of the three preceding financial years
• This provision was designed to punish and deter businesses who distort competition and harm consumers and other businesses through their actions.
• It's important to note that the outcome and the exact amount of any penalty will depend on a number of factors, including the nature, duration, and severity of the anti-competitive behavior, as well as the firm’s turnover.

Additional Information

• The Competition Commission of India (CCI) was established under the Competition Act, 2002, with the primary goal of preventing activities that have an adverse effect on competition in India, ensuring fair and healthy competition in the economic landscape of the country.
• The Act replaced the older Monopolies and Restrictive Trade Practices Act (MRTP Act) to better align with the realities of a liberalized economy. It recognizes the role of competition in promoting efficiency, protecting consumer interest, and ensuring freedom of trade in markets in India.
• The Competition Act, 2002, empowers the CCI to:
  • Prohibit anti-competitive agreements, including cartels.
  • Prohibit abuse of dominant position in the market.
  • Regulate combinations (mergers and acquisitions) that cause or are likely to cause an appreciable adverse effect on competition.
• The governing body of the CCI consists of a chairperson and six members appointed by the Government of India. The CCI is also responsible for advocacy and education about competition laws and aims at raising awareness and understanding of the issues involved.
• The Competition Act, 2002, is thus an essential legislative framework in India that aims to promote healthy competition, prevent monopoly and anti-competitive practices, benefit consumers, and ensure freedom of trade.

The correct answer is A - II, B - III, C - IV, D - I.

Key Points

• The FDI (Foreign Direct Investment) policy in India dictates the limit up to which foreign investment is allowed in different sectors of economy and the route through which such investments can be made. The automatic route is one where the FDI is allowed without prior approval from the Government or Reserve Bank of India.
• Trading in Transferable Development Rights (TDR) - As per the FDI policy, the foreign direct investment in trading of TDRs is prohibited, so it is associated with II. Prohibited.
• Multi-Brand Retail Trading – Foreign Direct Investment is allowed up to 51% under the government approval route, not the automatic route. So none of the options in List II corresponds directly.
• Satellite (Establishment and Operations) – Foreign Direct Investment is permitted up to 100% under the government approval route in the field of Satellites-establishment and operation, so it's associated with IV. 100%.
• Petroleum Refining (by PSUs) - In case of Petroleum Refining by PSUs, 49% FDI is permitted under the automatic route which associates it with I. 49%.

Additional Information

• Foreign Direct Investment (FDI):
  • Foreign Direct Investment (FDI) is a type of cross-border investment made by a resident in one economy (the direct investor) in an enterprise in another economy (the direct investment enterprise) with the objective of establishing a lasting interest in the enterprise. Essentially, it means when an investor, based in one country, invests in a business based in another country. The investor's aim is to have control, influence, or significant participation in the management of the enterprise.
• Regulator for FDI in India:
  • In India, the body that governs FDI is the Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry. It frames the FDI Policy, which is then implemented by the Reserve Bank of India (RBI).
• Routes of FDI in India:
  • There are mainly two routes through which India allows FDI, the Automatic route, and the Government route:
  • Automatic Route: Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the Government of India for the investment. This is allowed in sectors/activities listed under the Consolidated FDI Policy Circular of the Government of India.
  • Government Route: Under the Government Route, prior to investment, approval from the Government of India is required. Government approval is granted based on recommendations provided by the Foreign Investment Promotion Board (FIPB). The sectors/activities requiring government approval are usually those considered sensitive for the country.

The correct answer is Piggy Backing.

Key Points

• The phenomenon where one company ('rider') utilizes the established distribution channels of another firm ('carrier') in a particular country to export its goods is known as Piggy Backing.
• Piggybacking is a cost-effective way for companies to expand into new markets. Instead of establishing new distribution channels which can be costly and time-consuming, they make use of the channels that have already been established by another company.
• The company providing the distribution channels (the 'carrier') usually benefits from additional revenues brought by handling a complementary product line from the 'rider'.
• Therefore, the correct answer in this case is: Piggy Backing

Additional Information

• Rider: In this context, the 'rider' is the company that wants to export its products using the distribution channels of another firm.
• Carrier: The 'carrier' is the company that has established distribution channels in a target country.
• Piggybacking: This term refers to a scenario where a company leverages the distribution network of another firm to sell its products in a foreign market.
• Counter Trade: This is a form of international trade in which goods or services are exchanged for other goods or services instead of for hard currency.
• Barter: This is the exchange of goods or services for other goods or services without using money.
• Switch Trading: It's a type of countertrade in which a third party trading house buys the firm's counterpurchase credits and sells them to another firm that can better use them.

The correct answer is Carriage Paid To (CPT)  Key Points

Carriage and Insurance Paid To (CIP)

Under CIP, the seller is responsible for arranging and paying for the carriage of goods to a named destination, and also must provide cargo insurance coverage until the goods are delivered to the carrier or appointed person at the destination specified. However, CIP requires the seller to cover insurance, which does not align with the scenario where the buyer assumes cargo insurance responsibilities.

Cost, Insurance and Freight (CIF)

CIF applies to sea or inland waterway transport and requires the seller to cover the cost, freight, and insurance to bring the goods to the port of destination. Similar to CIP, under CIF, the seller is responsible for procuring and paying for the insurance up to the destination port, contradicting the condition that the buyer handles the cargo insurance.

Carriage Paid To (CPT)

CPT means the seller pays for the carriage of goods to a named destination. Here, the risk, along with the responsibility for additional costs after the goods have been handed over to the carrier, transfers from the seller to the buyer. The seller does not cover insurance under CPT, which is in line with the scenario where the buyer assumes the responsibility for cargo insurance, import custom clearance, and other costs and risks after the goods have been delivered to the carrier. This matches the scenario described, making CPT the correct choice.

Cost and Freight (CFR)

In the case of CFR, the seller must pay the costs and freight necessary to bring the goods to the named port of destination. However, risk is transferred to the buyer once the goods are loaded on board the ship, and importantly, CFR does not require the seller to provide insurance, which must be obtained by the buyer if desired. While CFR might seem to fit certain aspects of the scenario (not covering insurance), it specifically applies to sea or inland waterway transport and does not fully match the description provided as well as CPT does, particularly acknowledging that the responsibility for customs clearance, duties, and taxes explicitly falls to the buyer under CPT after the delivery point.

Therefore, "Carriage Paid To (CPT)" is aligned with the conditions that delivery of goods happens at the seller's expense to the named place of destination, and after which the buyer assumes cargo insurance, import custom clearance, payment of custom duties, taxes, and other costs and risks.

Correct answer is E, A and D Only

Key Points

• FDI = FDI stands for foreign direct investment. It refers to the investment made by the individual, organization or the government from one country into business that are located in another country. FDI involves acquiring interest in an enterprise abroad through the purchase of stocks, ownership stakes or the establishment of new ventures. FDI contribute to the economic growth, technology transfer and job creation. Different countries have different rules and regulations governing the FDI.
• The decision to invest by FDI is determined by the OLI paradigm which was formulated by an economist John Dunning. He states that OLI stands for Ownership, Location and Internalization.
  • Ownership advantage = The first consideration is the ownership advantage including proprietary information and ownership rights of the company. This may include branding, copyrights, trademark and the patents. It provides specific advantages to the parent company. Ownership advantages are considered to be intangible as it gives a relative competitive advantage such as reputation.
  • Location advantage = Location advantage is the second necessary decision while investing in the FDI. Companies must assess weather there is advantage or not for performing specific functions within a particular nation. This depends on the availability and cost of resources. Locational advantage refers to natural or created advantage which are generally immobile such as coal mines, gold mines, petroleum etc.
  • Internalization advantage = Internalization refers to the idea that a firm weather choose to internalize its activities rather than relying on external markets or a third party. Sometimes it is more beneficial or cost effective for an organization to operate from a different market or a third party while the business keep doing the work in house. So the business must think of outsourcing its production as it will benefit the business more in terms of cost.
• The OLI paradigm that is ownership advantage, location advantage and internalization advantage provides a comprehensive framework for understanding the factors that can influence the firm's decision to engage in Foreign Direct Investment or not.

Correct answer is Intermediaries

Key Points

• Intermediaries = Intermediaries also known as marketing channels are set of interdependent organizations involved in the process of marketing a product or a service available for use or consumption. Marketing channels helps to convert the potential buyers into profitable orders. The intermediaries can be of various types like wholesalers and retailers which buy the goods, take title and resell them others are agents which which search for the customer and negotiate on the producer's behalf for price and quality but do not take title of the goods and the last are facilitators they facilitate the sale and purchase but do not take title nor negotiate they include warehouses, banks, advertising agencies, transportation services.
• Roles of marketing channels
  • Many producers lack the financial resources to carry out the direct marketing so they opt for the marketing channels and the intermediaries for the purchase and sell of the product as it will be less costly and the product can reach the target market easily.
  • Producers can earn a greater return by increasing the investment in their own business and giving out the marketing task to the intermediaries. This makes the goods widely available and accessible to the target market. The intermediaries often provides the producers more than it can achieve on its own as now they can focus only on their business.
  • In some cases the direct marketing is not at all feasible because the then the producer will not be able to reach all the segments of the market because they do not have the contacts, experience, specializations which intermediaries have. This involves smooth flow of goods  services in the market and reaching all the target segments.

Additional Information

• Channel levels = Channel level shows the number of intermediaries that are working in a particular channel. There are mainly four types of channel levels                                          0 Level = Manufacturer ⇒ consumer ( direct marketing)                                                                                                                                                                                                 1Level = Manufacturer ⇒ wholesaler ⇒ consumer                                                                                                                                                                                                     2Level = Manufacturer ⇒ wholesaler ⇒ retailer ⇒ consumer                                                                                                                                                                                         3 Level= Manufacturer ⇒ wholesaler ⇒ jobber ⇒ retailer ⇒ consumer
• Number of intermediaries = Producer has to decide the number of intermediaries to use at each channel level. Three strategies are available for the producers that are
  • Exclusive distribution = It means when the producer limits the number of intermediaries and wants to have control over the service and the output like in case of auto mobiles and major appliances.
  • Selective distribution = It involves the use of more than few but less than of all the intermediaries who are willing to carry the product.
  • Intensive distribution = It involves placing the goods and service by the producer in as many outlets as possible. This strategy is used by the products like soap, snack foods, tobacco.

The correct answer is C, D, A, E, B

Key Points 

• The chronological order of some key rounds of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), which later led to the establishment of the World Trade Organization (WTO).
• Annecy Round (1950): The second round of GATT negotiations took place in Annecy, France, in 1949, not in 1950. This round primarily focused on further tariff reductions on industrial goods.
• Torquay Round (1950-1951): The third round of GATT negotiations occurred in Torquay, England, from 1950 to 1951. This round aimed to further reduce tariffs and trade barriers, particularly focusing on agricultural products.
• Kennedy Round (1964-1967): The sixth round of GATT negotiations, known as the Kennedy Round, was held in Geneva, Switzerland, from 1964 to 1967. The Kennedy Round focused on further tariff reductions, particularly in sectors such as chemicals, textiles, and agricultural products.
• The Tokyo Round was the seventh round of GATT negotiations, spanning from 1973 to 1979. It involved 102 nations and aimed to address non-tariff barriers to trade, such as quotas, subsidies, and technical barriers.
• Doha: Under the banner of WTO, the Doha Development Round of World Trade Organization negotiations aimed to lower trade barriers around the world and launched in 2001.

Additional Information

• Both GATT and the WTO have played significant roles in promoting international trade, fostering economic growth, and ensuring a rules-based trading system.
• While GATT focused primarily on tariff reduction, the WTO covers a broader range of trade issues and has a more robust institutional structure for trade governance.

Key Points

• Most innovational are incremental. This because most of the technological innovations make small scale, gradual and continuous improvements on the existing products and services. Products are modified and improved to make them more efficient and user friendly. For example, TV has seen considerable incremental innovation in terms of improvement in design, functions, resolution and picture quality.
• Most innovations involve commercial utilisation of ideas. Innovations create products that have a commercial value. Innovations develop products which are commercially successful. This is done by marketing and distributing the product to the market and exploiting it for profit maximisation. For example, smart phones have created a substantial commercial and economic value to the manufacturers.
• The risk in introducing innovations is high as new technologies require huge investment in terms of financial investment, time and expertise. The innovations encounter various challenges due to the uncertainties in the market which involve risks of market positioning, technical barriers, changing customer needs and preferences and economic and political fluctuations.

Additional Information

• Innovations are stimulated by domestic rivalry and geographic concentrations. Rivalry in a competitive market stimulates the firms to differentiate, improve and innovate their products in order to gain a larger market share. Geographic clusters facilitate exchange of knowledge and creative ideas which results in innovative methods of saving costs, transfer of technology and fosters technological advancements.
• Isoquants are curves that show various combinations of inputs that result in a certain level of output. Isoquants can depict technological advancements by showing different combinations of inputs that result in same level of output using different technological conditions.

Key Points

• South Asian Free Trade Agreement categorises India, Pakistan and Sri Lanka as Non- least Developed Contracting States. These are relatively more economically developed within the region. These states have higher levels of income, infrastructure and industrialisation.
• Bangladesh and Bhutan are categorised as Least Developed Contracting states. These states are designated as Least Developed Country by the United Nations. These are low income countries who confront various economic challenges and are more vulnerable to external shocks.
• All contracting states provide special and more favourable treatment exclusively to the Least Developed contracting states with regards to enhancing exports from LDCs, providing technical assistance and assisting them in expansion of trade.
• The agreement contains rules where safeguard measures are not applied against products originating in Least Developed contracting states.

Additional Information

• SAFTA is a free trade agreement of the South Asian Association of Regional Cooperation (SSARC), which came into effect on 1 January, 2006.
• SAFT signatory countries are Afghanistan, Bangladesh, Bhutan, India, Pakistan, Sri Lanka , Maldives and Nepal.
• The  primary objective of the SAFTA agreement is to promote mutual trade and economic cooperation among the member countries by eliminating barriers to trade and promoting conditions of fair competition in the free trade area.

Key Points

• Domestic monetary policy:  When a country's currency is accepted as a reserve currency, the country's ability to conduct independent domestic monetary policy comes into conflict because any changes in the domestic money supply or interest rates can have international consequences.
• External currency policy: The policies which are aimed at maintaining the exchange rate stability can come in conflict with the domestic objectives as such policies can hamper the policies like price stability or devaluation of currency.
• Foreign Trade policy: When a country's currency is used as a reserve currency it strengthens the currency's exchange rate. A strong currency cam affect a country's export an import market, making the exports costlier and imports cheaper, thus disrupting the balance of payments. Conflict may arise when the country wants to promote exports and protect its domestic industries.

Additional Information

• Reserve currency is a globally recognised foreign currency that is held by other countries as a part of their foreign exchange reserves.
• A reserve currency is easily convertible and has a stable value. The US dollar is the dominant reserve currency, with a share of 61% of global reserves.
• A reserve currency reduces the exchange rate risks there is no risk of exchanging the currency while making payments.

Correct answer is Niryat Bandhu Scheme

Key Points

• Foreign trade policy = Foreign Trade Policy refers to a government's guidelines and regulations related to international trade. It includes tariffs, trade agreements and other measures to regulate the import and export. The main objective of foreign trade policy is to promote economic growth of the country. Schemes that have been implemented by the foreign trade policy is Niryat Bandhu Scheme.
• Niryat Bandhu Scheme = This scheme was introduced on 13 October 2011 as part of the foreign trade policy 2009-2014. This scheme was implemented by the Director General of Foreign Trade under the Ministry of Commerce and Industry.
• Objectives of Niryat Bandhu Scheme
  • Mentor new and potential exporters on the intricacies of foreign trade through counselling, training and outreach programmes so that they can reach the international trade.
  • To boost exports from India.
  • The primary goal of the Niryat Bandhu Scheme is to improve international business and to ensure that all the activities are carried in a legitimate manner.
  • The Niryat portal is committed to analyze India's export and import in a comprehensive manner so as to guide and mentor the next generation of entrepreneurs entering the field of international trade.
• Benefits of Niryat Portal
  • The Niryat portal will help to bring a positive change in the field of trade and commerce especially for MSMEs.
  • It is easy to use as the user has to login with their username and password and access the trade information easily.
  • This portal is organized by the professionals who have a great knowledge in the area of export and import. So the users will the authentic information.

Correct answer is Individual opinions are independent of collective opinions.

Key Points

• Collectivism = Collectivism is the social or political ideology that emphasizes the importance of collective or group interest over individual interest. It will promote cooperation, responsibility and a sense of community. In a collectivism society there is focus on group harmony, collaboration and well being of the community.
• Characteristics of collectivism
  • Group harmony = Group harmony is maintaining harmony within the group. It is the central value in the collectivism. Due to group harmony conflict is avoided and individuals are encouraged and agree to societal norms and expectations.
  • Emphasis on community = Collectivism emphasis on community's well being rather than the individual interest. Due to this there will be strong sense of community, shared responsibility and cooperation.
  • Support and collaboration = Through collectivism there will be more support and collaboration among the members of the company. In this relations take precedence over the task and individuals often see themselves as a part of larger whole.
  • Group loyalty = In collectivism the members are expected to prioritize the interest  of their in group over out group members. Through this the goals of the company will be achieved easily.
• Advantages of collectivism
  • Collectivism leads to higher unity and harmony so there is much sense of togetherness and community.
  • Due to collectivism society tends to feel as if they have stronger support of friends, family and extended family.
  • In collectivism there is a felling of loyalty among the members of the group.
• Disadvantages of collectivism
  • Collectivism prioritize the group so they focus less on the individual uniqueness or diversity.
  • Collectivism emphasizes the interest of the group over the interest of the individuals which means self expression is not encouraged.
  • In collectivism members will be able to focus less on thinking about themselves hence resulting in less personal development.

Correct answer is A and C Only

Key Points

• MNC = MNC means Multinational Company. Multinational company means a company which has its business operations in many countries other than the home country and has a huge capital base and technological know how. In MNC the production process is scattered across more than one country and the investments are also made in several countries. So the goods sold by an MNC are known as MNC goods.
• Domestic goods = These are the goods which are manufactured by the domestic or the national company. Domestic company means those companies which do not have huge financial resources and are generally confined to a narrower place. In domestic company the production process are confined to domestic country and there is no investment other than the home country.
• Reasons for substitution between domestic and MNC goods
  • Increased knowledge = Due to increased knowledge of the customer they can understand and compare the benefits and the advantages of the MNC goods versus domestic goods and then make an informed decision to purchase the goods. If the MNC good will be superior than the domestic customer will drift away from buying the local goods and will move on to MNC goods.
  • Low transportation cost = As the transportation cost reduces the overall cost of importing the goods also reduces into the domestic market. This decreased cost will make the cost of the product less. This reduction in price would lead a shift to MNC goods from the domestic goods.
  • Technological advancements = As MNC have more technological advancements they can offer a good quality product at less price. This can lead to substitution of domestic goods with MNC goods.
  • Access to resources = As MNC have access to resources related to specialized labor, advance technologies and specific natural resources there production cost decreases and as result per unit cost of the product also decreases. This decreased cost can make the the MNC goods price competitive with domestic goods and leads to substitute of domestic goods.