A MNC can be simply defined as a company which owns or controls production facilities in more than one country which has been acquired through foreign direct investment.

Characteristics of Multinational Corporations (MNC)

• It has production facilities in a foreign country
• It should realize at least 25% of its total sales from its overseas operations
• It has a geocentric and integrative approach in conducting its business operations
• It has an efficient system of communication between headquarters and subsidiaries

Need for Multinational Corporations (MNC) 

Companies expand their business operations overseas due to the following reasons –

• To Avoid Tariff and Non-Tariff barriers
• To minimize transportation and distribution costs
• To exploit opportunities present in the host country
• To secure scarce raw materials and resources
• To help in economic growth and development of the host country

Concepts related to Multinational Corporations (MNC)

Transnational Corporation – It is an enterprise which consists of a parent company and its foreign affiliates where the parent company acquires control over assets of its affiliates through major equity holdings.

Foreign Affiliates – It is a company in which an investor who belongs to another country holds more than 10% equity shares of the company.

Subsidiary – It is a company in the host country in which another company directly owns more than 50% of its equity and has full control over management.

Associate – It is a company in the host country in which a foreign investor holds more than 10% but less than 50% equity shares.

Branch – A company is said to be a branch of another company –

• When it is not a permanent office or Headquarters of the mother company
• When its land, equipment and machinery is directly owned by the mother company
• When its management control and decision making lies in the hand of the parent company

Advantages/Benefits of Multinational Corporations (MNC)

• It results in Economic growth and development of the host country
• It raises the standard of living of the people by offering high quality and huge variety of products
• MNC`s bring advance technology and modern technical, research and managerial skills to the host country which aids in its development
• It accelerates industrial growth and increases the rate of investment in the host country
• It promotes exports and reduces imports
• MNC`s facilitate efficient utilization of resources in the host country
• MNC`s raise competition in the domestic market thereby breaking monopolies and support the development of the domestic industries directly or indirectly
• It promotes Bilateral Trade relations and cooperation among different countries

Disadvantages/Demerits of Multi-National Corporations (MNC)

• A MNC may develop monopoly in the host country
• MNC may work against national interest
• They may provide out-dated technology
• May influence and manipulate domestic policies according to their selfish interests
• May have an adverse effect on culture and lifestyle of the people of the country
• May have adverse effects on domestic markets

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International Market Intermediaries are middleman or intermediaries who act as channel members in the product distribution channel. They facilitate the sales process buy linking buyers with sellers.

International Market Intermediaries are responsible for seeking potential buyers/sellers , negotiating terms of trade and importing/exporting the products to the end user. 

Types of International Market Intermediaries

The Various types of International Market Intermediaries are as follows:

Foreign distributor – It refers to a foreign company having exclusive rights to distribute a company’s product in the foreign market or specific area.

Foreign retailer – It is a retailing company in a foreign country engaged by the foreign distributor concerning dealing and selling of a company`s products. Foreign retailers deal in products meant for consumers.

State-controlled trading company – It is a government owned company authorised to deal and sell the products/services of foreign companies. Generally utility and telecommunication equipment are sold to state controlled companies by manufacturers. Example – State Trading Corporation of India.

Export Broker – An export broker is engaged in exporting goods for a domestic company by charging a fee. Export brokers act as a representative of a manufacturer and are responsible for bringing together buyers and sellers and negotiating the terms for the seller. The export broker may operate under its own name or that of the manufacturer.

Manufacturer’s Export agent / sales representative – It is an independent firm exclusively engaged to take up all export activities of a domestic manufacturer. An export agent operates under his own name and charges a commission for seeking potential buyers and selling the domestic manufacturer`s product.

Export Management Company – It is a company that manages the entire export activities of a domestic company on a contract. It may function as an export department for a manufacturer therefore it is also known as a Combination Export Manager (CEM).

Cooperative Exporter – Manufactures of a particular product in the domestic country form a cooperative union to manage their export activities. Example – Singer, Borg Warner

Webb-Pomerene Association – It is an export cartel jointly formed by two or more domestic manufacturers to market their product overseas.

Purchasing/Buying agent – It is an agency of a foreign buyer/importer company which appoints agents to arrange for buying products from other countries.

Country controlled buying agent – It is a government agency involved in locating and buying products for its country.

Resident Buyer – A resident buyer is an independent agent located near a highly centralized production industry involved in buying products on behalf of an importer.

Export Merchant – An export merchant is a person who buys products in domestic country to sell them in foreign country.

Export Drop Shipper – A person who links exporters and importers. An export drop shipper is also known as a desk jobber or cable merchant.

Export Distributor – A company which is granted exclusive rights to represent the manufacturer in selling the products in foreign country. The company may use his own name or manufacturer’s name to sell the product.

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Regional economic Integration refers to cooperation between various countries of a particular region in order to develop that particular area. It includes economic integration of various trading areas of different countries. It is also known as Regional trade block, Regional economic forces and Regional grouping. A regional trade block is a type of inter-governmental agreement, in which barriers to trade are reduced or eliminated among participating countries. Regional economic integration is a collaborative arrangement between different countries in order to take advantage of market opportunities and to promote economic growth and stability.

Major Trading Blocks that have emerged during recent years include:

• European Union
• North American Free Trade Agreement (NAFTA)
• Association of South East Asian Nations (ASEAN)
• Asia Pacific Economic Cooperation (APEC)
• South Asian Association for Regional Cooperation (SAARC)

Levels of Regional Economic Integration →

Preferential Trading Agreement – It is a loosest form of economic integration where a group of countries make a formal agreement to trade goods and services on preferential terms. It results is reduced tariffs and sometimes a special quota is allowed for preferential access. These agreements are generally made between developed and developing countries to promote economic development of developing nations. Example – The European Union has a preferential trading agreement with the Middle East and Latin America.  

Free Trade Agreement – It is a permanent arrangement usually between the neighboring countries. It involves complete removal of tariffs on goods. However, it is not applied to agricultural sector, fishing or services. The member countries are free to charge their own external tariffs from countries outside the free trade area. Therefore each member country has full freedom over trade with external countries. Example – North American Free Trade Agreement (NAFTA) and European Free Trade Association (EFTA)

Customs Union – Just like the members of Free Trade Area, the members of Custom Union also remove barriers among themselves. In addition they also have a common trade policy with respect to non-member countries. Due to the common trade policy, a common external tariff is charged from non-member countries and revenue is shared among the member countries. Example – Association of Southeast Asian Nations (ASEAN)

Common Market – The common market has no barriers to trade among the member countries and there is also a common external policy for trade with non-member countries. In addition the restriction on the movement of the factors of production is also removed. Factors of production include Labour, Technology, Capital etc. The restriction is abolished on immigration, emigration and cross border investments. This is done to employ the best resources in the best possible manner. Example – European economic community

Economic Union – Economic Union involves full integration between two or more economies. There are no trade restrictions between member countries, they follow a common external tariff policy and the restriction on the mobility of factors of production is also abolished. In addition there is coordination between the member countries on their economic policies such that the nations have coordinated monetary policy, fiscal policy, social welfare programs etc. and usually a common currency is used in trade. Example – European Union

Political Union – Political Union involves all features of Economic Union and also complete political integration between member countries. The member countries share a common decision making and judicial body and there is complete unity between member nations. The best example is United States of America which includes thirteen separate colonies operating under Article of Confederation.

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Tariff and Non-Tariff Barriers are restrictions imposed on movement of goods between countries.  It can be levied on imports and exports. Tariff and non tariff barriers are imposed for various reasons such as –

(i) National Security – Countries enforce tariff and non-tariff barriers to protect the security of the nation. Eg. Defence sector in India

(ii) Retaliation – Government of a country intervenes in the trade policies in order to act as a bargaining tool. Retaliation agreements help countries to allow free trade among them.

(iii) Protecting Jobs – Government aims to protect domestic employment. Domestic employment is affected from foreign competition as domestic industries start to import services from abroad in order to keep up with the competition.

(iv) Protecting Infant industries – Competition form imported goods threatens the infant industries of a country. In order to develop and grow certain industries government may impose heavy tariffs on imported goods to increase prices and help the infant industries.

(v) Protecting customers – Government may levy a heavy tax on goods which are against the welfare of the country and its citizens.  

Tariff Barriers

Tariff is a custom, duty or a tax imposed on products that move across borders. The words tariff/custom/duty are interchangeable. It is the most common instrument used for controlling imports and exports.

Import tariff/duty – It is the custom duty imposed by the importing country i.e. the tax imposed on goods imported. It is levied to raise revenue and protect domestic industries.

Export tariff – It is the duty imposed on goods by the exporting country on its exports. Generally certain mineral and agricultural products are taxed.

Transit duties – It is levied on commodities that originate in one country, cross another and are consigned to another.  Transit duties are levied by the country through which the goods pass.  It results in increased cost of products and reduction in amount of commodities traded.

Other Tariff barriers

Specific duty – It is based on (specific attribute) physical characteristics of goods. It is a fixed or specific amount of money that is levied as tax keeping in view the weight(quantity)/measurement (volume) of the commodity.

Ad valorem duty –  These are duties that are imposed according to the value of commodities traded between countries. It is generally a fixed percentage of the invoice value of the goods traded. 

Compound duty – It is a combination of specific duty and ad valorem duty on a single product.  It is partly based on quantity and partly on the value of goods.

Non Tariff Barriers 

These are non tax restrictions such as (a) government regulation and policies (b) government procedures which effect the overseas trade.  It can be in form of quotas, subsidies, embargo etc.

Quotas – It is a numerical limit on the quantity of goods that can be imported or exported during a specified time period.  The quantity may be stated in the license of the firm.  If the importer imports more than specified amount, he has to pay a penalty or fine. 

VER (voluntary export restraint) – It is a quota on exports fixed by the exporting country on the request of the importing country. The exporting country fixes a quota regarding the maximum amount of quantity that will be exported to the concerned nation.

Subsidies – It is the payment made by the government to the domestic producer so that they can compete against foreign goods.  It can be a cash grant, subsidized input prices, tax holiday, government equity participation etc.  It helps a local firm to reduce costs and gain control over the market.

Other barriers

Administration dealings – These are regulatory controls and bureaucratic rules and regulations which affect the flow of imports.  It can be a delay at custom offices, safety inspection, environment regulatory inspection etc.

Local content requirement – Legal content requirement is a legal regulation which states that a specified amount of commodity must be supplied in the domestic market by the producer.  It is used to help local labour and domestic suppliers of goods.  Government may state a – (a) labour requirement (b) input requirement or (c) component required at a local level.

Currency Control – Government may impose restrictions on currency convertibility. In order to import goods countries have to make payment in foreign currency which is acceptable worldwide i.e. US dollar, European Euro or Japanese Yen.  The government can put a limit on the amount of money that can be converted in foreign currency or ask a company to apply for a license to obtain such currency.

Embargo – It means a complete ban on certain commodities. A country may ban import and export of certain goods in order to achieve some political or religious goals.

Product testing and standardization – Standards are set for health, welfare, safety, quality, size and measurements which have to be complied with in order to enter a foreign market. The products have to meet international quality standards. All Products must meet the quality standards of the domestic county before they are offered for trade. Inspection is very extensive in case of electronic goods, vehicles and machinery.

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A careful analysis of various factors have to be done before entering a foreign market in order to choose to most profitable market. These factors are :-

A) Country Specific Factors –

• Laws and Regulation of the Country
• Infrastructural Conditions
• Property rights and Legal framework
• Political Factors
• Cultural Factors

B) Industry Specific Factors –

• Entry and Exit Barriers
• Industrial Complexity
• Uncertainity in Industrial environment
• Supply and Distribution pattern

C) Firm Specific Factors

• Resources of the firm
• Technological Risk
• Goals and Objectives of the Firm
• Experience of the Firm

D) Project Specific Factors –

• Size of the Project
• Project Orientation
• Availability of raw material and labour required for project implementation 
• Availability of suitable market for the project

Modes of entry in foreign market →

(1) Exporting – It is the process of selling goods and services produced in one country to other country.  Exporting may be direct or indirect. 

Under direct export – A company capitalizing on economies of scale in production concentrated in the home country, establishes a proper system for organizing export functions and procuring foreign sales.

Indirect export involves exporting through domestically based export intermediaries. The exporter has no control over his product in the foreign market.

Advantages –

1. It helps in distribution of surplus
2. It is less costly
3. It is less risky
4. Under direct export the exporter has control over selection of market
5. It helps in fast market access

Disadvantages –

1. High start-up cost in case of direct exports
2. The exporter has little or no control over distribution of products
3. Exporting through export intermediaries increase the cost of product

(2) Joint Venture – It is a strategy used by companies to enter a foreign market by joining hands and sharing ownership and management with another company. It is used when two or more companies want to achieve some common objectives and expand international operations. The common objectives are –

• Foreign market entry
• Risk/reward sharing
• Technology sharing
• Joint product development
• Conforming to government regulations

It is useful to meet shortage of financial resources, physical or managerial resources

Advantages –

1. Technological competence
2. Optimum use of resources
3. Partners are able to learn from each other

Disadvantages –

1. Conflicts over asymmetric investments
2. It may be costly
3. Cultural and political stability may pose a threat to successful operations
4. Conflicts in management

(3) Outsourcing – It is a cost effective strategy used by companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.  It includes both domestic and foreign contracting and also off shoring (relocating a business function to another country).

Advantages –

1. Swiftness and expertise in operations
2. Concentration on core process rather than supporting ones
3. Risk sharing
4. Reduced costs

Disadvantages

1. Risk of exposing confidential data
2. Hidden costs
3. Lack of customer focus

(4) Franchising – It is a system in which semi-independent business owners (franchisees) pay fees and royalty to a parent company (franchiser) in return for the right to be identified by its trademark, to sell its product or services, and often to use its business format or system.

Advantages –

1. It is less risky
2. Advantage of expertise of franchiser
3. Highly motivated employees

Disadvantages

1. Difficulty in keeping trade secrets
2. Franchisee may become a future competitor
3. A wrong franchisee may ruin company’s name and goodwill

(5) Turn Key Project – It involves the delivery of operating industrial plant to the client without any active participation. A company pays a contractor to design and construct new facilities and train personnel to export its process and technology to another country. Turn key projects may be of various types –

BOD – Build, Owned and Develop

BOLT – Build, Owned, leased and Transferred

BOOT – Build, Owned, Operate and Transfer  

(6) Foreign Direct Investment – It is a mode of entering foreign market through investment.  Investment may be direct or indirectly through Financial Institutions. FDI influences the investment pattern of the economy and helps to increase overall development. The extent to which FDI is allowed in a country is subjected to the government regulations of that country. It can be done by purchasing shares of a company, property and assets.

Advantages –

1. Modifications can be made at any point of time
2. It is an easy mode of entry

Disadvantages

1. The government policies may not be helpful
2. The return on Investment may be low

(7) Mergers & Acquisitions –  A merger is a combination of two or more district entities into one, the desired effect being accumulation of assets and liabilities of distinct entities and several other benefits such as, economies of scale, tax benefits, fast growth, synergy and diversification etc. The merging entities  cease to be in existence and  merge into a single servicing entity.

Acquisition implies acquisition of controlling interest in a company by another company.  It does not lead to dissolution of company whose shares are acquired. It may be a friendly or hostile acquisition or a bail out takeover.

(8) Licensing – Licensing is a method in which a firm gives permission to a person to use its legally protected product or technology (trademarked or copyrighted) and to do business in a particular manner, for an agreed period of time and within an agreed territory. It is a very easy method to enter foreign market as less control and communication is involved. The financial risk is transferred to the licensee and there is better utilization of resources.

Advantages –

1. Easy appointment
2. Less investment is involved
3. Low cost of labour

Disadvantages

1. This method is time consuming
2. Decline in product quality may harm the reputation of licensor

(9) Contract manufacturing – When a foreign firm hires a local manufacturer to produce their product or a part of their product it is known as contract manufacturing. This method utilizes the skills of a local manufacturer and helps in reducing cost of production. The marketing and selling of the product is the responsibility of the international firm.

Advantages –

1. Low cost of production
2. Development of medium and small scale industries
3. No dilution of control

Disadvantages –

1. Difficulty in maintaining quality standards
2. Local manufacturers in foreign market may lose business

(10) Strategic Alliance – It is a voluntary formal agreement between two companies to pool their resources to achieve a common set of objectives while remaining independent entities. It is mainly used to expand the production capacity and increase market share for a product. Alliances help in developing new technologies and utilizing brand image and market knowledge of both the companies.

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International Business refers to the global business where goods and services are exchanged between countries. It involves transfer of goods, services, information, resources, capital etc.

International business comprises of all commercial transactions that take place between two or more countries beyond their political boundaries. These transactions may take place between private companies or governments of different countries.

According to Grosse and Kojawa, “International business is defined as transactions devised and carried out across international borders to satisfy corporations and individuals”

Drivers of International business→

(i) Continuous decline in trade restrictions and investment barriers after the World War II has resulted in increased international business between countries.

(ii) Changes in technology and communication have made it easier to interact and exchange goods, services and information across geographic borders.

(iii) Emergence of global institutions like IMF, GATT and WTO have helped in managing and regulating the foreign markets and provided a platform to its member countries for trading across borders.

(iv) Potential markets of the world are being exploited to generate maximum returns due to increase in the level of competition.

Factors affecting International Business →

Types of Orientation in International Business →

(A) Ethnocentric approach – It focuses on the values and ethics of the home country.  The strategies are devised and formulated for domestic operations first and the overseas operations are secondary.  The foreign activities are conducted mainly to distribute surplus. This approach is suitable for small companies as less investment is required and less risk is involved.  The activities are managed by an export department or a separate international division.

(B) Polycentric approach – Under such an approach a company’s policies and procedures are based on host country.  The local market needs and requirements are met by a team of local employees and various foreign subsidiaries are established to work independently to achieve the objectives and plans of the organization. Such an approach is generally used by Multi-national Corporations.

(C) Regiocentric approach – It is applicable when the company caters to different regions or different markets.  Each region has a special or distinctive feature depending upon regional factors, political factors, economic factors etc.  The regions are categorized and strategies are formulated accordingly having national and regional headquarters.

(D) Geocentric approach – It applies for the entire globe or world. A Company following this approach uses common practices and strategies throughout the world i.e. Common HR and marketing practices.  It helps in building a common brand image and goodwill.  Such an approach is used by large scale enterprises.

Advantages of International Business →

(i) Business development – Business expansion, survival of a firm, overseas marketing, development of export culture, use of new strategies etc

(ii) Financial benefit – Scale of economies, optimum utilization of resources, increased sales and profit

(iii) Technological benefits – Benchmarking, new product development, global quality standards

(iv) Production advantages – Large scale production, flexibility in operations, use of global resources, improved productivity, full use of plant capacity

(v) Human resource advantages – Diversified human resource portfolio, increased labour productivity, improvement working culture, better standards on living

Problems in International Business

1. Political stability of host country
2. Tariffs, Quotas and Trade Barriers
3. Corruption and Bureaucratic practices in host country
4. Piracy of Technology
5. Maintaining quality standards
6. Difference in culture and Language barriers
7. War and terrorism
8. Competition from domestic companies

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Boston consultancy group growth share Matrix commonly known as BCG Matrix is a famous portfolio analysis technique developed by Boston consultancy group in the 1970`s. It was developed for managing portfolio of different business units. The BCG Matrix  shows a relationship between products that are generating cash and products that are eating cash.

Large companies who want to be organized in Single Business Units(SBU) face a challenge of allocation resources among these units . The BCG Matrix shows various business units on a graph of market growth v/s market share relative to competitors. Resources are allocated to business units according to where they are situated on the graph.

Four Cells of a BCG Matrix

(A) Cash cows – It is a business unit with large market share in a mature and slow growing industry. Cash cow require little investment and generate cash that can be used to invest in other business units. These a generally large and mature business units reaping the benefits of experience and customer loyalty.

(B) Star – It is a business unit that has a large market share in a fast growing industry. It may generate cash but due to rapid growing market it requires investment to maintain its needs. It is a high growth – high market share business unit. These business units are generally in the growth stage of its product life cycle and not self sufficient in terms of its financial needs.

(C) Question mark? – It is also called the problem child. It is a business unit which has a small market share in a high growth market. Such a business unit requires huge investment to grow market share but whether it will be a star or not is unknown.

(D) Dogs – These are business units with a small market share in a mature industry .A dog may not require substantial cash but it ties up capital that could be invested elsewhere. Such a business unit must be liquidated unless it has some special strategic purpose or prospects to gain market share in the future. 

The BCG matrix provides a framework for allocating resources among different business units and allow one to compare many business units at a glance.

Criticism of the BCG Matirx

It is criticised that it does not reflect the true nature of the business. The BCG Matrix considers only two dimensions High and Low for measurement and while a business may enjoy a high, medium or low market share/growth rate.

It assumes that high market share always leads to high profits which is not be true. High Costs are involved in business units with large market share which may lead to normal profits.

There are many parameters to measure profitability other than growth rate and market share. The BCG Matrix ignores all other indicators of profitability. 

The model does not clearly define the markets.

Long term profitability of a business depends upon a variety of factors which may not be related to market share or growth. A business with low market share can also earn high profits without needing large amount of investment.  

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A Non Banking Financial Company is a financial institution that does not have a full banking license and facilitates bank related financial services.  It means –

(a) A financial institution that is a company

(b) A Non-banking institution that is a company whose principal business is the receiving of deposits

(c) Such other institution registered with RBI with prior approval of Government

A Non Banking Financial Company supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits.  It also produces competition in the financial services industry.  NBFC’s keep their services flexible to meet the needs of specific client.  NBFCs may specialize in one particular sector and develop an information advantage.  It enhances competition through unbundling targeting and specializing.

Roles of a Non Banking Financial Company

As recognized by the RBI the specific roles of a Non Banking Financial Company are

• Development of sectors like transport and infrastructure
• Substantial employment generation
• Help and increase wealth creation
• Broad base economic development
• To finance economically weaker section
• Huge contribution to state exchequer
• Irreplaceable supplement to bank credit in rural segments, major thrust on semi-urban, rural areas and first time users.

NBFCs are spread all across the country with more than 13,000 + players registered with the RBI. Approx. 570 NBFCs are authorised  to  accept  public  deposits. Assets  worth Rs. 15000 crores are financed annually. Asset financing includes providing finance for commercial vehicles, passenger laws, multi-utility vehicles, construction equipment and consumer durables.

Role of Non Banking Financial Company in Economic Development

NBFCs aid in economic development in the following ways –

• Mobilization of Resources – It converts savings into investments
• Capital formation – Aids to increase capital stock of a company
• NBFC`s provide long term credit and Specialized credit
• Aid in employment generation
• Help in development of financial markets
• Helps in attracting foreign grants
• Helps in breaking the vicious circle of poverty by serving as government’s instrument

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The International Monetary Fund (IMF), is an international monetary institution established by 44 nations under the Bretton Woods Agreement of July 1944.  It was established to –

(a) promote economic and financial cooperation among its members

(b) to facilitate the expansion and balanced growth of world trade

(c) to eliminate the widespread devastation and economic loss of the Second World War.

Membership

At present 186 countries are members of the International Monetary Fund.  To join the IMF, a country must deposit a sum of money called a quota subscription, the amount of which is based on the wealth of the country’s economy.  Quotas are reconsidered every five years and can be increased or decreased based on IMF needs and the prosperity of the member country.  Voting rights are allocated in proportion to the quota subscription.

Objectives of International Monetary Fund (IMF) →

The main objectives of International Monetary Fund are as follows –

→ International Monetary Cooperation – Due to widespread devastation after the Second World War monetary cooperation among member countries was needed to prevent the outbreak of another war.

→ To ensure stability in foreign exchange rates – the instability in foreign exchange rates produced adverse repercussions on international trade; hence the IMF was established to curb this situation.

→ To eliminate exchange control – IMF strives to remove or relax exchange controls with a view to give encouragement to the flow of International Trade.

→ To establish a system of multilateral trade and payments system – This was considered necessary as the old bilateral trade agreements obstructed the free flow of international trade.

→ To help member nations to achieve balanced economic growth of international trade.

→ To eliminate the disequilibrium in the balance of payments.

→ To promote investment of capital in undeveloped countries.

Organization and structure of International Monetary Fund (IMF)

The structure of the International Monetary Fund consists of  –

→ Board of Governors

→ An Executive Board

→ A managing Director

→ A Council and a staff with its headquarters at Washington, USA.

→ There are adhoc and standing committees appointed by the Board of Governor and the Executive Board. 

→ There is also an Interim Committee appointed by the board of governors. 

The Board of Governors and the Executive Board are decision making organs of the Fund.The Board of Governors is the top structure composed of one Governor and one alternate Governor appointed by each member.  The Board has now 24 members who meet annually to take decisions regarding policies of the fund and fund activities.

The Executive board has 21 members, five Executive Directors appointed by five members with the largest quotes and 15 Executive Directors are elected at intervals of two years by the remaining members according to the constituencies on a geographical basis.  Its power relate to all regulatory, supervisory and financial activity of the fund.

The Managing director of the fund is elected by the Executive Directors.  He is the non-voting Chairman of the Executive Board and the Head of the Fund staff and is responsible for its organization, appointment and dismissal.

The Interim Committee was established along with the development committee in October 1974 to advise the Board of Governors on supervising the management and report all aspects of the transfer of real resources to developing countries respectively.  Both the committees consist of 22 members currently.

Functions or activities of the International Monetary Fund (IMF)

It can be divided into two broad categories –

Financial Assistance – The basic objective of the IMF is to provide the financial support to the member countries in order to develop their resources.  The assistance is provided in the form of loan in order to expand the volume of trade at international level.  It also assists in stabilization of currencies and arrangement of financial fund. The member countries can request IMF for financial help in order to control the Balance of payment situation.The loan taken by the IMF also helps in economic growth and development.  IMF has got a variety of arrangement or loan facility.  The programme of such arrangement is formulated by the member country in consultation with the executive board of IMF.  The loan amount is released in installment as per the programme the various instruments or facilities are according to the specific circumstances for the diverse membership.  Some of the schemes are –

(a) Poverty reduction and growth facility (PRGF)

(b) Extended fund facility

(c) Compensation and contingency financing facility (CCFF).

(d) IMF also extends finance for recovering from various natural disasters and conflicts.

Technical Assistance – The technical services provided by IMF have developed the productive resources of the member countries to help them to manage their economic and financial affairs.  It helps to strengthen the human and institutional resources. The technical assistance provide by it is free of charge to the requested member countries if it is within the resource limits of IMF.  About 90% of such services are provided to the middle group and low income group countries.

The technical assistance is provided in the following areas –

◊ Revenue Administration

◊ Financial Statistics

◊ Tax Policy Administration

◊ Exchange Rate System

◊ Financial Sector Sustainability

◊ Monetary Policy System

Special Drawing Rights (SDR)

Special Drawing Rights are also known as paper gold, are a form of international reserves created by the International Monetary Fund in 1960 to solve the problem of international liquidity.  They are international units of account in which the official accounts of the IMF are kept.  They are allocated to the International Monetary Fund members in proportion to their fund quotas and are used to settle balance of payments deficits between them.

SDR are used as a means of payment by Fund members to meet Balance of payment deficits and their total reserve position with the Fund.  They cannot be used for any other purpose.  Thus SDR act both as an international unit of account and a means of payment.  The SDR scheme has been criticized on the grounds of inequitable distribution and high interest rate.

Advantages of International Monetary Fund (IMF) →

→ Establishment of a monetary reserve fund – Under this system, the fund is able to accumulate a sufficient stock of the national currencies of different countries which meets the foreign exchange requirements of the member countries.

→ Setting up of a Multilateral Trade and payments System – It was hoped that restrictions on foreign trade would be eliminated after the end of the transitional period.

→ Improvement in short term disequilibrium in balance of payments. This is achieved by lending foreign currencies to member countries against their national currency.

→ Stability in Foreign Exchange Rates – the fund has attached a certain amount of stability in foreign exchange rates, this stability had the effect of promoting the flow of international trade among different countries.

→ Advisory and Technical assistance – It helped member countries through its policy advice and technical assistance in formulating sound policies and building robust institution.

Criticism of International Monetary Fund (IMF) →

→ Limited scope – Its scope is limited as it deals only with imbalances in payments which arise from current trade transactions and not with the repayments of war loans or of blocked reserves.

→ Fixation of unscientific quotes – The quotes of the various member countries have not been fixed on any scientific basis. It is criticized that the fund has been continuously dominated by few countries.

→ Inability to remove exchange control – It has not succeeded in persuading member countries to eliminate exchange controls and other restrictions on foreign trade.

→ Inadequate provision of liquidity – The fund found it difficult to meet the foreign exchange requirements of its members because of its limited resources. Despite various efforts there has been no perceptible improvement in the international liquidity situation.

→ Inadequate representation of developing country – About 90% of the members of the International Monetary Fund are developing countries but they have been given only 38% of the total voting power in the affairs of the fund.

India and International Monetary Fund (IMF) →

 → India was among the first five nations having the highest quota with IMF and it has been also allotted a permanent place in Executive Board of Directors.

 → Independence of India Rupee – Since the existence of International Monetary Fund the Indian rupee has become independent. Its value is no longer determined by the pound sterling but is expressed in terms of gold.

 → Membership of the World Bank – It is on account of its membership of the fund that India could become a member of the world Bank, which has provided several loans to India for various economic purposes.

 → Economic advice from the Fund – India can seek the expert advice of the firm for solving its economic problems. Fund has given valuable advice to the Government of India on matters regarding financing of the Five Year Plans.

→ Increase in Quota – Being an important member of the International Monetary Fund, India’s quota was 400 million SDR which rose to 4158.2 million SDR in 1998.

→ International exchange standard – By virtue of membership of the IMF, Indian currency has been connected with international exchange standard allowing India to make payment in any country of the world easily.

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